Income Effects and Current Law Forecasts of Health Care Spending Growth

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DESCRIPTION (provided by applicant): Each year the Office of the Actuary (OACT) at the Center for Medicare and Medicaid Services (CMS) and the Congressional Budget Office (CBO) assess the fiscal health of the Medicare trust funds. These forecasts are required to assume current law remains in force (no policy changes). Current-law forecasts may produce unsustainable projections if the current policy environment inhibits market mechanisms from slowing cost growth. The challenge for forecasters is that past experience does not clearly indicate any persistent slowing in aggregate health care spending growth, yet forecasters generally believe that spending growth will slow as health care spending consumes a greater share of income. This belief is reflected in both the CBO and OACT models, which assume spending growth will diminish over time, though neither relies on underlying models of behavior to justify the assumptions. Recent CMS advisory panels have called for improved understanding of the mechanisms that, under current law, might slow spending. The effect of existing beneficiary cost sharing has been of particular interest. We propose to construct a microsimulation model of Medicare spending that will focus on the extent to which current-law cost sharing rules may slow spending growth in the future, when health care constitutes a significant share of disposable income for many elderly Americans. This mechanism has not been explicitly accounted for in current forecasts. It is uncertain how large this effect may be and what the associated distributional consequences will be. Our contribution will be to provide better current-law forecasts by explicitly incorporating budget constraints and by using an individual, as opposed to a representative agent, models (because heterogeneity can bias representative agent models). Further, our model will be a tool that forecasters can use to explore the sensitivity of results to various assumptions and to assess distributional consequences of cost growth. We have 3 aims. Aim 1: Develop a current-law microsimulation module of Medicare spending for beneficiaries over the age of 65, conditional on supplemental coverage, which reformulates and integrates the role of income effects in restraining demand growth. Aim 2: Develop a current-law microsimulation module of insurance demand for Medicare beneficiaries over the age of 65 that, consistent with demand and risk theory, describes how cost growth will influence the distribution of supplemental coverage in the future. Aim 3: Conduct validation testing and sensitivity analysis on the integrated microsimulation model and use the model to conduct policy analysis examining the potential impact of current-law cost sharing requirements on the future trajectory of health care spending. PUBLIC HEALTH RELEVANCE: Project Narrative: This project will construct a microsimulation model for that will quantify the common intuition that budget constraints will, over time, slow Medicare spending growth. Our contribution will be to improve existing current-law forecasts by making this intuition explicit and by allowing forecasters to better understand how cost sharing may slow spending. Unlike existing models, our model will be grounded in economic theory and model spending relative to income at the beneficiary level.