CBO lowers Medicare, Medicaid cost estimates: 3 things to know

The Congressional Budget Office has reduced the estimated cost of Medicare and Medicaid by $89 billion for the time period from 2015 to 2024 in an update to the budget and economic outlook the agency released in April. Here are three things to know about Medicare and Medicaid spending, according to the latest CBO projections.

1. Revisions to the economic forecast drove the drop in expected Medicare and Medicaid spending over the next decade. Under current law, Medicare fee-for-service payment rates for most services undergo automatic updates, which depend on changes in the prices of the labor, goods and services healthcare providers buy. The CBO's latest projections are slightly lower for 2014 to 2015 than they were in its previous forecast for both the prices of medical goods and services and labor compensation per hour. Therefore, Medicare payment rate updates will be $49 billion, or less than 1 percent, lower than previously forecasted. Lower than expected prices for medical services and labor will also reduce expected Medicaid spending by an estimated $40 billion, or 1 percent, from 2015 to 2024, according to the CBO.

2. Federal spending for major healthcare programs will increase by $67 billion, or 9 percent, in 2014, according to the CBO. The increase will primarily be driven by Medicaid expenditures, which the CBO expects to grow by $40 billion, or 50 percent, this year, partly because of Medicaid expansion under the Patient Protection and Affordable Care Act. Meanwhile, Medicare outlays are expected to grow by $12 billion, or 2 percent, this year, similar to the 2013 growth rate.

3. The CBO's projections assume physician reimbursement will be cut by 24 percent in April 2015 and will increase and decrease by small amounts in the following years under Medicare's physician payment formula, the sustainable growth rate. However, if lawmakers override the scheduled SGR cut with a temporary patch —  as they have every year since 2003 — Medicare spending will exceed CBO's baseline projections. Holding current payment rates through 2024, for instance, Medicare spending would increase by $131 billion, or about 2 percent, from 2015 to 2024.


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