Not long ago, I wrote about the Center for American Progress’ (CAP’s) “Senior Protection Plan” —a report that aims to rein in Medicare “by $385 billion over ten years without harming beneficiaries.” In that post, I suggested that CAP’s proposals might well give us a preview of the “modest adjustments” that President Obama had said he would be willing to make to Medicare. At the time, I highlighted three of CAP’s recommendations:
— increase premiums for the wealthiest 10% of Medicare beneficiaries (raising $25 billion);
— insist that drug-makers extend Medicaid rebates to low-income Medicare beneficiaries (saving $137.4 billion);
— prohibit “pay for delay” agreements that let “brand-name drug manufacturers pay generic drug manufacturers to keep generics off the market” (saving $5 billion).
Last week, in his State of the Union address, President Obama embraced the first two: “Already, the Affordable Care Act is helping to slow the growth of health care costs,” he noted. “The reforms I’m proposing go even further. We’ll reduce taxpayer subsidies to prescription drug companies and ask more from the wealthiest seniors.” (In time, I suspect that the administration also will call for a ban on those decidedly seamy “pay for delay” deals.)
“On Medicare,” he added, “I’m prepared to enact reforms that will achieve the same amount of health care savings by the beginning of the next decade as the reforms proposed by the bipartisan Simpson-Bowles commission.” The commission called for reducing Medicare spending by roughly $350 billion over 10 years– a sum that is not far from CAP’s $385 billion target.
Are These “Adjustments” Too Modest ?
These may seem like small numbers. But keep in mind that this is on top of the $950 billion that the Affordable Care Act (ACA) saves by squeezing waste out of health care spending, while simultaneously raising new revenues. Of that $950 billion, some $350 billion comes in the form of Medicare savings achieved by:
— Containing Medicare inflation by shaving annual “updates” in payments to hospitals and other large facilities by 1% a year for ten years, beginning in 2014– $196 billion
— Cutting disproportionate share hospital payments to hospitals that care for a disproportionate share of poor and uninsured patients over 10 years beginning in 2014 – $22 billion.
Why has Medicare been overpaying Advantage insurers? Under the Medicare Modernization Act (MMA) of 2003 Congress agreed to pay Advantage Insurers 13% more than it would cost traditional Medicare to cover the same seniors. Since then research has shown that seniors themselves didn’t believe that Advantage is worth the premium. A 2009 study published in the International Journal of Health Care Finance and Economics reveals that, when Advantage beneficiaries were asked how much they would pay, out of their own pocket, for the benefits provided by their insurer, they estimated the value of those benefits at just 14 cents for every extra dollar that Medicare was paying. The Incidental Economist’s Austin Frakt, a coauthor of the report, concluded: “This relatively poor return of value on taxpayer dollars is why I support reductions in Advantage payments.”
Under the ACA only those Advantage insurers that receive four or more stars under Medicare’s five-star quality rating system will escape the cuts. Thus the best plans will be rewarded, ensuring that they stay in business, while encouraging others to pay more attention to the quality of care their customers receive.
Reform legislation saves another $196 billion by trimming annual updates to hospitals, nursing homes and ambulatory surgical centers by 1% a year for 10 years. If in a given year, inflation suggests that they should receive a 3% hike, they will instead see their Medicare payments rise by only 2%. Here, the goal is to encourage hospitals to find ways to become more productive. When reformers talk about increasing “productivity,” they are not talking about “downsizing” hospital staffs or asking hospital employees to work harder. The ACA focuses on creating systems that help them work as teams that can provide streamlined, safer care.
In its June 2010 report, the Medicare Payment Advisory Commission (MedPAC) revealed that when hospital revenues fall—either because the hospital has fewer patients, or because private insurers are paying less—many can and do become more productive. In fact, they become so efficient that they manage to turn a profit on their Medicare patients. (The same MedPAC report reveals that one-third of U.S. hospitals already are able to make a profit on Medicare patients, refuting the conventional wisdom that Medicare always pays hospitals too little.)
That hospitals are able to cut waste when they concentrate should come as no surprise. Like most other organizations, hospitals tend to spend lavishly when feeling flush, investing in hotel-like amenities, new wings (which often are not needed), higher salaries for executives, and pricey if not fully tested cutting-edge equipment. On the other hand, when money is tight, the same institutions are more likely to concentrate on avoiding waste. And when hospitals make that effort, the quality of care also improves. Patients do not benefit from waste.
Finally, under the ACA many fewer patients will be uninsured. As a result, Medicare can lower the additional payments that it now makes to hospitals that care for a large number of uninsured patients.
Medicare Spending Is No Longer Growing at a Breakneck Pace
Because hospitals know those cuts are coming, many have become more cost-conscious. As the President noted in his State of the Union: “Already, the Affordable Care Act is helping to slow the growth of health care costs.” Back in the summer of 2011, I reported that hospitals had begun to ask: “How can we cut our costs?” Since then, government numbers have confirmed that Medicare’s spending has slowed, in part because hospitals have begun tightening their belts.
Two weeks ago, the Congressional Budget Office (CBO) released the latest figures: since 2010 (when Congress passed the Affordable Care Act) Medicare’s outlays have risen by an average of just 2.9% per year — far less than the 8.4% annual growth seen between 2002 and 2009.
As former Obama health care adviser Ezekiel Emanuel pointed out a few days ago in the New York Times: “over the last three years, Medicare costs per person have grown 1.3 percent slower than growth in the overall economy. In January, a Department of Health and Human Services (HHS) report showed that Medicare spending per beneficiary grew just 0.4 percent in 2012.”
In response, CBO has lowered its long-term projections. Five years ago, CBO estimated that Medicare spending in 2018 would amount to 3.9 percent of GDP. Now CBO puts 2018 Medicare spending at 3.5 percent of GDP.
The difference between 3.5 percent and 3.9 percent might not sound like much, but as Peter Orszag, former director of the Office of Management and Budget (OMB), recently observed, we’re looking at substantial savings “That difference has about the same impact on the budget as did the upper-income tax cuts that expired as part of the fiscal deal reached on Jan. 1.”
Here, you might be wondering: “So if the growth of spending is decelerating, why are premiums increasing?” Emanuel raises, and answers, precisely that question. One reason, he suggests,is that “like everyone else in the health care industry, insurance companies are uncertain about the future, particularly about what will happen to their margins when the new exchanges open in October. The natural response to uncertainty is caution, and for insurance companies, the cautious approach is to increase revenue and profits as much as possible in the short term in case Obamacare lowers them in the long term.
“But once the exchanges begin to facilitate competition,” Emanuel adds, “this fear should dissipate and premiums should come down.” (I agree. In the Exchanges, all plans will have to meet the same standards: covering all essential benefits, offering free preventive care, capping out of pocket costs … As a result, they will be pretty much alike. The only way for a plan to differentiate itself will be to compete on price.)
And this is just the beginning. As Medicare’s Trustees observed in their 2011 Annual Report, the ACA “contains roughly 165 provisions affecting the Medicare program by reducing costs, increasing revenues, improving certain benefits, combating fraud and abuse, and initiating a major program of research and development for alternative provider payment mechanisms, health care delivery systems, and other changes intended to improve the quality of health care and/or reduce its costs to Medicare.”
Few of Obamacare’s critics could name even a dozen of those 165 provisions. They haven’t read the legislation.
Most Americans don’t know how the ACA sets out to trim the fat in our health care system. And for good reason: it’s impossible to list and explain 165 reforms in a news story or a blog post– let alone on television. But this is how historic legislation makes a difference. The good is in the details. We will recognize this as reform rolls out, and begins to affect each of us in different ways.
In the meantime, Obamacare’s opponents won’t acknowledge that the ACA is beginning to put a lid on healthcare inflation. They claim that the recession explains why seniors are spending less on care. But the notion that the recession accounts for a slowdown in Medicare spending just doesn’t make sense. Unlike so many younger Americans, seniors haven’t lost their health insurance, and almost all have supplemental insurance that covers their out-of-pocket expenses. Their Social Security incomes have remained stable. They have little reason to cut back on care.
Finally, if you look at Medicare spending as a percent of GDP, you find that it has remained flat for three years. This is extraordinary– particularly at a time when GDP is growing so slowly.
The changes indicates that we are seeing a “structural” change, in Medicare spending, Orszag notes, not simply a short-term response to economic cycles. ”
As we look ahead to 2014 , the question becomes: Will Medicare spending slow further ?
Yes. Long term savings are baked into the ACA cake.
As President Obama observed Tuesday night: “We’ll bring down costs by changing the way our government pays for Medicare, because our medical bills shouldn’t be based on the number of tests ordered or days spent in the hospital – they should be based on the quality of care that our seniors receive.”
This I would argue is the third, and most important way that the PPACA will both “protect’ patients and make high quality medical care “affordable” for all
In part 2 of this post I will explain how we are beginning to change the way we pay for care, in part by “bundling” payments to doctors and hospitals. In January, the Centers for Medicare and Medicaid (CMS) officially launched “Bundled Payments for Care Improvement,” (BPCI) a program that has enrolled more 500 hospitals, health systems and other providers. When reimbursements are bundled, doctors and hospitals receive a lump sum for an episode of care. If they manage to deliver “better care for less” they will share in the savings. If not, they may lose money.
Already, hospitals have begun to sign contracts both with Medicare and with private insurers that link financial reward to clinical performance. The more the hospital exceeds its cost-reduction and quality-improvement targets, the more money it can keep. If it misses the targets, it will lose tens of millions of dollars. This is a radical shift. It means that providers will have “skin in the game.”
Some of Obamacare’s critics claim that we really don’t know whether moving away from paying “fee for service” will reap substantial savings. This just isn’t true.
In Part 2, I’ll cite both research and on-the ground examples revealing how collaboration and risk-sharing can work.
Finally, I’ll take a look at Presdient Obama’s proposals to save another $350 billlion by: raising Medicare premiums for the wealthiest 5% of all seniors, while insisting that drugmakers give deep discounts to Medicare beneficiaries who qualify for Medicaid.
Do these ideas stand a chance of being accepted by Congress? Without question, Republicans will fight them tooth and nail. But in the end, both Democrats and Republicans agree that we have to save money somewhere. Ultimately, they will have to choose the most “politically palatable soltuions.” I will suggest that cutting overpayents to private sector insurers, and raising premiums for seniors at the very top of the income ladder meet that definition.
I am convinced that President Obama would veto any broad reforms that would ration care, or shift costs to middle-class seniors.
As for Republicans, they should be wary of alienating seniors. This is the one group of voters that they can depend on.
In their fury, extremists can be self-destructive. But I believe that most Republican legislators would like to be re-elected. If they fail to accept the political reality that the public is not behind them on slashing Medicare and Social Security, the nation will face the automatic across-the-board cuts to the budget that are scheduled to go into effect in March—cuts New Jersey Mayor Cory Booker rightly describes as “blunt, brutal and blind.”
If that happens, the Republican Party will “inherit the wind.”