Annual Medicare spending declines for first time; Cuts by Congress, anti-fraud efforts among reasons for 1 percent drop


WASHINGTON -- Medicare spending declined in the most recent fiscal year for the first time in the history of the program, even as private health insurance plans reported increases of 4 percent to 10 percent, new government data show.

The decline was slight -- 1 percent from 1998 to 1999 -- but significant because Medicare has grown every year since its creation in 1965.

The reduction in Medicare spending surprised many health policy analysts. Medicare had been growing 10 percent a year when Congress curbed Medicare payments to doctors, hospitals and nursing homes in 1997. Lawmakers said then that they intended to slow the growth of Medicare but never expected to reverse it.

The savings stem from many causes, including cuts made by Congress, low inflation and efforts to rein in fraud. Those conditions may prove temporary, analysts said. Even so, they could relieve worries about the program's long-term stability and make it easier for Congress to provide coverage of prescription drugs or other benefits.

The 1999 federal fiscal year ended Sept. 30. In April, the Clinton administration reported a slight decline in Medicare spending for the first half of the fiscal year, but said it was a fluke, not a trend. In June, the White House was still forecasting an increase in Medicare spending for the full fiscal year.

But new statistics from the Treasury Department belie those predictions. Medicare spending declined by 1 percent, to $212 billion in the most recent fiscal year, from $213.6 billion in the previous year.

By contrast, when the Balanced Budget Act was passed in 1997, the Congressional Budget Office predicted that the government would spend $231 billion on Medicare in 1999 -- or $19 billion more than was spent.

"The decline in Medicare spending is a phenomenal development," said Robert D. Reischauer, a former director of the Congressional Budget Office, "considering the increase in the number of beneficiaries and the resurgence of rapid growth in health costs in the private sector."

In a recent survey of 600 large employers, Hewitt Associates, a consulting concern, found that the cost of its employee health benefits increased by an average of 7.8 percent this year, the largest increase since the early 1990s.

One big difference between Medicare and private health plans is that Medicare generally does not cover prescription drugs.

A sharp increase in drug spending is widely believed to be a major reason for the increase in the cost of private health plans. Drug manufacturers have developed dozens of effective but costly new medicines, and drug companies have encouraged greater use of their products through advertisements aimed directly at consumers.

President Clinton and congressional Democrats are mobilizing a campaign to secure Medicare coverage of prescription drugs. The issue is sure to be hotly debated in next year's presidential election and in many congressional races.

Medicare spending rose an average of 10 percent a year from 1990 to 1997, then climbed 1.5 percent in fiscal 1998.

The decline in Medicare spending in the last fiscal year means that more money remains in the Medicare trust fund to buy health care for people who are elderly or disabled. But it does not solve Medicare's long-term financial problems.

Medicare finances health care for more than 39 million people. The number of beneficiaries has been increasing about 1 percent a year and will grow faster as millions of baby boomers join the rolls after 2010.

Nobody can say for sure when the growth of Medicare spending will resume. The slowdown has lasted longer than analysts predicted. Congress and the White House agreed last week to restore some of the money cut in 1997. But the amount to be restored, averaging less than $2.5 billion a year, is relatively small, compared with total Medicare spending.

Health policy analysts in and out of the government gave these reasons for the decline in Medicare spending:

Hospitals and other health care providers, scared by the federal crackdown on Medicare fraud, have become more conservative in their billing practices and more diligent in trying to comply with federal rules.

Hospital admissions for Medicare patients have unexpectedly declined. Even more surprising, the severity of illness for the average patient, as measured by the government, has also declined. So Medicare is paying less for the average patient than it otherwise would.

Health care providers are taking more time to submit claims, perhaps because they have been preoccupied with efforts to prepare their computers for the year 2000. And the government has been slower in paying claims. These delays temporarily slow Medicare spending, but do not save money in the long run.

Inflation has been lower than expected. This lowers Medicare spending because payments to health care providers usually include an allowance for inflation.

Visits to sick people by home care companies have declined, after a decade of rapid growth.

In writing rules to carry out the 1997 law, the Clinton administration has restricted Medicare spending more than Congress intended.

The law established complex new formulas to pay health care providers. Marilyn Moon of the Urban Institute, a public trustee of the Medicare trust fund, said that confusion about the new payment rules might have depressed spending.

"A lot of health care providers don't know what to make of the new law and the new rules, so they take a go-slow approach," Moon said. "They are interpreting the regulations even more stringently than they have to."

William S. Custer, an economist at Georgia State University in Atlanta, said the Medicare cutbacks could indirectly contribute to increases in costs for private health insurers.

"Hospitals, doctors and other health care providers may be unable to give discounts to private health plans because of the financial constraints imposed on them by Medicare," Custer said. Many hospitals say Medicare does not fully cover their costs, so they find it difficult to cut prices for patients with private insurance.

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