As I and others have cautioned, there has been an excess of exuberance about the recent slowdown in health care spending. The jury on that is still out on the degree to which the encouraging numbers are due to profound and lasting changes in the system rather than the recession.
Now there is another round of excitement—in this case misplaced rather than just excessive—thanks to the recent Medicare Trustees Report. This year the trustees project that the Medicare Trust Fund can be sustained until 2026, or for 2 years longer than last year’s forecast. Supporters of the Affordable Care Act (ACA) are beaming.
But rather than celebrate, it would be wise to read the statement at the end of the report, starting on page 273, by Acting Chief Actuary Paul Spitalnic. He warns that while the projections may be technically reasonable on the basis of current law, it strains credulity to imagine that several key mechanisms in the law itself will actually operate as planned. For instance, he writes, “[c]urrent law would require a physician fee reduction of an estimated 24.7 percent on January 1, 2014—an implausible expectation.” He goes on to caution that while the law’s price updates for most categories of nonphysician services are to be adjusted downward in line with economy-wide productivity, “[t]he best available evidence indicates that most health care providers cannot improve their productivity to this degree for a prolonged period as a result of the labor-intensive nature of these services.”
Furthermore, writes the chief actuary, the “unprecedented” changes in the law mean that “the prices paid by Medicare for health services are very likely to fall increasingly short of the costs of providing these services.”
Spitalnic sums up his grave doubts about the plausibility of the report’s projections in this way:
“[T]he financial projections shown in this report for Medicare do not represent a reasonable expectation for actual program operations in either the short range (as a result of the unsustainable reductions in physician payment rates) or the long range (because of the strong likelihood that the statutory reductions in price updates for most categories of Medicare provider services will not be viable).”
The Chief Actuary urges readers to examine the various “illustrative alternative” projections in the report, where the trustees explore what many would say are more realistic scenarios, such as Congress continuing to avoid imposing the Sustainable Growth Rate (SGR) cuts and blocking future cuts by the Independent Payment Advisory Board (IPAB). These more realistic alternatives result, of course, in a far gloomier picture of Medicare’s future cost trajectory.
The Trustees Report is essentially a version of the economist’s joke about the challenge of being stranded on a desert island with cans of food but no rocks or tools to open them. How does one survive? The economist’s solution is simple: Assume a can opener. In this case, the official trustees’ projection simply assumes that the ACA seamlessly goes into effect as written.
It is not easy to envision any easy path for achieving a slowdown in Medicare costs. But some things do seem clear.
One is that it is a grave mistake to assume that improving efficiency will necessarily mean lower total Medicare spending. Improved efficiency is, of course, good. But in all my years as an economist, I have never encountered a business that cut costs and introduced innovations in order to reduce its revenues and profits. The only reason a business will seek efficiency that also reduces its bottom line is because of competition or because customers refuse to pay as much.
Another conclusion, flowing from this, is that Medicare total spending can only be slowed if there is an overall and real budget for the program. A true budget for Medicare would be like a budget for anything else—a direct constraint on how much is spent. But no meaningful budget exists today. With most seniors in open-ended fee-for-service Medicare, the “budget” is just a guesstimate of the total cost of paying the fees and hospital visits incurred. That is why lawmakers’ promises to protect fee-for-service directly contradict their pledges to assure the long-term sustainability of the program. Until Congress gets serious about encouraging seniors to use Medicare Advantage plans or another form of managed care, together with a defined payment to their chosen plan, there can be no effective spending control.
Still, it’s important to remember that any limited long-term budget for Medicare has to balance 3 objectives. One is the federal budget objective of a reasonable and sustainable future level of federal spending on the program. Another is to distribute financial risk in a way Americans deem to be fair. That means balancing the financial risk faced by today’s Medicare beneficiaries (in the form of premiums and out-of-pocket costs) and the financial risk to taxpayers and future generations of not effectively holding down Medicare spending on seniors. And the third objective is to squeeze down on the health system in such a way that it pushes providers and plans to look hard for innovations that result in cost reductions. That pressure must neither be too light (or providers won’t have enough pressure to find less costly ways to deliver services) nor too aggressive (or there will be disruptions and unacceptable declines in the quality and availability of services).
Success in achieving cost control through a budget requires a careful balancing act among these 3 objectives.
Even if we can agree on an overall and long-term Medicare budget, how should we keep spending on track? Through an expanding array of payment and price controls, ultimately enforced by a far more powerful and more independent IPAB? (Henry Aaron of the Brookings Institution and I have debated that approach.) Or by distributing the budget amount to enrollees through some form of premium support for a managed care plan, so that seniors become real cost-conscious customers? Others make that argument. The Trustees Report was not the place to resolve that debate. But the chief actuary’s intense skepticism about the plausibility of the ACA’s cost controls means that sooner or later we must make that choice.
About the author: Stuart M. Butler, PhD, is Director of the Center for Policy Innovation at the Heritage Foundation in Washington, DC, where he focuses on developing new policy ideas. Previously he served as Vice President for Domestic and Economic Policy Studies. He is also an Adjunct Professor at Georgetown University’s Graduate School.
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