CBO Projects Small Dip in Medicare Spending

One of the notable changes in Congressional Budget Office’s (CBO) latest budget baseline was a downward revision in projected Medicare spending from their last forecast in February. CBO now estimates that Medicare spending net of offsetting receipts for the 2015-2024 period will be approximately $106 billion lower than what the agency projected back in February.

Nearly $20 billion of that revision, though, comes from an 18 percent increase in the ten-year cost of replacing the Sustainable Growth Rate (SGR) formula with frozen physician payments, up to $124 billion from CBO's previous estimate of $105 billion.¹

Most of the decrease ($98 billion) in Medicare spending is due to technical changes to CBO’s baseline, particularly a $56 billion decrease in projected spending for prescription drugs covered by Medicare Part D, as well as a $38 billion reduction in net spending for Part A and Part B benefits. According to CBO, net outlays for Parts A and B will be slightly higher from 2015 to 2017, but lower in subsequent years than they were in the previous baseline. However, CBO attributes part of this decline to the Sustainable Growth Rate (SGR) formula's scheduled reductions in physician payments (24 percent in April 2015), since the higher spending in the near term will require bigger cuts in later years. It is unlikely that lawmakers would ever allow such a reduction to occur, though Congress has historically offset past "doc fixes" with other health savings.

Recent legislation patching the SGR for 12 months also changed CBO's estimates. As a result, outlays will increase by $6 billion in 2014 and mandatory outlays will decrease by $7 billion for the 2015-2024 period, primarily through reducing over-payments for certain Medicare services and extending the reductions in Medicaid payments to hospitals that treat a disproportionate share of low-income patients.

CBO’s projection of lower Medicare spending is welcome news, but with the baby boom generation beginning to retire en masse, Medicare remains one of the primary drivers of increased debt this decade and beyond. Now is not the time to get complacent about reforms that could improve the program for beneficiaries and taxpayers alike.