Could Slowing Health Care Costs Save Medicare?

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MedicaidAmong all the budget concerns facing the U.S., few pose as big a threat to the government's balance sheet as our growing health care bill. The rise in health care costs has significantly outpaced both inflation and economic growth for decades, leading to increasingly dire projections about Medicare's long-term solvency in recent years.

Yet even as policymakers debate about ways to shore up Medicare, some promising trends suggest the government program may get a new lease on life.

Although the Medicare program's trustees' report says the program will remain solvent until 2024, its projections are based on assumptions that haven't been borne out in the past.
For instance, Congress has traditionally kept reimbursement-rate cuts from taking effect, with the latest reversal overriding what would have been a 31 percent cut effective Jan. 1.

With Medicare's expansion to include prescription-drug coverage, the program has become exposed to a new set of health costs. And as the Baby Boom generation gradually reaches Medicare age, it'll be tougher than ever to keep costs in line.

Cutting Back

Yet past predictions about financial trouble haven't resulted in Medicare's failure. Back in 1997, the Medicare Trustees' report set 2001 as the program's insolvency date. But shortly thereafter, a new law was passed that cut back on the expansion of health care expenditures, extending Medicare's viability for years.

And recently, we've started to see a favorable trend arise: Growth in health care spending has slowed to its lowest level in 50 years.

According to the newest data from Centers for Medicare and Medicaid Services, health-related spending rose 3.9 percent in 2011. That was the first time in more than 10 years that it rose more slowly than the overall economy grew.

What's less clear is whether spending growth will stay subdued.

Can the Good Times Last?

Some economists believe that the slow recovery from the deep recession of 2008 and 2009 has forced many would-be patients to forgo necessary medical care due to job loss and the loss of insurance coverage. As the Washington Post reported, the number of Americans covered by private insurance fell by 8 million from 2005 to 2011 even as Medicare enrollment soared 12 million over the same period, and many of those formerly covered by employer-provided health insurance fell back on Medicaid.

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Since government programs tend to pay less than private insurance for health care, a reversal of the trend away from private insurance -- as the Affordable Care Act envisions -- could send costs growing more quickly again.

Others, though, point to spending trends among hospitals and other health-care institutions. Knowing that reimbursement rates will be held in check, these institutions are reining in their own costs to stay profitable, suggesting that slower growth in spending could be more lasting.

What to Watch For

Projections aside, the key event for health care costs will come next year, when major provisions of the Affordable Care Act take effect. As a report from influential conservative think tank The Heritage Foundation noted, not only does Medicare's own actuary forecast that growth in health spending will start to accelerate over the next decade, the government's portion of overall spending throughout the economy will rise dramatically once coverage under Obamacare becomes available.

There's an unavoidable time lag of several years before reliable data on spending will become available, so we won't know right away what impact the Affordable Care Act will have on how much people spend for their medical care.

But with millions of Americans depending on Medicare, it'll take the combined efforts of government policymakers, medical professionals, and patients to for the nation to have a chance of keeping costs under control, saving Medicare and avoiding a financial catastrophe.

You can follow Motley Fool contributor Dan Caplinger on Twitter @DanCaplinger or on Google+.

Photo Credit: Getty Images

Gallery: How A Family Of Four Manages To Live Well On Just $14,000 Per Year
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How A Family Of Four Manages To Live Well On Just $14,000 Per Year
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Could Slowing Health Care Costs Save Medicare?

"My husband told me he'd heard about this book, ["America's Cheapest Family Gets You Right on the Money]," she said. "We talked about it over the phone and I read it and thought how it could apply to us."

The couple had a single savings goal in mind –– scraping together $30,000 for a downpayment on their home in their native Henderson, Nevada.

The mindless spending was out, and Wagasky came up with a budget she could make work.
"I changed the way I was grocery shopping and started working my way up, " she said.

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Wagasky barely knew her way around a kitchen when she started her money makeover.

Now she's an avid cookbook collector (she checks them out from libraries or asks for them as gifts to save), and it's one of the simplest ways she's managed to cutback on spending.

With a $7 bread-maker she scored at a local thrift shop, she never spends on store bought slices. She's not shy about professing her love for wholesale stores like Costco, which is her go-to source for baking ingredients.

Above Wagasky's twist on homemade Sloppy Joe's.

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"Everything must be budgeted," Wagasky wrote in a June entry on her blog. "From family outings, to toiletries to clothes purchases. It must be budgeted."

And she takes Do-It-Yourself to the extreme. Everything from laundry soap and clothing to the kitchen her husband installed in their new home was either crafted by hand or thrifted.
She swears by this home-made laundry detergent recipe. (pictured above)

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When it come to cutting costs, cable was as easy luxury to part ways with.

With two children aged 6 and 8 to entertain, Wagasky invests $14.99 in a Netflix plan and recently added Hulu to the mix.

The family also uses a simple antennae to pick up basic cable channels.

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With a single source of fixed income, there's no room for impulse purchases in the Wagasky household.

They budget $400 for groceries each month and that's it.

"Once that $400 is gone, it is gone," she writes. "There are no extra shopping trips made because there is no more money."

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Wagasky said they have no credit debt, but they do charge emergency expenses on plastic when absolutely necessary.

"We recently had some medical bills we had to pay, and we were able to take our savings and pay those down as fast as we could," she said.

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With gas prices creeping higher each all the time, the Wagaskys watch their mileage like hawks.

That means combining errands together and doing all they can to make one take of gas last a month.

"We know we don't get to drive and visit family often, so when we do we cherish it," she wrote in a blog entry.

"We don't go just for an hour, we stay and visit and even run errands that may be close to where we have family. We try to remember that when the gas is gone...it is gone."

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After Wagasky's husband left active duty and started school, the couple knew they would only have $14,000 per year to live on.

So they paid off the $8,000 he owed on his truck while he was earning more and they could afford the expense.

They also bought a van, which they saved $10,000 for initially and were able to pay the remaining $12,000 owed within a year.

Having zero car payments is a nice relief.

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Like anyone with simple math skills, Wagasky was quick to realize how much cash she was wasting on prepackaged snacks for her children.

She cut them out completely and whips up homemade granola bars and trail mix instead.

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If you're on a tight food budget, your freezer will become your best friend.

Wagasky chops vegetables and fruits and freezes them for a month. She actually does the same for dairy products like cheese, butter and yogurt.

"I am able to freeze about 8 gallons of milk each month," she writes. "They sit at the bottom of my freezer and we thaw them out when we need them." Baked goods get the same chilly treatment.

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Wagasky was dubious about joining a food co-op, but after three months, she realized she would never beat the savings or quality she found.

Food co-ops pool membership fees together in order to fund a monthly harvest that's distributed at designated pick-up points.

A couple of times per month, Wagasky gets a basketful of in-season produce for $15 –– way better bargain than she'd ever find in stores.

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By the time Wagasky's husband came home from Iraq, they had managed to scrape together the $30,000 they needed for a downpayment on a home.

"But we decided the best option would be not to have a mortgage payment at all," she said. "We found a fixer-upper that didn't have a kitchen ... and we paid cash."

Price tag: $28,000. With the leftover cash, they were able to finish the kitchen and install wood flooring throughout the house.

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