Medicare's Financial Picture Is Looking Better

Maybe Medicare spending won't break the bank, after all—or at least not as quickly as we thought.

Medicare's trustees said Monday they think the recent slowdown in health care spending might continue, which would save the system billions of dollars. Spending cuts in Obamacare would save even more money, they said.

The trustees are required by law to issue a report every year about Medicare's finances, including the date at which they expect the program's trust fund—which pays for hospital stays—to become insolvent. Historically, it hasn't been a very sunny document.

But the latest report, released Monday, is more optimistic.The trustees now expect Medicare's trust fund to stay solvent until 2030, four years longer than their last estimate. It's the third year in a row that the trustees have added more time to the trust fund, and their optimism about the slower growth in health care costs is even more significant.

But not all health care experts share the trustees' confidence. Medicare's independent actuaries said the report's assumptions are "clearly unrealistic," in part because it assumes that Congress will allow Obamacare's cuts to take effect.

Here's what you need to know about the latest estimates:

Medicare's cost outlook is improving

Over the past few years, health care spending has been growing a lot slower than it did in the past. This is a big deal because it means everyone's health care budget—including the federal government's—will go further.

For a while, no one wanted to get too excited about the spending slowdown, because health care experts assumed it was a result of the broader economic crash of 2008. So the assumption was that as the economy improved, health care spending would resume its out-of-control growth. But now the economy is improving, and health care costs are still growing slowly. On Monday, the Medicare trustees seemed cautiously optimistic that this trend would continue.

"The Trustees are hopeful that U.S. health care practices are in the process of becoming more efficient as providers anticipate a future in which the rapid cost growth rates of previous decades, in both the public and private sectors, do not return," the latest report says.

Obamacare is helping

Obamacare's cuts to Medicare spending are at least part of the reason the trustees are more optimistic. The Affordable Care Act calls for big cuts in Medicare's payments to doctors, hospitals, and other health care providers, and it also includes measures that aim to make the health care system more efficient.

The trustees have previously said the health care law extended the life of Medicare's trust fund, and they said Monday that Obamacare's cuts will "add substantial further savings" on top of the slower growth caused by other economic factors.

But that's assuming Congress lets the law's cuts happen as scheduled—an assumption the trustees have hesitated to make before.

A lot of this depends on Congress

Predicting Medicare spending is no easy task. It requires a lot of assumptions about the economy and the price of health care, and also about Congress. The trustees have to guess what Congress will do with Medicare rates, and whether it will let scheduled cuts take effect.

This year, for the first time, the trustees are assuming that the biggest scheduled cut to Medicare spending won't happen. Medicare's payment formula calls for massive cuts every year to doctors' pay—they're around 25 percent now, more than doctors could absorb. Every year, though, Congress delays the scheduled cut. The Medicare trustees assumed that Congress will keep blocking the reduction in doctors' pay, so the savings from a 25 percent cut will never actually appear.

But the trustees assumed that Congress won't block most of Obamacare's Medicare cuts. If those cuts are allowed to take effect, the trustees said, Medicare spending will grow to about 6.9 percent of the total economy by 2088. If Congress blocks the Affordable Care Act's cuts, Medicare would instead eat up about 8.4 percent of the economy instead.

Medicare is still crazy expensive

The latest trustees' report is more optimistic than past findings, but it still shows Medicare eating up a bigger and bigger piece of the total U.S. budget every year. The program is on an unsustainable path, the trustees said—it's just not quite as unsustainable as it was before.

"Notwithstanding recent favorable developments . . . Medicare still faces a substantial financial shortfall that will need to be addressed with further legislation," the trustees said.

The slowdown in Medicare spending is usually measured in terms of per-person costs. But even when those costs stay unchanged, the retirement of the baby-boom generation will mean an influx of new beneficiaries and a new strain on Medicare's finances.

Medicare's actuaries said Monday that the trustees were too optimistic, particularly in assuming that Congress would let Obamacare's spending cuts take effect.

The trustees' assumptions should not "be interpreted as the most likely expectation of actual Medicare financial operations in the future but rather as illustrations of the very favorable impact of permanently slower growth in health care costs, if such slower growth can be achieved," the actuary said.

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