July 31, 2006
The rate of so-called “excess” growth in Medicare spending per beneficiary has varied widely over the last several decades, and growth has slowed substantially in recent years. (Excess growth is defined as growth beyond the combination of the general rate of economic growth and the rate of change in the age composition among beneficiaries.) The annual rate of excess growth fell from 5.5 percent over the period from 1975 to 1983 to 0.9 percent over the period from 1992 to 2003. Changes in provider payment policies might help explain the observed slowdown. Those changes include the implementation of a prospective payment system for short-stay hospitals, and, more recently, the imposition of mechanisms to control aggregate Medicare physician spending. Possible alternative explanations—increases in managed care enrollment, changes in Medicare cost sharing, and a system-wide spending slowdown—do not account for the slowdown in Medicare spending. The slowdown is of an economically important magnitude and deserves further study.