Smaller Payouts, Lower Fees Slow Medicare Spending
Policy + Politics

Smaller Payouts, Lower Fees Slow Medicare Spending

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Health care spending over the last two years has slowed to levels not seen since the mid-1990s. The conventional wisdom is that it reflected the recession-related reductions in demand by people who lost jobs and their health care coverage.

That could not have affected Medicare’s nearly 50 million beneficiaries, most of whom are retired. Yet Medicare spending slowed right along with the privately insured, suggesting something else was at work. Two of the nation’s leading health care experts clashed at a public forum on Tuesday over what might be behind the spending slowdown. The latest Medicare trustees report showed the program’s trust fund exhaustion date had remained almost unchanged in the past year despite less-than-anticipated tax collections due to the lingering effects of the recession.

Robert Reischauer, a trustee and former head of the Congressional Budget Office, suggested the past two years’ debate over health care reform, which beyond covering the uninsured emphasized delivering higher quality care at lower cost, had a major impact on providers. They are scrambling to lower costs even before the Affordable Care Act’s payment reforms go into effect.

“I see for the first time in the provider community the recognition that change is inevitable, which wasn’t there in the 1980s and 1990s,” he said at an American Enterprise Institute forum. “There’s a big head of steam out there.”

The pessimistic view was offered by Gail Wilensky, who headed what is now called the Centers for Medicare and Medicaid Services during the elder Bush administration. She argued that the slowdown in Medicare spending in 2010 was largely a function of government skimping on reimbursements, not greater efficiency at the nation’s hospitals and physician offices. “Right now what we have is lowered payments, not lower costs,” she said.

Which analysis is right? The answer to that question will have major implications for achieving long-term sustainability in a system that is currently projected to exhaust its trust fund assets by 2024. There is some evidence to suggest that some hospitals, which receive 43 percent of all Medicare spending for their in-patient and out-patient services, are learning to deliver higher quality care for larger patient populations without a huge jump in spending.

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The latest Medicare Payments Advisory Commission annual report, released last month, showed that overall hospital margins for their Medicare patients improved from -7.1 percent in 2008 to -4.5 percent in 2010. This improved profit picture came despite a sharp falloff in earnings from their investment portfolios due to the stock market crash. “After the decline in the economy, they constrained cost growth in 2009 and 2010,” the report said.

Moreover, the report showed that those hospitals that performed best on quality indicators like mortality and readmission rates were able to make money at Medicare’s reimbursement rates, which are about 75 percent of what privately-insured patients pay on average. “Medicare payments more than covered the costs of the median efficient hospital, with the median efficient hospital generating a (plus) 4 percent Medicare margin in 2010,” the report said.

However, Medicare cut payment rates in 2011 and 2012, in part to recapture what it considered overcharges made in 2009 and 2010. A report released by CMS on Monday showed that the Affordable Care Act’s cost-cutting provisions will lower Medicare spending by $200 billion through 2016. The MedPAC report estimated hospital margins would fall back to -7.0 percent by the time its next report comes out.

Reischauer said he was optimistic that providers would adapt to an era of lower reimbursements. “The last two years costs are lower than expected. Something is going on,” he said. “You can only attribute so much to the weakness of the economy.”

Of course, if the Supreme Court voids the health care reform law, all bets are off. “This momentum will shift into reverse,” he said.