Outside the Beltway

Krugman vs. The Actuaries on Medicare

Paul Krugman's Medicare projections don't line up with what the actuaries are telling us.

Steve Verdon · Friday, August 6, 2010 · 3 comments

Dave Schuler catches Paul Krugman going on all starry eyed about the Medicare report.

…the Medicare actuaries believe that the cost-saving provisions in the Obama health reform will make a huge difference to the long-run budget outlook. Yes, it’s just a projection, and debatable like all projections. And it’s still not enough. But anyone who both claims to be worried about the long-run deficit and was opposed to health reform has some explaining to do. All the facts we have suggest that health reform was the biggest move toward fiscal responsibility in a long, long time.

Unfortunately, although that’s what the summary that I cited yesterday says, that’s not what the actuaries have said.

Dave is quite right. The actuaries saw things quite differently. What the actuaries did in their analysis was to look at what was likely to occur or not, not merely what was required under current law. For example, one of the things likely to not occur are the reductions in payments to doctors for Medicare. From the actuarial analysis section,

As noted in the preceding Introduction and Conclusion sections, the actual future costs for Medicare are likely to exceed those shown by the current-law projections in this report. Congress is almost certain to prevent reductions in Medicare payment rates to physicians that would total about 30 percent over the next three years. These reductions are required by the sustainable growth rate system in current law, but smaller reductions have been overridden every year since 2003. Under the Patient Protection and Affordable Care Act, as amended, increases in the prices paid by Medicare for almost all other (non-physician) categories of health services will be reduced by the growth in economy-wide productivity (about 1.1 percent per year). As described previously, the long-term feasibility of the slower price increases is very uncertain, and a strong possibility exists that Congress would eventually moderate or eliminate these adjustments.

For these reasons, the estimates shown under current law should be used cautiously in evaluating the overall financial obligation created by Medicare and in assessing the financial status of the individual trust fund accounts.–emphasis added

Indeed the actuaries estimate that from 2010 to 2019 Medicare expenditures will grow at an annual average of 5.8% when due to several factors such as growth in the number of beneficiaries, price increases, increases in the number of services for enrollees and that includes the unrealistic schedule of reduce payments to physicians. However, these numbers are likely too low given that there is every reason to believe that Congress will prevent these pay reductions from taking place.

When interpreting these projections, however, it is important to understand that projected Part B, SMI, and total Medicare expenditures are unrealistically low in 2010 and later because of the current-law physician payment reductions. Should these payment rates, by new legislation, be prevented from declining, the overall Medicare costs shown in this section would be increased—possibly by about 6 to 9 percent in the short range, depending on the specific changes enacted. If, in addition, the productivity adjustments to other Medicare price increases are phased out after 2019, then total Medicare costs in 2030 could be roughly 18 percent greater than shown in table III.A2, 38 percent greater in 2050, and 69 percent greater in 2080.

Guess Prof. Krugman didn’t read that far into the report. Of course, he didn’t even read the overview completely either,

It is important to note that the improved outlook for the HI trust fund depends in part on the feasibility of the productivity adjustments to payment updates for hospitals, skilled nursing facilities, home health agencies, and hospice care organizations. There is a significant likelihood that these providers would not be able to reduce their cost growth rates sufficiently during this period to match the slower increases in Medicare payments per service, in which case they would eventually become unable to continue providing health care services to Medicare beneficiaries. If such a situation occurred, and Congress overrode the productivity adjustments, then actual costs would be higher and the HI trust fund would be depleted somewhat sooner (in 2028, based on the illustrative alternative projection).–page 26

[…]

However, the projected future growth rate reflects unrealistic reductions in physician payments required by current law. Legislative changes to the current statute regarding physician payments are nearly certain and could increase the projected Part B growth rates to roughly 8 percent through 2014.–page 31

[…]

As noted, due to the structure of physician payment updates under current law, the projected Part B expenditure and income growth is unrealistically low.–page 32

[…]

It is very likely that Congress will legislatively override the significant reductions in physician payments per service that are scheduled. Scheduled negative physician fee updates in 2003 through November 2010 have already been overridden by legislation, and the negative physician fee update scheduled for December 2010 is larger than any of those previously avoided. However, these unlikely payment reductions are required under the current-law payment system and are reflected in the Part B projections shown in this report. Consequently, the Part B, total SMI, and total Medicare estimates shown for 2010 and thereafter are likely to be significantly understated and should be interpreted cautiously. –page 32

So contrary to what Prof. Krugman asserts those of us who were opposed to the ACA and are concerned about the fiscal outlook have nothing to explain. I am not opposed to health care reform, I was opposed to the ACA because I don’t think the cost saving measures will be implemented and thus will end up making the situation and the fiscal outlook worse. Or, to put it another way, I agree with my co-blogger Dave Schuler, “we really are in need of healthcare reform legislation.”