by Michael Levine and Melinda Buntin – Congressional Budget Office
Growth in spending per beneficiary in the fee-for-service portion of Medicare has slowed substantially in recent years. The slowdown has been widespread, extending across all of the major service categories, groups of beneficiaries that receive very different amounts of medical care, and all major regions.
A summary of the study:
Between fiscal years 1980 and 2005, spending per beneficiary in the fee-for-service (FFS) portion of Medicare grew at an annual rate of about 8 percent, while between fiscal years 2007 and 2012, that rate was 3 percent. A reduction in economywide core price inflation explains part of that slowdown, but inflation-adjusted average growth in spending per FFS beneficiary also slowed markedly between those periods—from 4 percent to less than 1 percent.1 Spending growth has fluctuated over the past several decades, but previous declines were typically associated with significant policy changes (see Figure 1). For instance, the drop that began in the early 1980s was caused partly by the anticipation and implementation of the inpatient prospective payment system. The sharp drop in the late 1990s was precipitated in part by the Balanced Budget Act of 1997, which enacted a broad range of changes in payments to providers. But the most recent slowdown in spending, which began in the mid-2000s, cannot be so readily explained by legislated changes in policy.
This paper focuses on the slowdown in the growth of FFS Medicare spending for elderly beneficiaries through 2010, the most recent year for which detailed survey data on beneficiaries are available. Annual nominal growth in FFS spending per elderly beneficiary, which on average was very similar to the growth in per-person spending for all Medicare beneficiaries, was 7.1 percent from 2000 to 2005 and 3.8 percent from 2007 to 2010.2 The difference in growth rates between those two periods, 3.2 percentage points (rounded), constitutes the slowdown our study seeks to explain.3
To try to identify the causes of that slowdown, we performed a series of descriptive and statistical analyses based on a diverse array of data sources. However, those analyses did not yield an explanation for most of the slowdown in spending growth:
- Certain factors with quantifiable effects on spending growth, such as increases in payment rates, demographic changes among beneficiaries, and changes in the proportion of beneficiaries who enroll only in Part A of Medicare (hospital insurance), explain a small share of the slowdown.
- Notably, we did not find evidence that the financial crisis and economic downturn caused beneficiaries to use less care. Although the elderly as a group faced substantial declines in home values, significant losses in financial assets, and slower income growth, we could not identify a relationship between those factors and the amount of health care used by elderly FFS Medicare beneficiaries through 2010. The fact that spending growth remained slow in 2011 and 2012, after financial markets and income growth had begun to slowly recover, further suggests that factors other than the recession’s impact on beneficiaries’ finances were responsible for most of the slowdown.
Our analyses are subject to limitations and uncertainty, and future research could be helpful in examining potential effects of economic conditions that we did not investigate. We nevertheless conclude that factors other than the effect of the financial turmoil and weak economy on beneficiaries’ demand for services played the predominant role in causing the decline in Medicare spending growth. However, the quantitative analysis that we undertook did not identify those specific factors.
Given the large share of the slowdown that our quantitative analyses could not explain, we turned to qualitative assessments of other factors—in particular, factors affecting how medical care was delivered—to help explain the slowdown in spending growth. For instance, we considered the extent to which changes in Medicare’s payment rates might have affected providers’ incentives to deliver care to beneficiaries. We also explored trends in how care was delivered, such as a shift away from inpatient care later in the decade as well as changes in the rate at which new technologies and services were introduced. Although those qualitative assessments yielded no concrete explanations of the slowdown’s causes, we hope to have laid the groundwork for future research on those factors.
In investigating the sources of the slowdown in spending growth, we restricted most of our analyses to Medicare’s expenditures for elderly beneficiaries in the fee-for-service portions of Part A (covering hospital inpatient care, skilled nursing facility care, hospice care, and some home health care) and Part B (covering physicians’ services, hospital outpatient care, laboratory services, durable medical equipment, and other services, including some home health care).4 We investigated those classes of expenditures because we had detailed information on them; we restricted our analysis to the elderly, as data allowed, because we could better estimate the effects of the recession and demographic changes for that more homogeneous subset of beneficiaries.5
How Widespread was the Slowdown in Spending Growth?
The reduction in per-beneficiary spending growth for elderly FFS beneficiaries was distributed broadly across many different types of services, beneficiaries, and regions. Comparing growth in per-beneficiary spending between 2000 and 2005 with the slower growth between 2007 and 2010, we find the following:
- Annual growth in spending for every major service category was slower in the later period, though the declines in growth rates varied among services.
- Growth in hospital inpatient spending, which accounted for the largest share of the program’s spending, fell from an average annual rate of 4.3 percent between 2000 and 2005 to 1.7 percent between 2007 and 2010.
- The decline in the growth rate was especially pronounced for spending on hospice services, durable medical equipment, and drugs covered under Part B. Altogether, growth in spending for those items and services declined from an annual rate of 13.6 percent between 2000 and 2005 to 2.3 percent between 2007 and 2010. However, those categories accounted for less than a tenth of Medicare spending in 2010.
- Overall, the reduction in the growth of spending for the three largest service categories (hospital inpatient care, physicians’ services, and hospital outpatient care) accounted for the majority of the slowdown.
The slowdown in spending growth also occurred among both low-cost and high-cost beneficiaries. It was most dramatic for elderly FFS beneficiaries with no or relatively low Medicare expenditures, but the reduction in growth for the one-fifth of beneficiaries with the highest Medicare expenditures accounted for most of the slowdown. (Spending on those beneficiaries accounted for more than 80 percent of spending in 2010.) In addition, the slowdown was pervasive across states with different levels of spending per beneficiary and in both rural and urban counties.
The breadth of the reduction in spending growth did not point to particular causes of the slowdown.
Footnotes:
1 The analyses contained in this paper generally exclude 2006, the year in which the Part D prescription drug benefit was implemented. Although our focus is on spending in Parts A and B, the implementation of the large new drug benefit in 2006 may have had unobservable effects on how beneficiaries used services paid for under Parts A and B that year.
2 Average spending in Parts A, B, and D for all Medicare beneficiaries grew at an annual rate of 7.2 percent between 2000 and 2005 and 4.1 percent between 2007 and 2010. See Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, 2013 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds (May 2013), Table V.D1, http://go.usa.gov/bUZm.
3 With economywide core price inflation subtracted, the difference in growth rates was 3.0 percentage points.
4 Medicare Parts C (the Medicare Advantage program) and D (the prescription drug program) are excluded from our analyses, as are beneficiaries under the age of 65.
5 Within the FFS portion of Medicare, elderly beneficiaries accounted for roughly four-fifths of spending in 2010.
