How Much of the Medicare Spending Slowdown Can be Explained? Insights and Analysis from 2014

Appendix 1: Methodology

For this analysis, “Medicare spending” is defined as payments by the Medicare program for covered services, excluding the costs of administering the program. This spending amount does not include an offset for Part B premium payments (so-called “offsetting receipts”), but does include an offset for amounts paid to providers and subsequently recovered by the program due to improper documentation or some other reason. The years are federal fiscal years (October through September), and spending is adjusted to smooth out unevenness from year to year in the number of capitation payments to Medicare Advantage plans and Part D plans.¹

Projected Medicare spending for 2014 is taken from CBO’s March 2009 baseline,² with an upward adjustment applied to Part B spending on physician services to reflect a physician fee freeze.³ That 2009 projection takes into account the increase in the number of enrollees in the program due to the aging of the “baby boomer” generation, and the shift in enrollment toward a relatively younger population.

Actual spending in 2014 is from the September 2014 issue of the Monthly Treasury Statement, which covers the 2014 fiscal year (October-September).⁴ The difference between the two estimates—the 2009 spending projection for 2014 and the 2014 actual spending amount—serves as the focus of the analysis of the Medicare spending gap that we attempt to explain in this paper. We use the same methodology to quantify the difference in projected versus actual spending separately for Parts A, B, and D. For each of those parts, we compared CBO’s 2009 projected Medicare spending in 2014 versus actual 2014 spending from the Monthly Treasury Statement.

Chappel et al. (2014) take an alternative approach to quantifying the Medicare spending slowdown. They first measure the historical average annual growth in Medicare spending per enrollee excluding Part D from 2000-2008 (6.3 percent), and then create a benchmark by applying that growth rate from 2008 forward. That approach results in projected spending in 2014 that is even higher than the method we use. One difference between the approaches lies in the fact that using historical average growth rates implicitly assumes that the Medicare program will continue to be changed in ways that are similar to the ways it has been changed in the past, while using CBO’s projections (as we do) assumes that the Medicare program will remain unchanged during the projection period.

Appendix 2: Factors Related to Changes in Projected Versus Actual Medicare Spending in 2014

Factor	Estimate of Medicare spending effect	Source of estimate
PROJECTED MEDICARE SPENDING IN 2014 (BASED ON 2009 ESTIMATES)	$706 BILLION	Author’s analysis of CBO (2009a, 2009b)
ACTUAL MEDICARE SPENDING IN 2014	$580 BILLION	Author’s analysis of CBO (2014) and Treasury (2014)
DIFFERENCE	$126 BILLION
FACTORS RELATED TO LOWER MEDICARE SPENDING IN 2014	Effect on Medicare Spending in 2014
CBO projected savings from the ACA and BCA
ACA: Fee-for-service price cuts	$24 billion spending reduction	Author’s analysis of CBO (2010)
ACA: Medicare Advantage cuts	$16 billion spending reduction	Author’s analysis of CBO (2010)
ACA: Elimination of Medicare Improvement Fund	$16 billion spending reduction	Author’s analysis of CBO (2010)
ACA: Payment and delivery system reform	$2 billion spending reduction	Author’s analysis of CBO (2010)
BCA: Fee-for-service price cuts (sequestration)	$11 billion spending reduction	CBO (2011)
SUBTOTAL	$69 billion spending reduction
Other policy changes
ATRA: Recoupment of coding “creep”	$2 billion spending reduction	CBO (2013)
MMA and ACA: Competitive bidding for durable medical equipment	$2 billion spending reduction	Author’s analysis based on CMS (2012)
SUBTOTAL	$4 billion spending reduction
Prescription drugs
Unexpectedly slow growth in prescription drug spending	$16 billion spending reduction	Author’s analysis based on Medicare Trustees reports (2013 and 2014)
SUBTOTAL	$16 billion spending reduction
Unanticipated effects of changes in Medicare policy
Reduction in hospital readmissions	$1 billion spending reduction	DHHS (2014)
Reductions in home health utilization	$10 billion spending reduction	Author’s analysis
Increased recoveries from providers	$5 billion spending reduction	Author’s analysis of CBO (2009 and 2014)
SUBTOTAL	$16 billion spending reduction
SUBTOTAL: Factors related to lower Medicare spending	$105 billion spending reduction
FACTORS RELATED TO HIGHER MEDICARE SPENDING IN 2014
ACA benefit expansions	$4 billion spending increase	Author’s analysis of CBO (2010)
Unexpected growth in overall enrollment	$19 billion spending increase	Author’s analysis
Unexpected growth in enrollment in Medicare Advantage	$4 billion spending increase	Author’s analysis
SUBTOTAL: Factors related to higher Medicare spending	$27 billion spending increase
SUBTOTAL: EXPLAINED FACTORS	$78 billion spending reduction
RESIDUAL: Unexplained factors related to lower Medicare spending	$48 billion spending reduction
SOURCES: CBO, 2009a, CBO’s March 2009 Baseline: MEDICARE; CBO, 2009b, “A Preliminary Analysis of the President’s Budget and an Update of CBO’s Budget and Economic Outlook,” March 2009; CBO, 2010, “Cost estimate for the amendment in the nature of a substitute for H.R. 4872, incorporating a proposed manager’s amendment made public on March 20, 2010;” CMS, Competitive Bidding Update—One Year Implementation Update, April 17, 2012; CBO, Estimated Impact of Automatic Budget Enforcement Procedures Specified in the Budget Control Act, September 12, 2011; CBO, Detail on Estimated Budgetary Effects of Title VI (Medicare and Other Health Extensions) of H.R. 8, the American Taxpayer Relief Act of 2012, as passed by the Senate on January 1, 2013, January 1, 2013; CBO, 2014, “Congressional Budget Office’s April 2014 Medicare Baseline.” U.S. Department of Health and Human Services, 2014, “New HHS Data Shows Major Strides Made in Patient Safety, Leading to Improved Care and Savings;” U.S. Department of the Treasury, Monthly Treasury Statement of Receipts and Outlays of the United States Government for Fiscal Year 2014 Through September 30, 2014, and Other Periods.