Medicare Spending Slows: Proof that Providers Can Trim Fat — Part 3

While no one was looking, Medicare spending quietly began to slow early in 2010. As I explained in Part 1 and Part 2 of this post, from 2000 through 2009, Medicare reimbursements snowballed by an average of 9.7 percent a year. Then, in 2010 Medicare payments rose by just over 4 percent. So far this year, Medicare inflation is running a little under 4 percent. Yet Medicare has not sliced benefits for seniors, nor has it trimmed payments to providers in any significant way.

Why, then, are Medicare payouts no longer spiraling? Both Zeke Emanuel, a White House health care adviser during the first part of the Obama administration, and his boss at the time, Peter Orszag, former director of the Office of Management and Budget (OMB), agree that many health care providers are trying to rein in costs as they prepare for full implementation of the Affordable Care Act in 2014. Today, hospitals and most doctors are rewarded for “volume”: those who “do more” (more tests, more surgeries, more hospitalizations) earn more. Inevitably, perverse financial incentives lead to unnecessary care.

By contrast, under the ACA, Medicare will begin paying for “value” (better care at a lower cost”), not volume.  Hospitals are keenly aware of the changes that are coming. “My conversations with various hospital executives . . .  suggest they anticipate less generous reimbursement and more focus on value in the future,” Orszag told me while I was writing the second segment of this post. “Therefore they are trying to become more efficient now.”  Emanuel also has been traveling the country:  “Everywhere I go,” he reported in Part 1, “medical schools and hospitals are asking me, ‘How can we cut our costs by 10 to 15 percent?’ Hospitals know that “either [they] get volume under control, or prices paid both by private insurers and Medicare will drop.” Medicare won’t pay top dollar for unnecessary tests, and private sector insurers have told the Medicare Payment Advisory Commission (MedPAC) that if Medicare takes the lead, they will follow.

   What the Skeptics Say: Three Myths

  • Many doubters argue that the slow-down will be short-lived because the Baby Boomers are aging. Over the next few years, they say, as the oldest boomers turn 65, Medicare’s outlays will spike. What they forget is that the Pepsi Generation did not suddenly burst onto the scene in the late 1940s. The boom built gradually, and didn’t reach a critical mass until the late 1950s and early 1960s. Thus, as the Congressional Budget Office graph below reveals, the graying of the boomers won’t begin to have a major impact on Federal spending for another decade.

Factors Explaining Future Federal Spending on Medicare, 
Medicaid, and Social Security
                                             (Percentage of gross domestic product)

Source:    Congressional Budget Office.
By then, health reform legislation will have had a chance to further tame and contain Medicare inflation. Moreover, as I will explain in part 4 of this post, many of the boomers who enroll in Medicare in the years ahead will be quite different from earlier generations of seniors. Fears that they will bankrupt the system over the next twenty years are overblown. The real challenge won’t come until sometime after 2030, when Boomers reach their late 70s and early 80s. This is when they will need long-term care for Alzheimer’s and the other afflictions that will cripple many who managed to dodge cancer and heart disease.  The next chapter of health care reform will have to address long-term care. As I have said before, reform is a process, not an event.

  • Other skeptics suggest that the growth of Medicare outlays is declining because physicians have begun to shun Medicare patients. But research published by the non-partisan MedPAC in its March 2011 report reveals that “Overall, beneficiary access to physician services is good and better than that reported by privately insured patients age 50 to 64.”

More importantly, as noted in Part 1, Medicare payments have leveled off not so much because physicians are billing Medicare less, but because growth in reimbursements to hospitals has plunged. According to Standard & Poor’s, in the twelve months ending in May 2011, payments to doctors and other health professionals in the traditional Medicare system climbed by 4.7 percent while Medicare spending on hospital care inched up by only 1 percent. We know hospitals are not turning away Medicare patients; few could afford to keep their doors open if seniors were not filling their beds.

Although hospitals often grouse about Medicare’s stingy payments, MedPAC’s June 2010 report reveals that many hospitals turn a healthy profit on seniors. Granted, those profit margins vary widely: in 2000, Medicare reimbursements exceeded the cost of caring for the average senior by 12 percent; by contrast, in 2008, hospitals were losing an average of 4.7 percent while treating Medicare patients. But even in 2008—the worst year for hospitals since the beginning of Medicare’s prospective payment system—one-quarter of hospital enjoyed a profit margin of 6.5 percent, or more.

MedPAC points out that a hospital’s costs per patient made all of the difference: low-margin hospitals were spending 50 percent more on the average senior. More efficient hospitals kept an eye on their costs, and made an average of 3.7 percent per Medicare patient, even in 2008. (There is no evidence that the extra spending at low-margin hospitals led to better outcomes. Patients do not benefit from waste.) It’s worth noting that major teaching hospitals fared better than others; in 2008, they showed a 5.3 percent profit while caring for Medicare beneficiaries. This could be because academic medical centers (AMCs) are more efficient and/or because the long hours of low-cost care that residents contribute, combined with Medicare’s higher payments to AMCs, more than offset the cost of training medical students.

  • Still others argue that the slowdown is merely a temporary response to the recession: In hard times, they say, seniors are putting off getting needed medical care. But while the recession has forced many younger patients to skip doctors’ appointments and defer elective surgery—either because they have lost their health care insurance along with their jobs, or because they cannot afford the high deductibles and co-pays that their private insurance requires—seniors have far less reason to consume less health care. They have not lost their insurance. Fully 83 percent have supplemental insurance in the form of Medigap or Medicare Advantage that covers most cost-sharing.          

  Providers Control How Much Care Patients Receive

In other words, the change has not come on the demand side of the equation.

Here it is worth remembering that in the world of medical care, suppliers control volume. As UClA economist Thomas Rice points out in The Economics of HealthCare Reconsidered, this is one of the ways that the health care market is different from other markets. In other sectors of the economy, he notes, sellers ramp up the supply of products and services in response to demand, producing more of the goods and services that consumers appear to want, whether or not they need them. (This is not the seller’s concern.) As a result, “in the traditional economic model, demand is key,” says Rice; “supply is essentially along for the ride.” But, when it comes to medical treatments, the situation is reversed: patients undergo the tests and procedures that hospitals and doctors prescribe. The supplier tells the consumer what he needs.

Now, however, suppliers themselves are reining in spending—along with their own revenues. I believe that this surprising turn of events may well mark the beginning of lasting change. To understand why I am optimistic, it is critical to recognize how and why hospitals and physicians have begun to engage in a “paradigm shift” that moves the system toward better value for our health care dollars. Going forward, less aggressive care could turn a fragmented, competitive system hooked on growth into a collaborative, evidence-based enterprise that provides the right care, for the right patient at the right time.

How Providers are Trimming Fat from the Bills They Send to Medicare

Consider the headlines below: 

Thanks to an initiative that centered on educating and following up with patients after they leave the hospital, Charleston Area Medical Center (CAMC) has seen readmission rates of heart failure and pneumonia patients plummet.”

Hospital administrators and health care experts across the country say they're creating accountable care organizations, despite concerns about federal rules, because they realize they are the only way to remain profitable  . . . Between 60 and 80 health care organizations use private accountable care models now, and that number will rise by at least 100 next year, and exceed 2000 in 2013, . . . said Elliott Fisher, director of Dartmouth's Center for Health Policy Research.”

At St. Francis Hospital and Medical Center, operating room staffs don't just use a checklist but also have undergone formal training on using it” which involves “40 one-hour sessions for all operating room staff . . .It's not simply a matter of making out a checklist, but changing the culture of the operating room . . .  In a year long study of more than 2,000 surgeries at the hospital, the use of checklists resulted in 30-day post-operative complications dropping from 21 percent to 6 percent.”

Doctors at Partners now order imaging scans through the computer system and are automatically queried about the patients’ characteristics. . .  For each case, the software then provides an ‘appropriateness’ score, reflecting evidence- based protocols for the image requested. And in some cases, the program suggests an alternative to imaging.

The system is also used to compare doctors to one another, so they know if they use imaging tests more or less than their peers do. . . . The system seems to be working:  by 2009, doctors who once ordered 30 images per 100 patients were now ordering 20. . . Starting in 2015, the Medicare subsidies for adopting health IT systems are to be replaced by penalties for not doing so."

More than 2,000 of the nation’s 5000 hospitals  have signed on to a voluntary Medicare initiative aimed at reducing medical errors in the nation’s health care system, Health and Human Services officials announced in July . . ..  it is not an easy decision for a hospital to take part,” HHA acknowledged. “ Because it’s voluntary, the project requires time and resources from hospital CEOs and staff members . . . ‘This level of participation, this early, is evidence of the strong support across the country for strengthening American health care for future generations by improving it; not cutting it [said],’ HHS Secretary Kathleen Sebelius

Sixty-three percent of hospitals with more than 50 beds have palliative-care programs in place, up from just 30 percent a decade ago, according to the Center to Advance Palliative Care. In addition to improving patients’ quality of life, palliative care makes sound financial sense: A 2008 study published in the Archives of Internal Medicine found that patients who received palliative-care services cost hospitals between $1,696 and $4,908 less per admission."

“We are asking physicians and patients to follow guidelines … and to consider a recent [March 2011] American Society of Clinical Oncology position paper that reinforces the practice of discontinuing chemotherapy when the chance of success is minimal.”

“U.S. Oncology, the country’s largest private-practice organization, has implemented pathway-driven care, allowing regimens for first-line through third-line treatment but requiring central approval for subsequent chemotherapy. Prospective tracking of their patients with non–small-cell lung cancer showed that survival was the same whether the treatment was on or off the pathway, yet costs were 35% lower when the pathway was used.”

Meanwhile, United Healthcare is piloting a program of episode management, in which there is essentially no profit to be gained from choosing chemotherapy but oncologists’ income is maintained (at least for now).

 “A Paradigm Shift”

You know that a seismic shift has begun at ground level when you read a position paper on the American Society of Clinical Oncology Post counseling oncologists that when “cancer…has progressed despite multiple regimens” or when patients show poor responses to treatments, “giving  chemotherapy does more harm than good.”  Physicians of all stripes are becoming more aware of the price of overly-aggressive treatment, measured not just in dollars, but in terms of human suffering.

The ASCO post announces what it calls a “paradigm shift” away from the mantra that, for decades, has dominated end-of-life care in the U.S:  “Do everything possible."

As Dr. Thomas J. Smith writes:  “Every oncologist that is in the trenches of cancer care understands that when faced with an emotionally distraught patient . . . it is a lot easier to say, ‘OK, let’s try sixth line gemcitabine.’ We tend to remember the patients who respond, but not the ones who end up hospitalized with complications. The consequences of evading [the hard truth] in [treating] advanced cancer is poorer quality of life for our patients, and their surviving caregivers.”

The paper concludes: “We should relieve ourselves from inaccurate preconceptions about end-of-life care and reset some of our expectations about cancer treatment…The data showing the clinical value of honest discussions and early initiation of concurrent palliative care and hospice services are out there. It is up to us to listen.” 

A recent survey of approximately 100 U.S. oncologists and urologists by Sermo, the largest on-line physician network, confirms that physicians are rethinking cancer care. The poll reveals that oncologists and urologists have been slow to adopt Provenge, Dendreon's much-ballyhooed treatment for prostate cancer, on the grounds that it is too expensive, too difficult to administer, and that the benefits for patients just don’t equal the downside. (Readers may recall Health Beat’s  post on  Provenge, a Wall street darling so beloved by investors that doctors on the FDA panel who warned that risks outweighed benefits received death threats. I wrote about Provenge again, in April, when Medicare agreed to pay $93,000 for the drug.Provenge was supposed to be a block-buster, but a majority (68%) of the physicians who responded to Sermo’s survey said that in order for them to prescribe Provenge, or a similar life-extending treatment, the survival benefit would have to be seven months or more.  More than half of the doctors (57%) said that such medicines should cost less than $30,000.

These are just a few examples of how some providers are rethinking value. Cumulatively, they appear to be having an effect. Just last week, Orszag’s successor at OMB confirmed that this year, the bills that providers are sending to Medicare are lower than expected. As a result, the White House announced that according to OMB’s newest estimates “Medicare and Medicaid expenditures are projected to grow less than expected over the next decade.” This year, “the government is expected to spend about $4 billion less on Medicare” than projected. 
That $4 billion was saved without slashing physicians’ fees or shifting costs to seniors. I have less faith in ten-year projections–about anything. There are too many variables involved in any ten year estimates. But the current baseline is lower than OMB and Medicare’s trustees thought just a few months ago. This is good news.

Those in Washington who would kill Medicare in order to save it should take notice.

In Part 4 of this post, I will explain that despite some progress, Medicare is not out of the woods—not by a long shot. Everything depends on a sustained slow-down that brings Medicare inflation down to a point where it no longer exceeds growth in the larger economy. For the foreseeable future, this means that we cannot afford to have Medicare’s outlays rise by more than 2 percent a year.

This should be doable. When the provisions in the Affordable Care Act that cut Medicare overpayments to private insurers kick in next year, along with 1% cuts in annual increases to hospitals, skilled nursing facilities and other institutional providers, it will become easier to contain Medicare spending. Most importantly, structural reforms in how Medicare reimburses for care, moving away from fee-for-service, should have a lasting effect.

Finally, in Part 4, I will explain why the aging of the boomers does not spell doom for Medicare. As boomers enroll in Medicare, the majority will be very different from earlier generations of seniors—both in their needs, and in how we treat them.

4 thoughts on “Medicare Spending Slows: Proof that Providers Can Trim Fat — Part 3

  1. This article confirms what people have known for years and has been proven in other countries as well as in some places in the US.
    In particular, the reference to the Partners’ project of using computerized ordering systems to query and educate doctors about the value of various procedures is a feature many of us have hoped would be built in to the new electronic systems. That feature obviously should include surgical procedures and medication choices as well as testing. Advice should not only include questioning of inappropriate orders, but also recommendations for worthwhile choices.
    I would expect that many doctors would complain about what they would see as an infringement on their clinical judgement and argue that physicians are already equipped to make the correct choices. Unfortunately, research has demonstrated over and over that that is not the case, and the prompts offered by this kind of system should be welcomed by doctors trying to do the best for their patients.

  2. Pat S.
    Good to hear from you.
    I agree wholeheartedly. I wonder how many of the IT systems being sold today do include questioning of inappropriate orders, and suggestions …
    This comes back to the fact that no doctor can know everything,even in his or her own specialty.

  3. one of the other reasons Medicare spending is slowing is because providers including hospitals are no longer accepting Medicare patients or at best limiting there exposure to medicare clients.