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Managing Medicare's Costs

Soft economy slows the growth rate in Medicare’s and retirees’ healthcare costs

When the recession hit in 2008, consumers adapted their purchasing practices, moving away from higher-priced products. Late that year and during the first quarter of 2009, stock market pundits said (correctly, as it turned out) that among the safest investments were the big box discounters. And that among the riskiest were stocks in businesses relying on discretionary purchases. As if to prove the point, the sales of Rolex and other Swiss watches slumped by more than 40% in 2009.

People also spent less on essentials like food. Some shoppers began purchasing groceries in volume, e.g., four pounds of bacon at Costco, or they substituted chicken for steak or bought produce at half-price at a neighborhood Farmers Market. When Whole Foods, the chain of organic food stores, saw its sales fall by more than 4% in 2009, it revamped its strategy and introduced the “365” store brand value-priced products.

Healthcare consumers also changed their spending practices. Many people lost their jobs, some employers stopped paying for health insurance, and a few workers who did have employer plans skipped coverage to save money. The result was a ten percent decline from 2007 to 2010 in the number of workers in group health plans. And according to a recent study in the journal Health Affairs, during 2009 and 2010 healthcare spending grew at the lowest rates in the 50+ years that cost data has been collected.

The unsteady economy may not have been the only reason for slowing medical costs. Hospitals and large medical groups were beginning to form accountable care organizations, and even before the recession millions of Americans had become savvier healthcare shoppers because of their worries about rising costs. The Medicare Payment Advisory Commission is currently projecting that Medicare’s cost growth will remain low until 2020 — presumably long after the recession has passed — although the Medicare growth rate is still expected to be slightly higher than CPI inflation.

Among retirees the shift toward cheaper coverage has been easy to trace. Enrollment in the less expensive Medicare Advantage plans began to climb in 2006 when hundreds of new plans were rolled out. Although the largest enrollment jump was from 2005 to 2006, the rapid migration to these plans has continued: in 2005, just over one in eight Medicare beneficiaries was enrolled in an Advantage plan, and by the end of 2011 one in four was.

Meanwhile the number of people who have Medigap policies, which are pricier alternatives to Advantage plans, has been on a downward slope since 2004. By the end of 2010, there were 675,000 fewer policyholders than there had been six years earlier. And the introduction of more affordable Medigap plans in 2007 and again in 2010 created a middle ground for those wanting the flexibility that Medigap coverage offers but not wanting a higher-premium comprehensive plan. The industry trade group America’s Health Insurance Plans said in its report 2010-2011 Trends in Medigap Coverage that the four newest and least comprehensive plans accounted for 23% of all Medigap sales during the first quarter of 2011.

When retirees enroll in an Advantage plan, they understand that their medical services will be rationed. They will not be able to see specialists without first getting referrals, and they may be denied treatments that the plans maintain are not needed. Still, those in good health who do not regularly see several specialists may be willing to accept these restrictions as a necessary tradeoff for low or even zero premiums. Similarly, people who buy less comprehensive Medigap plans may ration their own care to avoid cost-sharing.

Yet neither of these explains why Medicare’s cost growth has slowed. Advantage plans receive monthly payments from Medicare, and the payments do not rise or fall based on the number of services a plan provides. So while Advantage plan enrollees may limit their use of healthcare to avoid cost-sharing, that doesn’t reduce Medicare’s costs, even though it does improve the plan’s profits. Also, the miniscule percentage of people with less comprehensive Medigap policies – about one-half of one percent of all Medicare beneficiaries — is too small to have much of an impact on Medicare’s bottom line.

What’s more likely is that many of the 36 million beneficiaries with fee-for-service Medicare rationed their care, which does reduce the costs for the government as well as insurance companies who sell comprehensive supplemental plans. Ideally, such reductions would occur with discretionary treatments. But in reality, there were also some reductions in services that were needed.

Even people with comprehensive supplemental plans will sometimes delay or skip services. Those wanting hip or knee replacements, for example, may decide to postpone surgery because of the added costs. Even though the surgery itself may be fully covered, the prescription drugs or the physical therapy or the time off from work may not be. If there is no long-term damage from postponing the surgery, some people will choose to do so.

Does skipping treatments during a recession create health risks? The answer appears to be no. Ironically, people’s health seems to improve during economic downturns, and several studies have shown that mortality rates declined during previous recessions. There are various explanations, none of them wholly satisfactory.

Last month the National Bureau of Economic Research published a working paper titled Why Are Recessions Good for Your Health? and, based on an analysis of mortality rates, the author found that the most plausible reason is that during a strong economy skilled nursing facilities find it difficult to maintain a full nursing staff, which results in higher death rates for elderly individuals. ◊◊

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