For years, observers of the federal budget have noted the accelerated pace at which the costs of healthcare programs like Medicare rose compared to the economy as a whole, with many policymakers identifying the problem as the biggest obstacle to a balanced budget in the long run. Yet in recent years, the growth in the costs of those healthcare programs have slowed down considerably, and now, some analysts seem to believe that the Medicare crisis is over for good. Unfortunately, the problem goes well beyond the immediate future, and despite the encouraging signs we've seen lately, there are still reasons for concern in the longer-term trend.
The latest on Medicare costs
Last month, the Congressional Budget Office released an update [opens PDF] to its previous projections for its budget and economic outlook. The report covered the entire federal budget, including both expenses and income. But the statement that drew the most attention was the CBO's projection that Medicare spending will rise by just 2% in the government's 2014 fiscal year, which ends on Sept. 30.
The trend toward more modest increases in medical spending has become more pronounced in recent years. As Fool analyst Morgan Housel noted back in 2012, what was then a slowdown in costs has dramatic implications for workers, businesses, and the healthcare industry. Now, as a New York Times article noted, per-capita Medicare spending is actually falling when you adjust for inflation, and policymakers hope that the fear of soaring healthcare costs will turn out to have been unwarranted. With per-person spending falling from $12,000 three years ago to $11,200 this year and with the CBO expecting similar levels of spending through 2020, Americans might well emerge with a new sense of security in Medicare's future.
Should you still worry about Medicare?
Yet even with the good news about current levels of Medicare spending, there are still legitimate concerns about the future. Even though net Medicare spending will rise by between 2% and 3% in 2014 and 2015, spending rates increase in certain key years, including an 8% jump in 2016 and a more than 10% increase in 2019 and 2022. Overall, when you look at 10 year projections, net Medicare spending will rise at about a 5.3% average annual clip through 2024.
The Times article noted that one demographic figure could contribute to the slow growth in costs. The much-anticipated surge in Baby Boom generation retirees has started to hit retirement age, and they're now eligible for Medicare coverage. For now, that might actually be good news, as a flood of relatively healthy 65-year-olds helps to cut average spending when added to a pool of older and less healthy Medicare recipients. Over time, that demographic bump will age and require more medical care, thus raising average costs over a window that likely falls beyond the 10-year look that the CBO report provides.
More troubling is that spending for what the CBO calls "major healthcare programs" -- which includes Medicaid, Obamacare subsidies, and the Children's Health Insurance Program as well as Medicare -- is expected to climb at a much higher pace. Expenditures for those programs in total will double over the next 10 years, compared to a rise of about 70% for Medicare alone.
The most encouraging sign for Medicare
Yet some of the favorable factors for Medicare spending appear unrelated to demographics. In general, Medicare patients haven't spent as much on the services they need, taking advantage of the flood of new generic drugs to cut prescription costs and getting less inpatient hospital care. Some economists point to the sluggish recovery as holding back spending on elective procedures, and it's entirely possible that nervous Medicare recipients are pinching pennies as well rather than shoulder even the small portion of overall costs they have to bear under the program. If that's the case, then patients could start spending again once the economy picks up steam, and that could reverse the trend toward lower costs.
What would be best for Medicare is if Americans realized the moral hazards involved in simply accepting whatever medical costs a doctor or hospital puts in front of them and started taking a more active role in what they spend on healthcare. It appears that people are taking baby steps toward asserting more control over their health care needs, and if it continues, that could be the long-term answer to Medicare's future crisis. If it doesn't last, though, then the recent optimism about Medicare's fate will turn out to have been premature.
Dan Caplinger and the Motley Fool have no position in any stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.