The Story of Medicare Spending

The graph above shows the steady rise in Medicare spending per beneficiary since the program started in 1966. But that doesn’t reflect constant dollars! (I hear someone say) Here:

Not quite up to the present but it gives you the general idea. I think it tells a story.

The cost per beneficiary has grown faster than inflation over the period of the last 55 years with only a few exceptions and those exceptions are significant. Note the period between 1997 and 2000. What happened?

Congress, alarmed at the growth of Medicare spending, imposed something called “Sustainable Growth Rate” (SGR). Here’s a description from Brookings:

Under the SGR formula, if overall physician costs exceed target expenditures, this triggers an across-the-board reduction in payments. The target is based on spending growth in the economy – that’s where the “sustainable” part of the name comes from – but is not tied to quality or access to care. This year, if Congress does not act by March 31, then payments to Medicare physicians would be reduced by 21.2 percent.

What happened to upset that?

However, since 2002, Congress has stepped in with short-term legislation (often referred to as the “doc fix”) to avert the payment reduction. These patches have kept increases in physician payments below inflation over time, and have also resulted in a huge divergence between the actual level of Medicare physician-related spending and the target in the SGR formula. Consequently, the budgetary cost of permanently fixing the SGR now runs over a hundred billion dollars. For years it has been clear that both the SGR and physician payment system urgently need attention.

In other words what reduced Medicare spending was reduce the compensation rates and what increased it again was allowing the compensation rates to increase.

One last point. The annual increase in spending per beneficiary is just under 6% and has been for some time. Private insurance is about the same. When Medicare was first put in place in 1965, healthcare represented about 5% of U. S. GDP. Now it’s 18%. That means that healthcare contributes a full percentage point to inflation every year.