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Medicare Cost Slowdown Could Close U.S. Budget Gap

Author: Peter R. Orszag, Adjunct Senior Fellow
March 20, 2013


New evidence that the slowdown in health care costs over the past five years is happening not only because of a weak economy comes from the Economic Report of the President, released last week by the President's Council of Economic Advisers. If the slowdown were to continue in the future, the report shows, Medicare spending would basically remain flat as a share of the economy.

Nevertheless, new data suggest Medicare spending growth may be picking up a bit. So it's important to take more aggressive action to improve value in health care.

The Economic Report of the President examines changes in health-care spending and unemployment rates across states, and concludes on that basis that the recession accounts for only 18 percent of the slowdown in spending growth since 2007. (A similar analysis for Medicare alone, which is mentioned only in a footnote in the report, shows an even smaller contribution from the recession, which is not surprising since Medicare beneficiaries tend to be better protected against economic fluctuations than the population as a whole.)

The report then goes on to examine some of the structural shifts that could explain why health costs are decelerating, including the movement away from fee-for-service payments and toward greater care coordination.

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