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Can Congress cut Medicare costs?

jhorney.jpgJim Horney is the director of federal fiscal policy at the Center on Budget and Policy Priorities. Before that, he worked on the Senate Budget Committee, and before that, he served as chief of the Projections Unit in the Budget Analysis Division of the Congressional Budget Office. If anyone in the country knows more about the federal budget, I haven't met them.

This morning, Horney, along with his colleague Paul Van de Water, released a report looking at Congress's record of success -- and failure -- at sticking to promised cuts in the Medicare system. The report is an important document, particularly as Republicans simultaneously argue that the cuts won't be implemented, and so the bill won't save money, and that the cuts should be removed, as they unfairly burden seniors. What Horney and Van de Water found was that these cuts are in line with past bills that have both been implemented and have not harmed Medicare as a program. I spoke with Horney earlier today.

It's fairly common to hear that sure, the bill cuts the deficit as it's written, but there's no way those cuts and savings will be implemented. Your paper looked at the history of this, though, and concluded otherwise.

Right, the facts just don’t back up that conclusion. There are examples, particularly if you look at the Medicare cuts in 1997, when Congress has gone back and ameliorated cuts somewhat. But overall, Congress has overwhelmingly allowed the savings its passed in the last two decades to go into effect.

Let's talk about those 1997 cuts, because that's really where this comes from. The 1997 Balanced Budget Act put into place the Medicare Sustainable Growth Rate formula, and the cuts that formula recommended have been overturned in 2002, 2003, 2005, 2007, 2008, and so forth. It seems like every time you turn around Congress is overturning its own Medicare cuts.

People need to understand some things about SGR. People imply that Congress promised big savings from the SGR when it was enacted, and then reneged on it. The answer is they didn’t promise big savings. They thought they would be modest. The Balanced Budget Act had $394 billion in Medicare savings over 10 years. The estimated SGR savings were $12 billion. It was 3 percent of the total.

What happened was it was badly designed. They thought it would get these modest savings. When they did the formula, the long-term trend of rapid increases in volume and intensity of medical services had slowed. They thought that trend would continue at this lower rate, and it did for a couple of years. But then it went back to its longer-term rate.

All of a sudden, the targets were exceeded by very large amounts and under the formula it would have led to very large cuts. But the other thing people don’t understand about SGR is that the cuts did go into effect in 2002, cutting reimbursement rates by 7.2 percent. But when they didn’t let the next year cuts go into effect, the implication you get from people is that physician rates skyrocketed. But that’s not true. Congress didn’t use the SGR formula, but they’ve only been allowing rates to increase by 1 percent, even though the Medicare Economic Index, the measure used to assess the increase in the cost of providing these services, has been rising by 2.5 percent annually.

So they weren't using the SGR cuts, but the specter of the SGR cuts spurred them to do cuts that they wouldn't have done in its absence?

Right. They didn’t allow the full SGR cuts to go into affect, but the adjustments they provided in place of SGR were way below inflation. If they simply freeze at the current rate, next year, the reimbursement rate will be 17 percent below what it was in 2001 adjusted by the MEI.

One of the points you make in the paper is that it's actually good they didn't allow the SGR cuts to become law. They were simply too deep. Is there anything like that in the current bills?

No, and that’s one of the points that we made. We think the things they have in the House and Senate bills are quite different from the SGR. There are things in there that will limit increases to providers. But they’re much more modest. They’re talking about potentially a 1 percent cut, and they’re not designed with these crazy formulas where even if you do what you're supposed to do, you could have to make much bigger cuts than anticipated. We looked really carefully, and there’s nothing in these bills like the SGR that aren’t tied to a reasonable sense of how the policy would work.

In the paper, you say that the cuts being considered now amount to about 6 percent of Medicare's spending. How does that compare with past efforts?

It's in line with what previous Medicare deficit reduction efforts have done. 1993, 1995, and 1997 are all in the range, and 1997 was more. It’s clearly not the case that the Medicare savings are out of line relative to the size of the program or what’s been sustained in the past. If you look at the cuts in 1997, they actually implemented cuts around eight or nine percent.

To get onto a theoretical point for a moment, there's emerged this strain of conventional wisdom that I call "deficit nihilism." People who are, quite rightly, worried about the deficit also look at these bills and criticize them because they think the deficit-reducing elements won't be implemented. But that leaves us with no options. The only way to cut the deficit is to pass legislation that cuts the deficit.

I agree completely. I think people are contradicting themselves when they say the deficit reduction in here isn’t big enough, and it won’t stick because Congress won’t do it. But they also just haven‘t looked at the record. When there’s been political will, and there has been in the past, Congress has done significant deficit reduction. The problem has been in recent years that there wasn’t the political consensus to do this.

What conditions allowed for past deficit-reduction moments?

We had one in 1990. There was a bipartisan consensus that the deficit was a problem. And now there’s no consensus. Democrats are resistant to cutting programs, but Republicans are adamantly opposed to raising taxes. And we can’t do real deficit reduction until we can have a balanced approach where everyone is giving up something.

But one of the huge developments this year that hasn’t been commented on as much as it should be is that health-care reform really will be deficit neutral, or better. Earlier this year, whenever we talked about health care with people on the Hill or smart observers in the middle of the process, we would say that the president wanted health care to be deficit neutral, and they would say, yea, we know, but when it's get down to it, we’re not going to pay for much more than half of this at the end of the day. No one says that anymore. It’s absolutely clear that we are going to pay for this bill.

By Ezra Klein  |  December 4, 2009; 1:23 PM ET
Categories:  Budget , Health Reform , Interviews  
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In other words: Repubs, you lie! yippee!

Posted by: ctnickel | December 4, 2009 2:26 PM | Report abuse

"Democrats are resistant to cutting programs, but Republicans are adamantly opposed to raising taxes."

And Republicans are ALSO resistant to cutting programs when they think there might be a political advantage to be had!

Posted by: Chris_O | December 4, 2009 2:40 PM | Report abuse

Reading this post and the Obama post in sequence get at the heart of the issue for me.

Horney's argument, essentially, is that because the current proposed cuts, along with prior ones, have been such as small part of overall Medicare spend, we've had success in carrying them out. Unlike the Republicans, I'm not worried about getting several hundred billion from the system to pay for expanded coverage. What I'm worried about is that a couple hundred billion doesn't come close to addressing the structural issues with health care costs that Obama is rightfully talking about. To address THAT we'd be using the t-word-- trillion-- not billion, when talking about cost savings. And in that context, the "initial steps" taken on a number of dimensions-- IMAC, ACOs, payment reform, just simply aren't enough.

This may be a "cost-saving" bill, but it isn't a "cost control" bill. The latter entails structural reforms that change the actual practice of health care, and that ISN'T something Medicare has really tried beyond some halfway attempts in prior pilot projects.

Horney addresses the real criticisms of the current approach-- too reliant on pilot projects and no clear path for structural changes in the system-- but sort of shrugs and says "Like it or not, answering these questions will require time and testing." But that's only because the reform was set up with goals that are not aggressive. If Medicare instead immediately adopted successes seen in the private sector-- converting 10% of reimbursement into P4P incentives, HMO-like constraints on specialist access, etc.-- we'd see real cost control begin. The ONLY reason those things aren't happening now isn't because we don't know they work, but because its politically difficult. So starting pilot projects to do further studying sounds good, but its just punting the tough issues down the road.

Of course the tough cost controls could take down the whole bill, and coverage is more important to the Dems. That's arguably OK. BUt its not OK to exclude tough cost control from the bill because you want to save your bullets for a $1 trillion coverage expansion AND at the same time argue you've done everything possible on cost control. Not even close.

Posted by: wisewon | December 4, 2009 3:21 PM | Report abuse

This bureaucrat has a promising future as a bridge salesman.

Even if you are gullible enough to believe in these hypothetical savings you still have to account for cost shifting that occurs when providers jack up costs for individuals and group plans to compensate for reduced Medicare reimbursements. Not to mention the fact that many doctors refuse to serve Medicare and Medicaid patients.

The President has painted himself into a corner making promises he cannot keep. He depends on hacks like Mr. Horney to tweak the numbers.

Posted by: dcn1 | December 4, 2009 3:33 PM | Report abuse

All this discussion assumes any cut, ever, of money spent on wars and weapons is simply off the table. I find it impossible to believe that most of the deficit could not be dealt with by safely and sensibly eliminating imperial overstretch. We can't afford and don't need 900 bases in 123 countries. And we don't need to pay contractors 10 times what the military could do itself for the piss-poor wages it offers to it recruits.

Posted by: janinsanfran | December 5, 2009 12:24 PM | Report abuse

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