Could Slowing Health Care Costs Save Medicare?

Among 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+.

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