Does Obamacare Explain Medicare’s Spending Slowdown?

Medicare may just be the budget buster that wasn’t. Somehow, after decades of nonstop growth, its spending per person has flattened over the past dozen years, saving taxpayers roughly $3.9 trillion since 2011, according to an Upshot analysis.

But the reasons for the slowdown — and its duration — are not well understood. Our article on this mystery outlined a few leading theories. It also provoked more than 2,000 reader comments, many raising interesting questions and ideas of their own.

Obamacare

“Funny how the massive savings coincidentally coincide with implementation of Obamacare with cost-cutting measures and large portions of the population finally accessing health care prior to enrollment in Medicare. Such a head scratcher.” — Stephen, Columbus, Ohio

The Affordable Care Act, which passed in 2010, should get credit for a significant share of Medicare’s savings during this period — and it may be responsible for a larger share than can be easily measured.

Let’s start with the easy part. The A.C.A. reduced the payments Medicare made to hospitals and to the insurance companies that administer private Medicare Advantage plans. Those changes alone are responsible for more than a trillion dollars in spending reductions, according to estimates from the Congressional Budget Office, or about a quarter of the savings attributable to the recent flat spending trend.

The C.B.O. routinely examines the factors that caused its forecasts to miss. When it comes to Medicare forecasts, it divides its errors into three big categories: economic factors, like inflation or tax revenue; so-called technical changes, related to the practice of medicine; and legislative changes.

This chart summarizes the sources of error beginning in 2009. There were some errors in all three categories, but the legislative changes related to Obamacare were substantial.

Now, the harder part. Parts of Obamacare intended to make health care more efficient may explain a share of the technical changes during this period, too. Obamacare included incentive programs, such as one that penalized hospitals if patients were released and then returned too quickly. And it established an office to run experiments to test whether various payment changes could lower Medicare’s spending without sacrificing quality. This set of policies is often called value-based payment because it tends to link the quality off medical outcomes to payment.

There is a rich scholarly literature evaluating savings from the various programs. In general, they tend to show middling results. Many saved Medicare a little money, but certainly nothing in the trillions of dollars. Still, the existence of the programs — and Medicare officials’ new determination to squeegee waste out of the system — may have led hospital administrators, doctors, nurses and others to focus on reducing waste.

“We have bent the cost curve,” said Ezekiel Emanuel, a professor at the University of Pennsylvania who worked in the Obama White House. He said all the experiments have added up to a new culture of medical practice. “There are things which we’re not seeing because of the way we analyze the data that are actually happening, and value-based payment is one of them.”

Not everyone gives Obamacare’s payment experiments credit for this change. Private insurers were also changing the way they paid for care, including in the growing Medicare Advantage program.

Some readers also said access to preventive care may have made people healthier and less costly when they retired. Some research suggests that Americans who enter Medicare without prior health insurance cost more in their early years of coverage than those who were previously insured. But most of Obamacare’s coverage expansion didn’t begin until 2014, so this effect can’t explain the early years of the slowdown.

Demographics

“I don’t see this anywhere in the article, but it may be attributed to the age demographics within Medicare. A new 65-year-old in Medicare consumes several times less the care of an over-85-year-old.” — Edward Nawrocki, President, East Region and Anderson Campus for St. Luke’s University Health Network, Pennsylvania

It is true that baby boomers began aging into Medicare in 2011, shifting the age mix of the program younger. Those many younger beneficiaries, on average, tend to cost Medicare less than the older ones who were already enrolled.

But the demographic change alone does not explain all of the spending reduction. The changing age mix of Medicare’s population was evident to the C.B.O. and the Medicare trustees, government groups that estimate Medicare’s spending trajectory. Both substantially overestimated spending in this period.

The chart above shows a series of annual projections from the budget office from the years around the retirement of the first boomers. Actual spending fell below those projections year after year. In its analyses of these revisions, the budget office pointed to the so-called technical adjustments, not demographic changes, as the source of its errors.

The future aging of the boomers, however, is one reason that the C.B.O. thinks Medicare spending will start growing again in a few years.

Covid

“What percentage of those who died during Covid were the elderly and/or with conditions that required more medical care? Harsh, I agree, but still a fact I’d like to see as one element of the puzzle around cost per client.” — Harriette, Switzerland

Covid cannot explain a trend that long predates it. In 2020, the first year of the pandemic, Medicare spending actually jumped up, mostly the result of emergency spending to help support hospitals.

But Covid may have the effect of reducing Medicare’s spending in the future. A recent analysis from Medicare’s actuary found that the Medicare beneficiaries who died tended to be those with more costly illnesses — who would have been more costly to insure had they lived.

Smoking

“Exposure to cigarette smoke has been a leading cause of heart disease and stroke for generations. Also, a leading cause of many cancers, C.O.P.D., and a significant contributor to diabetes. The smoking rate and, consequentially, secondhand smoke exposure have dropped precipitously. Has to have an impact?” — Christie James, Columbia, S.C.

Rates of cigarette smoking have declined substantially since 1965, the year Medicare was established, and it is true that current Medicare beneficiaries have lower smoking rates than previous ones. But the effects of that decline on Medicare spending are somewhat complicated, and unlikely to explain much if any of the spending trend.

Smokers tend to incur more health costs early in life — before they join Medicare — and to die at younger ages, potentially reducing the total cost of their care while Medicare is paying their medical bills.

Several researchers have modeled the effects of smoking reductions. The answers vary slightly, but they generally find that reducing smoking either increases spending on health care for seniors since nonsmokers live longer, or decreases it by a very small amount. One study by economists at the C.B.O., who surveyed the available literature, concluded that a policy that cut the smoking rate from 19 percent to 15 percent would save Medicare less than one-tenth of 1 percent of its budget over the long term.

The time trend of the smoking declines is also a poor match for the spending pattern. Smoking was declining as Medicare spending was skyrocketing, and continued to decline as Medicare spending moderated.

Prescription drugs

“Universal access to medically needed drug treatments provides a most effective way of controlling and preventing the development of key medical conditions, thus reducing the need for more costly medical and hospital procedures.” — Claude Ferguson, Montreal

Our article mentioned that the recent paucity of new blockbuster treatments might be pushing down Medicare’s spending trajectory. But several readers noted another recent change related to prescription drugs: Medicare began paying for them only in 2006 after the passage of the Part D drug benefit in the George W. Bush administration.

There is strong suggestive evidence that Medicare’s expansion to cover prescription drugs could be driving down the program’s spending on hospitalization and doctor’s visits. A detailed study of Medicare spending found very large reductions in Medicare’s spending on cardiovascular disease as the slowdown began. David Cutler, a health economist at Harvard and one of the paper’s authors, pointed to the widespread use of effective anti-cholesterol and blood pressure medications as likely contributors. The use of those medicines increased substantially among Medicare patients once the program began paying for them.

Drug spending did increase Medicare’s budget initially, but providing access to certain drugs might have prevented more costly operations and hospitalizations later in life for some patients. The cardiovascular drugs are relatively inexpensive and turned out to be very effective in preventing heart attacks and strokes.

Comments were edited for clarity and length.