The release this past week of the Medicare Trustees’ report was met with widespread enthusiasm among health economists and supporters of the federal health reforms in the Affordable Care Act (ACA). The report confirmed that Medicare costs continue to exceed projected revenues over time, but the date by which Medicare’s resources are expected to run dry is now later than previously anticipated because the growth in Medicare’s costs have slowed, consistent with a bending in Medicare’s cost curve.
Health economists are poring over the data to understand how this happened. One common belief (as discussed in a recent article in Health Affairs and another by researchers at the Kaiser Family Foundation) is that the recession has reduced demand for health care similarly to the way that it reduced demand for a wide variety of other services. Analysts disagree on the scale of the recession’s contribution to the deceleration in Medicare spending, but they agree that the recession alone does not explain it all.
Reduced Medicare spending might be a small silver lining of the recession, but it is not a strategy anyone would pursue to preserve the program. A significant financial barrier to health care not only raises important moral questions, but also it is not an effective way to selectively reduce unnecessary care. Researchers have found that when individuals reduce their demand for health care services in response to financial incentives, they are just as inclined to reduce necessary care as well as unnecessary care. Ideally, we want to slow Medicare costs while maintaining or improving access to and quality of care.
Recessions aside, there are only a small number of ways policy makers can attempt to slow Medicare’s cost growth over time. The available approaches vary in terms of the size of the political obstacles and by the degree to which they might alter access to and quality of care.
For example, Congress could lower Medicare’s costs by adding new restrictions on eligibility. Republican Congressman Paul Ryan, chair of the House Budget Committee, has repeatedly proposed increasing the age at which someone becomes eligible for Medicare as a part of his policy solution for the federal deficit. However, there is staunch opposition among Democratic members of Congress, who are concerned that this would leave older workers and retirees vulnerable to the high costs of health care coverage, and therefore at risk for the negative consequences of delayed care, for a longer period of time before they would be eligible for Medicare. Although this approach might reduce Medicare cost growth, the savings would be largely offset by increases in federal payments for premium tax credits for marketplace coverage, a reduction in Medicare premiums contributed by beneficiaries, and increased payments for those who would become eligible for Medicaid.
A second potential approach for lowering Medicare’s costs is reducing Medicare’s health care benefits. Lawmakers have for the most part avoided this strategy out of concern that it could be harmful to patients and be interpreted as a sign that the government is rationing health care.
A third approach to lowering Medicare costs is reducing the growth in payments to clinicians, health care facilities, health plans, and other service providers. Although this is politically more palatable to the general population than restrictions on eligibility and benefits, payment cuts could potentially affect beneficiaries’ access to and quality of care, especially if they result in providers leaving the program. This has been a significant problem in the Medicaid program, where payment rates lag behind those in Medicare.
The ACA included significant reductions in the growth of Medicare payments to hospitals, health plans, home health and a few other selected service providers, but it generally excluded new pay cuts to physicians beyond those previously incorporated into the 1997 Sustainable Growth Rate (SGR) policy. Even then, Congress has repeatedly voted to override the physician payment cuts in the SGR policy out of concern that if implemented, they could have a negative effect on patient care.
A fourth strategy for lowering Medicare’s costs, one that enjoys widespread support but offers limited financial return, is the reduction of fraud and abuse. In 2012, Medicare collected approximately $3.5 billion through its fraud and abuse program. While this was nearly a doubling of collections from 2011, it still represented only a tiny fraction of Medicare’s annual expenditures of $574 billion in 2012. Despite the somewhat limited financial return, a strategy for addressing fraud and abuse is nonetheless important as a deterrent to prevent these illegal practices from becoming a significant source of Medicare cost growth.
Ultimately, the only strategy that can significantly reduce Medicare’s cost growth without threatening access to and quality of care is for health professionals to engage in the redesign of health care to eliminate wasteful and unnecessary practices. The ACA is attempting to catalyze the process through a series of payment reforms—some in the form of carrots and others as sticks. One example is the financial penalty Medicare applied to hospitals in 2012 based on their readmission rate. While an evaluation of this policy’s effectiveness is still in progress, a recent report suggests that in 2012 Medicare’s hospital readmission rates decreased for the first time in several years.
Financial rewards are becoming increasingly available within Medicare’s fee-for-service delivery model based on reporting or demonstrating improvements in performance. More significantly, clinicians are also being given opportunities to work together to share in savings from bundled payments for specified procedures and for population-based care delivered through a primary care medical home or an accountable care organization. Another promising area for reducing costs and improving quality that allows collaborating states to share in savings that they can subsequently pass on to participating clinicians is through the integration of financing and care of beneficiaries who are eligible for both Medicare and Medicaid. Results from the evaluations of all of these efforts should start to be available over the next couple of years.
One way or another, Medicare’s costs will need to come under control if this program is to remain a robust health care safety net for the elderly and those with chronic disabilities. Medicare spending growth per beneficiary over the next decade is now projected to be no greater than the growth in the gross domestic product (GDP). This is a dramatic decrease over the historical spending growth rate of 2 percentage points above GDP. However, there will still be financial pressure on the program from the growth in the number of beneficiaries.
Congress anticipated that it might not have the political will to make some of the hard choices necessary to control Medicare’s spending and empowered a commission, the Independent Payment Advisory Board (IPAB), to implement Medicare spending cuts if targeted reductions in growth are not achieved over time. Although the IPAB is charged with developing fast-track legislation designed to reduce Medicare’s costs, it won’t be able to act with the precision that health professionals could use with each patient to eliminate unnecessary care while preserving what is most important for patients’ health. To avoid the crude actions of the IPAB, health professionals will need to work fast and in unison to develop not just one-time sources of Medicare cost savings, but strategies for becoming more efficient over time.
With the unanticipated help of the recession in slowing the growth in Medicare’s costs and some early successes in the ACA, we have a little breathing space. But health care cost inflation is on our tail and we have a lot of catching up to do.
About the author: Andrew Bindman, MD, is Professor of Medicine, Health Policy, Epidemiology and Biostatistics at University of California San Francisco (UCSF). He is the founder and Director of the University of California Medicaid Research Institute, a multicampus research program that supports the translation of research into policy.
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