On August 22, 2012, the Congressional Budget Office (CBO) issued an Update to the Budget and Economic Outlook for fiscal years 2012 to 2022 (Budget Update).  CBO states in the Budget Update that “[s]harp reductions in Medicare’s payment rates for physicians’ services are scheduled to take effect[]” in fiscal year 2013.  Following its normal procedures, CBO prepared baseline projections for, among other things, Medicare expenditures that assume that current laws remain in effect.  For example, the baseline projections assume that Medicare physician payments will be reduced by 27 percent in fiscal year 2013 and by additional amounts in later years as a result of the sustainable growth rate (SGR). CBO acknowledged, however, that Congress has passed legislation every year since 2003 to prevent the scheduled reduction from occurring.  Accordingly, CBO also developed alternate projections that assume that Congress passes legislation to block the SGR reduction from taking effect in fiscal year 2013, as Congress has done every year since 2003.  “If payment rates through 2022 stay as they are now, outlays for Medicare (net of premiums) would be $10 billion higher in 2013 and about $245 billion (or about 3 percent) higher between 2013 and 2022 than they are in the current-law baseline,” CBO states.

A number of updates to its economic forecast caused CBO to reduce its estimate of mandatory outlays in fiscal year 2012 by $7 billion and to increase its projection of those outlays by $212 billion for fiscal years 2013 through 2022.  With respect to fiscal year 2012, spending for Medicare is anticipated to be approximately $9 billion less than it was in 2011.  “However, most of that reduction is the result of $15 billion in payments being made in fiscal year 2011 rather than in 2012 because the first day of fiscal year 2012 (October 1, 2011) fell on a weekend.”  Without this change in the timing of payments, Medicare outlays would be up by nearly 4 percent this year.  For fiscal years 2013 through 2022, CBO changed its projections for Medicare spending because its current projection of economy-wide productivity are lower than they were in its prior forecast and its projected prices for goods and services (e.g., labor and non-labor outputs) are higher.  Accordingly, CBO now anticipates higher payment rates for Medicare than its March forecast—which results in an increase in Medicare outlays by $136 billion from 2013 through 2022.  With respect to Medicaid, higher projected prices for medical services and the cost of labor are expected to increase spending by $27 billion from 2013 through 2022. 

CBO projects that outlays for Social Security, Medicare, and Medicaid will grow from 10.5 percent of gross domestic product (GDP) in 2013 to 12.2 percent of GDP in 2022, and will account for approximately 55 percent of all federal spending by 2022.  As a result of enrollment increases, Medicare outlays (excluding receipts from premiums and other sources) are predicted to total 3.7 percent of GDP in 2013 and 4.3 percent of GDP in 2022.  As a result of the Medicaid expansion under the Patient Protection and Affordable Care Act (ACA), Medicaid outlays are anticipated to increase from an estimated 1.7 percent of GDP in 2013 to a projected 2.4 percent of GDP in 2022.  CBO also stated that another factor leading to anticipated growth in mandatory spending is the provision of subsidies for the purchase of health insurance, which will become available in 2014 under ACA.  “In total, outlays for those subsidies will reach $123 billion (or 0.5 percent of GDP) in 2022,” CBO states. 

CBO’s Budget Update is available here. 

Reporter, Adam Robison, Houston, +1 713 276 7306, arobison@kslaw.com.