The New York Times in an August 27, 2014 article noted big changes to estimated Medicare spending in the latest Congressional Budget Office (CBO) report published last week.  The estimated Medicare budget for 2019 in this year’s report has declined by approximately $95 billion from the 2019 Medicare estimate published by the CBO four years ago in 2010.  As the newspaper analysis notes, that’s six straight years of downward Medicare budget estimate forecasts by the CBO.

$95 billion obviously is a lot of money.  As the New York Times notes, that amount is greater than federal welfare, unemployment insurance and Amtrak, combined.  It is one-fifth of the estimated 2019 defense budget.  So, while there still is a deficit projected due to the cost of care for the baby boomer generation, perhaps the fiscal pain will not be as great as expected.

Interestingly, the CBO does not pin this decline on the weaker economy. Instead, it notes structural changes in healthcare delivery as inpatient hospital services demand declines, generic drug use increases and the healthcare delivery model shifts.  These “technical” changes dominate the budget forecast reductions.  Technical changes have been responsible for a twelve percent (12%) reduction since 2010 in estimated Medicare spending for the ten years between 2010 and 2020.  That reduction equates to an absolute dollar amount of $700 billion, a staggering number and one which suggests that further “technical” changes, as the healthcare industry moves to value-based reimbursement and takes on global risk, will continue to support and reduce that estimate substantially.

That said, how good an estimate is the CBO forecast if it has been this far off and adjusted materially downward every year for the last six? It may provide some nice quotations for the 2016 presidential election, but it likely will not be seen by the healthcare industry as a useful forecasting tool.  And as the economy strengthens and as populations gain health insurance coverage under Medicaid expansion and new health insurance exchanges, will demand for healthcare services rise substantially again and partially reverse this trend?  (Given that these are Medicare estimates, we think not but are mindful of dual eligible program costs.)  To our viewpoint, given the rapid shift coming this year and next in the healthcare delivery system, the best Medicare forecast is done retrospectively – or put another way, we think that the healthcare industry will be leading – and continuing to surprise – the government as it continues to evolve and take on the challenges of risk and value-based reimbursement systems.