CBO May Have Undershot Medicare’s Future Deficit Reduction By Over $300 Billion

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Several weeks ago, the Center on Budget and Policy Priorities analyzed the latest budget outlook from the Congressional Budget Office, and found that Medicare’s projected spending between 2010 and 2020 had dropped by over $500 billion since CBO’s projections in 2010.

This was effectively free deficit reduction: no spending had to be cut or policies changed. Health care markets simply shifted in an unexpected way that slowed the growth of health care costs — and what Medicare is projected to spend to buy health care for seniors slowed accordingly.

The big question is whether this slow down is temporary or long-term. David Cutler and Nikhil Sahni took a closer look and found that CBO’s numbers assume the slow down is temporary. If that assumption is wrong, then Medicare could see $363 billion in additional savings by 2023.

Cutler and Sahni constructed the graph below using CBO data. The blue line shows CBO’s 2010 forecast of Medicare’s “excess” annual spending growth. (The increase in spending per beneficiary minus the increase in gross domestic product per capita.) The green line shows CBO’s 2013 forecast. As you can see, while the growth projected in 2013 undercuts what was projected in 2010, the lines re-converge after 2018:

Basically, CBO is projecting that excess spending growth will jump back from its recent average of -2.9 percent to 1.4 percent after 2018.

Cutler and Sahni raise several reasons why this projection could be mistaken, and why the changes we’ve seen will stick: Medicare and Medicaid are moving to reduce reimbursement rates; digital record-keeping and new business models are lowering administrative costs; more low-cost generic drugs are becoming available as patents end, allowing for low-cost generics); we’re turning to expensive and overused procedures less often; and many health care organizations are restructuring to deliver care more efficiently.

This is important because Medicare is the primary driver of CBO’ long-term debt projections. As a result, predicting our future debt levels is a very tricky business, something the Beltway would do well to remember as it’s been gripped by debt panic. Changes in health care markets may have quietly lowered Medicare’s future spending by levels that rival the deficit reduction in either the “fiscal cliff” deal or 2011 Budget Control Act — all without lawmakers reducing any of Medicare’s benefits.

Equally important, we may very well owe many of those market changes — especially lower reimbursement rates, digitized records, and delivery system efficiency — to the reforms and incentives built into Obamacare. If true, that would make the health care reform law a far larger deficit reducer than anyone, including the CBO, has given it credit for.