Why have Medicare costs per person slowed down? Baby boomers and fewer hospital stays

The 65+ population now makes up 16% of the US population, up from 11% in 1980. In response to an aging population, Medicare costs are going up. Benefits totaled $713 billion in 2018, 25% higher than in 2009, and Medicare spending accounts for a fifth of all healthcare spending as of the latest year of data.

However, while program costs are increasing, there is an interesting counter-trend – the per person cost for insuring someone through Medicare has actually decreased.

In 2018, the overall cost of Medicare per enrollee was $13,339 per year, about $30 less than it was in 2009, adjusting for inflation. That’s even as benefits across Medicare totaled $713.4 billion, $144.4 billion more than in 2009.

Why are the costs of insuring someone through Medicare going down? A combination of demographics and policy changes may point to an answer.

The average Medicare beneficiary is getting younger

The average age fell from 76 to 75 between 2007 and 2017. Enrollment in all types of Medicare increased 29% during that period from 44.4 million to 58.5 million.

That one year drop in average age is significant for Medicare costs.

An influx of Baby Boomers enrolling in Medicare is playing a role in slowing down an increase in costs for Medicare Part A, which funds hospital stays, skilled nurse facilities, hospice and parts of home health care. In 2008, the share of Original Medicare (Part A or B) beneficiaries who were 65 to 74 years old was 43%. In 2017, 65- to 74-year-olds made up 48% of beneficiaries, the group’s highest share in the 21st century.

A 2015 Congressional Budget Office study showed that we spend 73% more on an enrollee in the 75 to 84 bracket than we do on those in the 65 to 74 bracket.

Our analysis below show how demographics factor into Medicare costs, especially age.

Hospital stays are getting shorter and less frequent

In 2017, Medicare’s inpatient payments totaled $135.3 billion, 72% of the $188.1 billion Part A total payments. That’s down from the $135.8 billion spent on inpatient programs in 2013.

While the percentage of Part A enrollees getting hospitalized during the year has remained unchanged at 18% between 2013 and 2017, there was a 4% drop in discharges (from 11.4 million to 11 million). During that period, the total days Medicare Part A patients stayed on inpatient visits dropped 7%. The number of discharges per 1,000 enrollees dropped 6%.

A 2018 report from the Medicare Payment Advisory Commission, the independent federal body that advises Congress on health care costs, explored the impact of the Hospital Readmissions Reduction Program (HRRP), which was enacted in 2010 giving hospitals financial incentives to cut readmission rates.

It found a drop in all readmission rates from 18% of cases in 2008 to 16% of cases in 2016, though there was a slight increase in observation and emergency department visits — both of which are covered under Part B. The authors of the report wrote:

The decline in readmissions across all conditions resulted in net savings to the Medicare program of roughly $2 billion per year. We conclude that the HRRP contributed to a significant decline in readmission rates without causing a material increase in ED visits, a material increase in observation stays, or a net adverse effect on mortality rates.

Hospital stays are making up a smaller part of Medicare benefits, but costs for outpatient services have gone up

That same report also noted that observation (non-overnight) stays as well as emergency department visits increased since the HRRP. (Though it didn’t entirely attribute the changes to the HRRP.)

Medicare’s cost data may show some of that shift. Costs for Medicare Part B, which covers physician, nurse, outpatient and other hospital services not related to staying overnight are increasing, both per enrollee and overall.

In 2008, the average Medicare Part B enrollee had 7.33 outpatient visits during the year. In 2017, that average rose to 8.5 visits, a 16% increase. Individual visits became 30% more expensive, averaging $195 in 2008 compared with $254 in 2017. Overall outpatient payments increased 58% from $45.6 billion in 2008 to $72.3 billion in 2017. Per enrollee, outpatient payments increased 51% from $1,424 in 2008 to $2,154 in 2017.

With new policies yet to go into effect, physician payment growth has slowed down

Part B physician payments have risen less than a percent from 2013 to 2017 from $3,122 to $3,147 per Part B enrollee, but long term trends in physician benefits remain to be seen. In 2015, the Medicare Access and CHIP Reauthorization Act was enacted, changing how physicians are paid under Medicare. Under the program, physicians have choices, based on qualifications, to get paid by Medicare via a merit-based payment system or an incentive-based payment system. The first year of that approach was in 2017.

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Sources

CMS Program Statistics: Medicare Utilization Section