Payment Rate Policies Contributed to Lower Medicare Spending Growth

Changes in Medicare payment policies and varying beneficiary characteristics drove the reduction in Medicare spending growth over the last decade, according to a study published in JAMA Health Forum.

Historically, Medicare spending has outpaced economic growth. However, Medicare Parts A and B annual per-beneficiary spending growth has slowed during the mid and late-2000s.

Researchers used data from the Medicare Master Beneficiary Summary File from 2007 to 2018 and Medicare Part A claims to determine how changes in payment rates and beneficiary traits influenced Medicare spending growth.

Between 2008 and 2011, Medicare Parts A and B per-beneficiary spending grew at an average rate of 3.3 percent per year. Spending growth declined to -0.1 percent per year from 2012 to 2015 and increased to 1.7 percent per year for 2016 to 2018.

Spending per beneficiary increased from $7,669 in 2007 to $9,129 in 2018. If payment rates had remained constant at 2007 levels, overall Medicare per-beneficiary spending would have been $7,744 in 2018, or 17.9 percent lower than actual 2018 spending, the study noted.

Most sectors, including inpatient, outpatient, and physician services, saw a decrease in Medicare spending growth between 2012 and 2015 and between 2016 and 2018 compared to 2008 to 2011. However, spending on Part B drugs and inpatient rehabilitation facilities increased at a higher rate in the later years.

From 2007 to 2018, inpatient services saw the largest cumulative increase in payment rates at 24.5 percent, while physician services saw the smallest increase at 6.5 percent. Home health agency payment rates rose 23.7 percent, skilled nursing facility rates increased 23.6 percent, and inpatient rehabilitation rates grew 19.7 percent.

“Inpatient and outpatient payment changes reflect both the increasing cost of service provision and payment rate reductions enacted under the Affordable Care Act,” researchers noted.

A portion of the 3.4 percentage point reduction in per-beneficiary spending growth that occurred between 2008 to 2011 and 2012 to 2015 can be attributed to payment rate changes and beneficiary characteristics that influenced healthcare use.

These factors accounted for 1.5 percentage points of the decline, or 44 percent in relative terms.

Between 2008 to 2011 and 2016 to 2018, spending growth decreased by 1.6 percentage points. Changes in payment rates and beneficiary characteristics account for 63 percent of this reduction.

Sequestration policies reduced Medicare payment levels by 2 percent, the study found. Sequestration measures reduced spending growth for 2012 to 2015 by 0.5 percentage points. In other words, it accounted for 15 percent of the decline in spending growth between 2008 to 2011 and 2012 to 2015.

Changes in beneficiary characteristics that influence healthcare use also contribute to the spending growth slowdown. The shares of Medicare beneficiaries under age 70 and with no chronic conditions increased over the study period. Without these changes, Medicare spending growth rates would have been higher in all three periods.

The beneficiary trait changes accounted for 6 percent of the spending growth decline between 2008 to 2011 and 2012 to 2015.

While payment rate adjustments and sequestration contributed to slower spending growth, the policies differ in how they impact beneficiaries, healthcare organizations, and long-term spending trajectories.

For example, payment rate decreases under the Affordable Care Act targeted specific high-cost sectors, while sequestration reduced payments for all Medicare sectors. In addition, payment rate adjustments may generate gradual, cumulative spending growth change, while sequestration measures only reduce spending growth during 2013.

“For policymakers seeking opportunities to contain long-term spending growth, these distinctions raise questions about the optimal approach for how payment policy can influence the Medicare budget,” researchers wrote.

“Targeted payment reforms, such as the implementation of prospective payments for inpatient and post-acute services, can create incentives to deliver care more efficiently. These changes can be implemented gradually, allowing time for clinicians and healthcare organizations to adjust to new payment incentives.”