Medicare Reductions — Real or Imaginary?

The Obama administration is expected to release a report today that indicates that healthcare reform will reduce Medicare spending by $575 billion over the next 10 years, starting with an $8 billion savings in 2011.  This could add 12 years of solvency to the program’s trust fund.

As with any partisan government report, we need to evaluate the accuracy of the numbers and the underlying assumptions.  Does it present a realistic and complete assessment?  Will the savings be used to solidify the Medicare trust fund, reduce premiums for our nation’s seniors or for another purpose?  The report indicates that Medicare spending cuts will help to lower seniors’ monthly premiums by nearly $200 annually by 2018.  For the moment, let’s assume and hope that the estimate is accurate and will be used to solidify the trust fund and reduce premiums for seniors.  These are all good outcomes and well worth pursuing.

One approach to generating the above savings is to implement price controls.  Medicare spending will keep increasing, only not as fast. Under the law, spending will rise by 5.3% a year on average over the next decade, compared to 6.8% without the cuts.  

The biggest portion of the Medicare cuts is from reductions in projected payment increases to hospitals and other providers over the next 10 years. The second biggest portion is reductions in payments to Medicare Advantage plans.  Cuts to Medicare Advantage plans start right away. The report says Medicare Advantage cuts account for $5.3 billion through 2011, more than 60% of the total estimated two-year savings of $7.8 billion.  An analysis by the Kaiser Family Foundation earlier in 2010 suggests that reductions in payments to Medicare Advantage would amount to $130 billion by 2019.  The reason for these reductions, per some analysts, is that the Medicare Advantage plans are overpaid when compared to the cost of care in traditional Medicare.  

As we’ve written before, price controls produce unintended effects.  How will hospitals and physicians react to a reduction in spending?  Will they sacrifice the quality of care?  Will they provide fewer services?  Will seniors realize $200 reductions in premiums but a greater reduction in services and quality?  Is that constructive? 

The insurance industry says the cuts will mean steep premium increases for millions of seniors in the plans. That could trigger an exodus, with seniors returning to traditional Medicare.  Is this the effect the government intended?

Unintended effects also is one of the reasons that a national health plan, so seductively attractive in many ways, was not implemented.  Monopolistic, or near monopolistic control, can yield arbitrary strategies and tactics that are not beneficial to Medicare beneficiaries and providers.

More effective than using the stick (ie, payment reductions) to force providers to become more efficient is to first provide incentives to drive quality and efficiency.  For example, a program to reduce hospital readmissions due to preventable infections and other problems is estimated to save $8 billion over 10 years. And projects involving the patient-centered medical home (ie, a new, team-based approach to providing medical care for seniors) is estimated to save $5 billion over the same period, by keeping patients with chronic health problems healthier and avoiding hospitalization.

The incentives in place in our healthcare delivery system often discourage cost-effective, high quality care.  Instead, these programs encourage more cost-effective care by removing wasteful care from the system.  These programs encourage higher-quality care.   

Revising incentives, gaining consensus and support and implementing new programs takes time and investment.  While better in the long run, the issues facing Medicare and the healthcare system overall are pressing.  Therefore, the carrot (ie, programs that drive higher-quality, lower cost care) cannot be the only approach that is used.  The stick also must be used to gain short-term improvements.  Unintended effects will need to be managed. 

My suggestion is that the proportion of stick to carrot needs to be constructive.  The current approach relies heavily on price controls (ie, the stick) and experiments to a limited degree with quality-improvement programs that drive lower cost.  The ratio needs to be changed to a more even balance between the two approaches.  That will yield longer-term benefits and reduce the impact of unintended effects.

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