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Posted at 4:18 PM ET, 01/28/2011

Will the Medicare cuts in health-care reform stick?

By Ezra Klein

medicareprod.png

It's a bit after 5 p.m. on a Friday, which means it's a good time for a long post on the sustainability of the Medicare productivity adjustments in the Affordable Care Act.

Excited? No? Then let me rephrase.

The most legitimate concern about the Affordable Care Act's pay-fors is that some portion of the $220 billion reduction in Medicare productivity payments won't stick. Richard Foster, Medicare's chief actuary, is clearly of this opinion: "While such payment update reductions will create a strong incentive for providers to maximize efficiency," he told the House Budget Committee, "it is doubtful that many will be able to improve their own productivity to the degree achieved by the economy at large." (It's worth noting that his testimony singles out this "one category" of savings as unrealistic, suggesting he considers the remaining $300 billion in cuts fairly uncontroversial.)

Foster's concerns should be taken seriously (and you can download his full testimony here). But they also need to be put into context: Eventually, Medicare is going to have to make much larger cuts than even the Affordable Care Act envisions. Nobody disagrees about that. Not the Affordable Care Act's proponents, and not its detractors. Nobody. But cutting costs isn't easy. And what Foster is saying is that if the system keeps working the way it is now, cutting costs will drive doctors out of business. He's right about that.

The question is whether the system will keep working the way it is now. The Affordable Care Act's proponents see the productivity cuts as one half of a squeeze play whose ultimate point isn't just to pay for health-care reform but to lower costs in Medicare -- and then the system -- as a whole. The cuts will push providers to find more cost-effective ways of caring for patients if they want to keep their profits up. Foster acknowledges as much when he says "such payment update reductions will create a strong incentive for providers to maximize efficiency." To put it differently, the payment reductions will force providers to do things more cheaply. But can things be done more cheaply without hurting patients?

That's where the legislation's delivery-system reforms come in. And this gets us to the right question, which isn't "are the Medicare cuts sustainable?" but "will the delivery-system reforms work?" If the answer to that question is "no," and if we can't think of some set of delivery-system reforms that do work, then the Medicare cuts are not sustainable -- and neither is Medicare, or the rest of the health-care system, or the American economy.

The delivery-system portion of the legislation is thick with experiments and ideas, so I'm not going to go through all of it. But here are a few of the basic ones: Converting the health-care system to electronic records makes it much easier to track patient outcomes and then use that data to make the system more efficient, not to mention offer an infrastructure where providers can easily look up the most cost-effective treatments for different conditions. Bundling care -- where a provider gets a lump sum to treat a diabetic for a year, as opposed to getting paid for every new thing they do to the diabetic -- will encourage more efficient care, as the hospital makes money when it doesn't overtreat, as opposed to when it does. Accountable Care Organizations would act as sophisticated care managers for their patients, making more money when the patients get top-flight care and, in particular, care that's coordinated (There's a lot of money wasted because the hospital doesn't know what the ER did for a patient). The hospitals that have the highest rate of infections and unnecessary readmittance will lose Medicare funding.

Then there's the hope of synergies: Health IT makes ACOs more effective, as it's a lot easier to share data and track outcomes. The flood of new research on what treatments work best make it much easier to do bundled care payments, as providers have a much better idea of what will work and what's a waste of money. The effort to record and punish high infection rates is backed up by the ACOs, which will be penalized for sending patients to providers who underperform. The Independent Payment Advisory Board has the power to take experiments that are proving effective and quickly spread them through the Medicare system.

So will any of this work? The honest answer is that I don't know, and neither does anyone else. Some of the ideas won't pan out. Some of them will work better than we expect. The biggest question is whether the political system is committed to continuously funding the things that seem to be working and replacing the experiments that aren't. The reality is that none of this needs to work all that well for the Medicare cuts to be sustainable, at least over the next few decades. But for Medicare to be sustainable, some of these things -- or their successors -- are going to have to work, and work big. Same goes for private insurance. Unless we can figure out some way to cover quality medical care without watching costs shoot up by 8 percent every year, none of this is sustainable.

But be skeptical when you read commentary (or legislation) on these questions that doesn't say anything about reforming the way we deliver care -- and that includes my commentary. The political system is better at talking about insurance than talking about how medical care is delivered, but insurance is expensive because it's paying for medical care, and it won't be affordable unless the medical care it's paying for becomes affordable. To end this on an optimistic note, we're going to figure this out. How do I know? Because we have no choice. And that would be true even if the Affordable Care Act hadn't passed. But happily, the Affordable Care Act, and its ambitious delivery-system reforms did pass. So now we're getting started. It's about time.

By Ezra Klein  | January 28, 2011; 4:18 PM ET
Categories:  Health Reform  
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Comments

The health care delivery experiments are already happening. In December, six health care systems in the U.S. agreed to share data on outcomes, quality, and costs across several common and costly conditions and treatments. The first target will be total knee replacement, a procedure that ranges on average from $16,000 to $24,000 per surgery. See http://sciencebusiness.technewslit.com/?p=2491

Posted by: alankotok | January 28, 2011 6:23 PM | Report abuse

updating to electronic records will have a hell of an increase in efficiency. As someone training to be a doc, I can't tell you how much time I spend flipping through hundreds of pages in charts just to learn about a patient. With the upcoming work hour limits, this might be crucial in patient care with increased handoffs. But having an organized manner of documenting a patient's history will save countless hours and billions of dollars in lost time.

Posted by: DDAWD | January 28, 2011 6:39 PM | Report abuse

I think that you just displayed incomplete knowledge of the text of the ACA. In fact, I think I know something about the ACA which you don't know. I am astounded.

You write that the Medicare productivity assumptions might hypothetically "drive doctors out of business." They won't. Yes some doctors are also small business men with office practices. Those doctors will not be affected by the cuts which apply only to hospitals, nursing homes and home health care agencies. This is important, because many doctors with office practices refuse to deal with the CMS. An attempt to reduce payments to them would reduce access to care for Medicare recipients and would not be sustainable. That's why the ACA does not attempt this.

http://bit.ly/eBCQPP

In contrast, as far as I can tell with half an hour of googling (a record for any one topic) there are no hospitals which refuse to accept medicare patients.

Also what's this about providers "profits." Most hospitals are non-profits.

Finally the idea that if Medicare reimbursement rates divided by wages decrease more than their productivity increases then they will go bankrupt doesn't make sense. The ACA implies that they will get more money from medicaid (low payments but better than trying to extract money from uninsured people with income below 4/3 times the poverty line) and more money from private insurance companies given the mandate (and subsidies).

The effect of the ACA on their solvency depends on what would happen without it. I'd say it saved hospitals since without the ACA the number of uninsured would have grown and grown.

Posted by: rjw88 | January 28, 2011 6:46 PM | Report abuse

Ezra, I *am* excited! Anytime people like yourself post thoughtful, reality-based comments on health care, it's another finger in the dike against the flood of willful ignorance.

Posted by: csaether | January 28, 2011 6:57 PM | Report abuse

I think that you just displayed incomplete knowledge of the text of the ACA. In fact, I think I know something about the ACA which you don't know. I am astounded.

You write that the Medicare productivity assumptions might hypothetically "drive doctors out of business." They won't. Yes some doctors are also small business men with office practices. Those doctors will not be affected by the cuts which apply only to hospitals, nursing homes and home health care agencies. This is important, because many doctors with office practices refuse to deal with the CMS. An attempt to reduce payments to them would reduce access to care for Medicare recipients and would not be sustainable. That's why the ACA does not attempt this.

http://bit.ly/eBCQPP

In contrast, as far as I can tell with half an hour of googling (a record for any one topic) there are no hospitals which refuse to accept medicare patients.

Also what's this about providers "profits." Most hospitals are non-profits.

Finally the idea that if Medicare reimbursement rates divided by wages decrease more than their productivity increases then they will go bankrupt doesn't make sense. The ACA implies that they will get more money from medicaid (low payments but better than trying to extract money from uninsured people with income below 4/3 times the poverty line) and more money from private insurance companies given the mandate (and subsidies).

The effect of the ACA on their solvency depends on what would happen without it. I'd say it saved hospitals since without the ACA the number of uninsured would have grown and grown.

Posted by: rjw88 | January 28, 2011 7:22 PM | Report abuse

OMG I am so excited!! maybe because I'm still at work at 7:30 on a friday working on this issue. <3s

Posted by: emmas | January 28, 2011 7:40 PM | Report abuse

First off I absolutely hope that every single cost saving provision does work and that the CBO wildly under-estimates everything in here becuase as you so if they don't we're in serious trouble just as we were pre-PPACA. That being said I've got an issue with the below statement you make:

Converting the health-care system to electronic records makes it much easier to track patient outcomes and then use that data to make the system more efficient, not to mention offer an infrastructure where providers can easily look up the most cost-effective treatments for different conditions.

What's to stop someone from stating that if the most cost-effecitve solution is chosen and the end result is not the desired one that this won't cause a legal issue. We already know that Web MD is already widely overused by non doctors to question doctors and their recommended courses of treatment.

Health IT also make ACO's more effective if that's their goal to be more effective but the rules for ACO's were debated and (and are still being decided from what I can tell) and unless I missed it we didn't hear anything about it around here.

See below for detail:

http://www.washingtonpost.com/wp-dyn/content/article/2011/01/09/AR2011010903401.html

The biggest concern I have with the article is the statement, "With regulators planning to issue rules for ACOs in the coming weeks, some prominent doctor and hospital groups are pushing for features that some experts say could undermine the overall goal - improving care while containing costs."

This is VERY disconcerting to say the least and there are many other concerns that prove out that these rules need to be as strict as the MLR regulations were and they haven't garnered nearly as much attention from any of the consumer groups that fretted over the MLR.


"Success may depend on CMS's rules. If the rules give providers too much flexibility, savings could vanish - or ACOs could even end up becoming a fiscal burden. If the rules are too strict, provider groups warn that few doctors and hospitals may join the experiment."

I really think it would benefit your readers if you did a post entirely on ACO's and get a Mark McClellan and/or a liberal economist to give their inputs as well.


Posted by: visionbrkr | January 28, 2011 11:30 PM | Report abuse


Many existing laws and regulations apply specifically to pregnant women. Several provisions of the Affordable Care Act offer new benefits for expecting mothers. Search online for "Wise Health Insurance" if you need affordable insurance for yourself or your wife.

Posted by: byronpatel | January 29, 2011 12:09 AM | Report abuse

I think it's going to be really tricky to make these kind of cost controls work. Giving a fixed amount of money for a diabetic seems reasonable, but what happens when they need more care than covered by the fixed amount? In these cases, the hospital needs insurance to cover the risk! In addition, much of the maintenance care of diabetes relies upon the patient changing their dietary and exercise habits. Are hospitals and doctors that treat less cooperative patients going to be penalized for that? (Much like schools in neighborhoods without strong education valuing cultures are penalized for being full of kids that don't study.)

The price mechanism is the most powerful lever in changing incentives when it is allowed to work as a relationship between the relative value of a good service between a producer and a consumer. Price controls are minefields of unanticipated consequences. There is always a chance they will work, for a little while, but they are not durable mechanisms, as the market for providing services will adjust around them.

Posted by: staticvars | January 29, 2011 11:56 AM | Report abuse

I think rjw88 has it right here. We've got two issues being conflated. One is whether the $220 billion in cuts to Medicare provider payments can stick. Many people are arguing that they won't, since the cuts that elicited the "Doc Fix" never stuck. What this misses, like rjw said, is that it's a lot easier to cut hospital payments than physician payments. Docs can dump their medicare patients, but hospitals can't, so the market dynamics and power are different. Notably though, the hospital trade groups actually supported PPACA, so if you think they are going bankrupt serving Medicare patients at reduced rates, think again.

The second issue is whether the efficiency measures will achieve the reductions CBO scored them to achieve (which is not much), or if maybe they will be even more productive. That's the question that is much tougher to answer.

Putting it all together though, we can be pretty confident that the Medicare cuts scored by the CBO can stick. Reduced provider payments are doable, and the score includes very conservative estimates of efficiency gains.

Posted by: sanjait | January 29, 2011 4:50 PM | Report abuse


I have read somewhere on the news that something like "Wise Health Insurance" is offering lowest health insurance rate for low and middle income families so search online and find them.

Posted by: keciaewers | January 30, 2011 12:01 AM | Report abuse

Catastrophic. The consequences will be catastrophic.

It's simply not true that no hospitals refuse Medicare. The Mayo Clinic, which the President praised for efficiency, refuses Medicare as full payment at one Arizona clinic. 3,000 Mayo patients must now pay a cash premium to Mayo ... or leave. And that's just the beginning.

Mayo has announced losses of $840 million on Medicare last year. Not a typo. $840 million. Anyone who believes those losses are NOT recovered from private insurance must be a Democrat. Medicare loss-shifting is a primary cause of higher insurance rates.

Ezra seems to buy the crazy notion that cutting provider costs will force them to be more efficient. Are you serious?

30 million new patients will enter the marketplace, paying the full medical rates. There are no new doctors.

What would the reader do? Doctors are already refusing NEW Medicare patients. This will cause even more doctors to refuse even EXISTING patients.

But the President (and Ezra) believe provider cuts will INCREASE EFFICIENCY ... with 30 million new full-pay patients standing in line outside their door?

Other large providers will join Mayo in refusing Medicate as full payment -- which is legal, according to Mayo.

Still following me? Every single penny of the higher additional fees paid by seniors will be a loss-shift from Obamacare. That's how the President and his party "pay for" their takeover. By forcibly extracting higher co-pays from our senior citizens (I'm 69)

How totally shameful. If you think the teabaggers are hostile, wait til the seniors figure this out. The entire Ponzi scheme will then collapse , because it really cannot be paid for.

Do the math.

Posted by: LibertyIssues | January 31, 2011 8:27 AM | Report abuse

This post by Ezra sounded familiar...oh, that's right...I posted on these very boards last week about how the $200 billion of 'productivity savings' would never stick. While Ezra does his best to protest that, well, something is better than nothing, he (once again) indirectly proves that the CBO report he has waived around for the past year claiming deficit-reduction from the ACA is a work of fiction.

Ezra rightly questions whether any of the savings will stick, but the Democrats in the ACA told the CBO to 1) assume they would, and 2) assume the government would realize 100% of the savings from these hazy yet-unknown 'efficiency improvements'.

In an early version of the health care reform the CBO 'what-iffed' only cutting Medicare rates by 50% of the presumed efficiency savings. This would allow doctors/hospitals to keep the other half of the savings, and thereby incent them to actually work harder to implement the reforms quicker and more fully. But alas, that would have left the Democrats from being able to claim 'deficit-reduction' from the ACA, so Democrats told the CBO to assume 100% of these savings would go back to the government via Medicare reimbursement rate cuts.

Of course, that now means most of the savings won't happen since there will be no incentive for providers to work hard to implement efficiency reforms if the government is just going to take 100% of the savings for themselves!

(read: how much harder would you work at your job if the government was going to tax you 100% of your incremental income?)

Posted by: dbw1 | January 31, 2011 10:08 AM | Report abuse

Health care will never be more affordable because the insurance companies will just pocket the savings.

Posted by: hossplay3 | January 31, 2011 12:12 PM | Report abuse

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