Psssst. Obamacare is Working

Recent data published by both the Standard & Poor’s Healthcare Economic Composite Index and the Congressional Budget Office reveal some unusually good news on the Medicare spending front.

The rapid growth in annual government spending on Medicare is slowing down – and is doing so in rather dramatic fashion.

While these tidings have many of my progressive pals popping the champagne corks in the hope that this spending slowdown may yet save us from further cuts to the Medicare program, I’m afraid I feel the need to drizzle a bit on their parade – if only just little.

Here’s the data-

Over the year ending May 2011, Medicare claim costs rose at an annual rate of 2.64%, as measured by the S&P Healthcare Economic Medicare Index. That number is down 4.36 percentage points since May 2010, and down 5.53 percentage points since its November 2009 high. This represents the lowest annual growth rate in the six years S&P has been tracking the health care information.

This is a trend you have to got to love – if, in fact, it turns out to be an actual trend rather than a brief blip in an upward trajectory that cannot be deterred.

So far, few are prepared to predict that this is all going to last – and for a very good reason. The baby boomers are coming to test the Medicare system as it has never been tested before.

It’s also not like we haven’t seen these kinds of fluctuations before.

Medicare rates are incredibly responsive to policy changes. When those policies put the clamps on what the government is willing to pay to the providers that care for our seniors, the growth in Medicare spending slows- and vice versa.

Going back to 1992, Congress reacted to unacceptable growth in government Medicare expenditures by instituting the Volume Performance Standard (VPS) whereby physicians were incentivized to see more patients if they wanted to keep up with what they had been earning from Medicare prior to the changes.

This cutback in physician payments was followed by the Balanced Budget Act of 1997, where government put the breaks on the rates paid to hospitals and post-acute care providers along with the first real regulations targeting fraud in hospital, home health, and hospice benefits.

A year later, having found that the VPS payment formula instituted to control payments to physicians was producing too much volatility, Congress went to the sustainable growth calculation (SGR) – the payment formula that is still with us to this day and causing a whole bunch of trouble.

As you might imagine, after all these policy changes designed to slow spending in Medicare were instituted, the growth curve did slow dramatically.

Then came the Balanced Budget Refinement Act of 1999, the bill that was something of a political rejection to the work done in 1997. After a few years of loud provider complaints and effective arm-twisting by the health care lobbyists, providers achieved a significant raise in pay rates and Medicare benefits were expanded to include some brand new services.

As a result, by 2002, the growth in Medicare payments had taken off once again – and continued to be a problem right through to the end of the decade.

But it wasn’t all about increased payments to hospitals, doctors and home health care workers. There is a significant part to all this that people always seem to forget when discussing costs in health care.

A fair share of the rising costs of health care over the past decade is attributable to some wonderful – if expensive – medical technologies and modern age innovations that are not only keeping you and I alive longer (I know that I am still alive because of these advances), but is also permitting us a quality of life at an older age than we have ever experienced before.

The problem is that these great steps forward cost big money – a bill that is passed along to the consumer or, in the case of consumers over 65, to the federal government.

So, why the sudden pull back in the rise in the cost of health care?

According to one-time White House health care policy advisor Zeke Emmanuel, we can thank the ACA for the slowdown in Medicare cost growth.

Emmanuel points out that the providers treating Medicare beneficiaries know they are going to be forced by the ACA to find real savings by the end of 2013 and understand that they have to get started with this now.

If Emmanuel is correct – and I think that, to a point, he is – this would be an example of pricing reacting to policy changes, not unlike what we experienced as the result of the 1997 legislation.

Indeed, we know that the growth in all health care costs have been decelerating since early 2010.

While many correctly attribute this deceleration to difficult economic times causing consumers to put off physician visits and elective procedures (and the co-pays that come with them) coupled with a general acceptance in the provider community that they must face up to lowering their costs, I think there may be something else at work – something that would also account for the dramatic slow down in the increasing cost of Medicare.

Explains David Blitzer, Chairman of the Index Committee at Standard & Poor’s (via Dailymarkets.com):

Historically, there has been a general pattern of healthcare trends declining on a lagged basis following economic downturns. Much of our spending on healthcare is related to supply-side factors – in particular, the supply of new technology and procedures. It takes considerable time for investments in healthcare to translate into increased supply and, conversely, reduced investments often result in a reduction in trend a few years later. The decline in index growth rates that began in mid-2010 may be a result of trends slowing due to reduced capital spending during the recession that began in 2007.

Mr. Blitzer has hit the proverbial nail on the head.

While our Great Recession combined with the policy effects of the ACA may be bending the Medicare cost curve, it is likely doing so at the expense of technology and other innovations that could keep our seniors with us a little longer so that they can enjoy and participate in the lives of their grandchildren.

This is the real sacrifice that our seniors are being forced to make and the reason I cannot help but inject a small, dark cloud into the discussion.

So, as we celebrate this happy development and take note that this may be yet another important benefit of the Obama health care reform, let’s not lose sight of the realization that there is a real-life cost that comes with these victories – a cost that you, or someone you love, may ultimately have to pay.

Rick Ungar

Rick Ungar is an attorney in Southern California and a frequent writer, speaker and consultant on health care policy and politics. He is a contributing writer at Forbes. Readers can reach him at rickungar [at] gmail [dot] com.