Increased Year-End Health Care Spending Could Worsen Inflation

Policymakers are currently discussing a number of policy changes for potential inclusion in an end-of-year package attached to government funding that could increase Medicare and other health payments. These changes could cost up to $35 billion next calendar year, and if made permanent they would cost $500 billion over a decade. These policies would also exacerbate inflationary pressures and increase prices by 20 to 50 basis points. The following is largely an update to a previous analysis, which can be found here. 

Federal health care spending nearly totaled a record $1.5 trillion (nearly 6 percent of Gross Domestic Product) in FY 2022, and rising health care costs continue to drive up household costs, depress wage growth, and contribute to inflation. Having spent over $300 billion to support health care providers during the pandemic, Congress should avoid unnecessary payment increases at the end of the year and should offset additional health spending with other health savings.

While some health policies are extended every year (so-called "health extenders") and don't have substantial costs, policymakers are reportedly pushing other more expensive policies that would increase federal health care spending and result in premium increases for Medicare beneficiaries. These include the revival of a pandemic-era emergency pause to the Medicare sequester that has otherwise been in place since 2013, along with extensions of other pandemic relief such as physician payment bonuses and some pandemic-era bonus Medicaid funding for home- and community-based services.

The costliest health policy being suggested is a suspension of the Medicare sequester. The Medicare sequester is a 2 percent cut to Medicare payments originally imposed in 2013 and originally set to expire in 2021. It has been extended eight times and now runs through 2031. It was suspended at the onset of the pandemic but was phased back in at 1 percent from April to June of this year and has been in full effect since July. Enacting another suspension after the sequester has already gone back into effect makes little sense. In addition to the $15 billion price tag for the first year, pausing the sequester would worsen the financial situation of the Medicare trust fund, which is already projected to be insolvent in 2028, according to the Medicare Trustees. 

Another costly potential policy involves Medicare physician payments. There is discussion of extending COVID-era percent physician payment bonuses enacted in 2020 (at 3.75 percent) and 2021 (at 3 percent), as well as rolling back the scheduled 4.5 percent reduction in the Physician Fee Schedule recently finalized by the Centers for Medicare and Medicaid Services (CMS).

The bonuses were intended as pandemic relief and to help smooth the transition into a long-planned effort to rebalance physician payments away from specialty care and towards primary care in a budget-neutral manner. However, elective procedures and in-person visits have normalized, and it's now year two of the effort to rebalance physician payments. Additionally, Medicare's pandemic expansion of telehealth coverage remains in effect, blunting any argument that care utilization is still depressed by the pandemic. 

On top of the changes in physician payments, incentives for physicians to participate in alternative payment models (APM) are expiring at the end of 2022. 

Cost of Potential Health Care Policies

Sources: Congressional Budget Office and Committee for a Responsible Federal Budget. Estimates are rough and rounded.  *If every Medicare beneficiary were to test once per year, costs would amount to $60 billion per year according to one account, not accounting for follow-up treatment; the actual cost would likely be some fraction of that amount. 

The Medicaid home- and community-based funding proposal would extend a 10 percent federal matching increase that was originally included in the American Rescue Plan. It would cost $10 billion to extend for another year and $114 billion over ten years. However, states are currently flush with Medicaid money, having already seen billions of dollars in supplemental Medicaid funding tied to the public health emergency, and this further COVID relief is unjustified.

Additionally, CMS is scheduled to enact cuts and clawbacks to home health services in Medicare. These cuts are tied to the removal of therapy visits from payment factors, which MedPAC has supported to prevent abuse and overspending. To suspend these cuts would cost over $3 billion in 2023 but $18 billion over ten years if permanently halted. 

Lawmakers are also considering the addition of other costly health care legislation, such as reforming prior authorization in Medicare Advantage, which would cost $16 billion over the decade, and permanently extending Medicare's coverage of telehealth, which would increase spending by $25 billion.

They are also discussing the inclusion of the Medicare Multi-Cancer Early Detection Screening Coverage Act or passing it as stand-alone legislation. The bill would require Medicare to cover Food and Drug Administration-approved multi-cancer screening tests that could increase spending by up to $60 billion per year (if every Medicare beneficiary were to take the test). While the legislation is not likely to be scored to cost that amount, it would still increase costs by billions per year and lead to increases in Medicare premiums. Especially problematic is that the legislative move would establish a precedent of Congress interfering with Medicare coverage decisions that protect patients from uncertain effectiveness and large costs. 

Other extensions, which pre-date the pandemic, include increased Medicaid funding for territories; increased payments or funding for Medicare-dependent hospitals, low-volume hospitals, ground ambulances, rural home health care, and maternal visiting; and suspending cuts for clinical laboratory services. Extending these policies for a year would cost nearly $2 billion.

Lastly, Congress might consider capping cost sharing for insulin at $35 per month in the private sector, building off the cap in Medicare enacted by the Inflation Reduction Act. This will cost roughly $5 billion over a decade by increasing costs for private insurers and resulting in higher premiums and Affordable Care Act subsidies. 

By boosting health care costs, these changes would also worsen inflation. A 2014 Federal Reserve study suggests the sequester suspension alone would increase prices by 9 to 24 basis points. The increases here could potentially boost prices by more than twice that amount, meaning prices could ultimately be as much as half a percentage point higher as a result. 

In addition to increasing federal spending by $35 billion, these policies would boost household spending on health care. For example, we estimate Medicare premiums would increase by roughly $4 billion in the first year, and out-of-pocket cost sharing would go up as well. Private sector premiums would also rise as a result of the insulin payment cap. CBO estimates total private sector costs would rise by $2 billion per year. 

Lawmakers must also decide how to address the impending PAYGO sequester, which calls for 4 percent cuts to Medicare and zeroing out all non-exempt mandatory programs due to the cost of the American Rescue Plan. While it's unlikely that those cuts will be allowed to go into effect, lobbying efforts have used the threat of the PAYGO sequester to make other potential cuts seem larger than reality. Repealing or delaying the sequester would not be scored as a budgetary cost due to the original deficit increase from the American Rescue Plan already being accounted for, but other efforts to increase health payments would come with the costs outlined above.

Ultimately, adding these policies to an end-of-year spending package without offsetting them is unnecessary, bad fiscal policy, and would worsen inflationary pressures. There are plenty of offsets available for policies that lawmakers choose to enact anyway, including equalizing Medicare payments regardless of site-of-care, reforming post-acute care, reducing Medicare Advantage overpayments, and many more. Given the outlook for health care spending and impending Medicare trust fund insolvency, Congress should be pursuing policies to further lower health care costs and Medicare spending, not extending unnecessary relief to doctors and hospitals.