Medicare continues to exhibit remarkably slow growth: a modest 3 percent over the past year. That’s great news, but a debate is raging about whether this is caused by a weak economy (and therefore will reverse as the economy recovers) or other factors (and therefore may persist, drastically improving the budget outlook).

Two new studies tilt toward the optimistic possibility. The first, a technical paper from the Congressional Budget Office, parsed the decline in cost growth per beneficiary from 7.1 percent a year from 2000 to 2005 to 3.8 percent from 2007 to 2010.

The researchers found that the slowdown was widespread across beneficiaries, services and regions. Then they examined whether growth in price or quantity of services had fallen, and found that less than a 10th of the change could be attributed to payment rates.

Almost all of the change, then, was due to slower growth in the quantity of Medicare services. This finding is crucial, because part of the skepticism over whether the slowdown will continue is based on experience: Previous periods of slow growth haven’t persisted. Past Medicare slowdowns, however, were typically driven by price (in the form of payment reductions), not quantity of services. Good thing that’s not the case now.

The CBO team then examined various things that might have caused the quantity slowdown, none of which turned out to have had much effect. As Megan McArdle has written, the biggest factor they could identify was demographics, but even that accounted for only 0.3 percentage point (or still less than a 10th) of the reduction.

The recession, for its part, had almost no effect, which is not surprising because most Medicare beneficiaries face very small out-of-pocket charges, and most of their income comes in the form of Social Security checks, which don’t decrease when the economy is weak. The researchers conclude that “available evidence does not support a finding that demand for health care by Medicare beneficiaries was measurably diminished by the financial turmoil and recession.”

So what is the mystery factor? Changes in the delivery of care could have played a role, the CBO surmises, even though these are difficult to quantify. Hospital admission rates per beneficiary have fallen, for example, and more end-of-life care may be taking place at lower-cost hospices, rather than hospitals. (In 2000, 22 percent of the beneficiaries in the study who died used hospice care. In 2009, 42 percent did.) A “heightened public focus on cost containment” might have contributed to these trends, the researchers suggest.

My own interactions with hospital executives and other health-care providers suggest something similar: Most providers anticipate that, in the future, they will be paid based less on how much they do than on how well they do it. And that anticipation is leading to significant change today.

This raises the question of how much scope providers have to reduce costs without compromising the quality of their care. Here’s where the second new paper comes in. David Cutler and Ariel Dora Stern of Harvard University, Jonathan Skinner of Dartmouth College, and David Wennberg of the Geisel School of Medicine examined why Medicare spending varies so much across regions of the U.S. They found that patient demand explains little. Instead, it appears to be related to differences from place to place in the ways doctors practice medicine. The researchers’ survey of doctors revealed a significant statistical association between how physicians would treat hypothetical patients and actual spending patterns across regions.

If doctors who tend to provide more intensive care than medical guidelines suggest instead simply followed those guidelines, the Cutler team found, Medicare spending would fall by an astonishing 17 percent. To be sure, in some individual cases, it makes sense for doctors to go beyond the guidelines, but do we really think the entire 17 percent is justified? Findings such as these suggest there is substantial room for Medicare savings that don’t harm ― and potentially improve ― care.

Neither of these studies is definitive, but they are part of a growing body of evidence suggesting that big changes are happening in health care ― and that there is ample scope for them to continue. In the coming months, as we move into the silly season of negotiations over the federal debt limit and next year’s spending levels, the biggest government expense of all may be improving faster than policy makers yet appreciate. 

By Peter Orszag

Peter Orszag is vice chairman of corporate and investment banking and chairman of the financial strategy and solutions group at Citigroup Inc. and a former director of the Office of Management and Budget in the Obama administration. ― Ed.

(Bloomberg)