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August 25, 2011

Medicare Spending Slows Sharply

Maggie Mahar

It is an article of faith, at least among conservatives, that as long as Medicare remains a government program, outlays will rise relentlessly, year after year. Only “the market” could possibly tame Medicare inflation, they say. The fear-mongers argue that unless we either shift costs to seniors; raise the age when they become eligible for Medicare; or turn the whole program over to private sector insurers, Medicare expenditures will bankrupt the country.

Here is the truth: Both Standard & Poor’s (S&P) and the Congressional Budget Office (CBO) now have 18 months of hard data showing that Medicare spending has begun to slow dramatically. Health reform legislation has not yet begun to kick in to pare Medicare payments, but something is changing on the ground. As I pointed out in an earlier post, Medicare spending began to plunge in January of 2010. After levitating by an average of 9.7 percent a year from 2000 to 2009, CBO’s monthly budget reports show that Medicare pay-outs are now rising by less than 4 percent a year. (Over the year ending June 2011, Standard & Poor’s reckons that the cost of Medicare claims rose by just 2.5 percent.  But S&P’s Medicare index does not include Medicare Advantage, the private sector option that costs the government significantly more than traditional Medicare.)

Pessimists argue that Medicare pay-outs often fluctuate, and that this is just a short-term drop.  Moreover, the naysayers insist, over the next few years, a horde of aging Hippies will push Medicare’s outlays higher. But hard numbers fly in the face of their assertions. Over 40 years, Medicare pay-outs have rarely dipped, and even a cursory glance at U.S. birth rates makes it clear that the baby-boom bulge will not have a significant impact on Medicare expenditures for another ten to fifteen years. By then, the Affordable Care Act (ACA) will have had a chance to rein in health care spending.

Peter Orszag Comments on the Slow-Down

After publishing the first part of this post, I heard from Peter Orszag, former director of the Office of Management and Budget in the Obama administration. Orszag was well aware of the deceleration in Medicare payouts, and later in the week, he published an opinion piece on Bloomberg, explaining how some hospitals are beginning to use information technology to rein in wasteful spending. Over the weekend, Orszag took a closer look at the CBO monthly budget reports cited in the first part of the post, and he confirmed, via e-mail, that “so far this year, Medicare spending has risen by slightly less than 4%,” after climbing by “just a little over 4 percent” in 2010.

Orszag posted a second piece on Bloomberg headlined: “Medicare Spending Slowing as Hospitals Improve Care.” “The data don’t yet allow a definitive conclusion about what’s causing the recent deceleration and whether it will last,” he writes, “but it may be an early signal of a shift toward value in the health sector. My conversations with various hospital executives, for example, suggest they anticipate less generous reimbursement and more focus on value in the future – and are therefore trying to become more efficient now. That’s the discussion taking place in the strategic planning process at Mount Sinai Medical Center in New York, where I recently joined the board of directors.”

Providers Take the Lead As They Anticipate Reform

To put the slow-down in context, consider the chart below. In the three decades prior to 2000, Medicare inflation slipped below 5 percent only twice, and the first time, it bounced back the very next year. The only sustained slow-down came at the end of the 1990s, following cutbacks in Medicare payments that were part of the Balanced Budget Act of 1997. But at the beginning of this century, Medicare’s outlays once again spiraled.

EXHIBIT 1 Annual Growth Rates In Per Enrollee Payments For Personal Health Care, Medicare And Private Insurers, 1970–2000

What is striking about the recent dip to 4 percent, is that this time around, there have been no major policy changes in Washington. Over the past 18 months, neither benefits nor payments to providers have been reduced in any significant way. The Affordable Care Act does call for cutting overpayments to Medicare Advantage insurers, while shaving annual increases in payments to hospitals, nursing homes and other institutional providers by 1 percent a year over ten years. But these changes have not yet taken effect.

This slow-down is not a result of Congress cutting Medicare spending. Instead, as former White House health care adviser Dr. Zeke Emanuel pointed out in Part 1 of this post,  providers are “anticipating the Affordable Care Act kicking in 2014.” They can’t wait until the end of 2013, he explained: “They have to act today. Everywhere I go,” Emanuel, told me, “medical schools and hospitals are asking me, ‘How can we cut our costs by 10 to 15 percent?’ They know that they must trim their own costs if they are going to lower the bills that they send to Medicare.’" Like Orszag, Emanuel is seeing a “shift toward value in the health sector.”

In the past, Medicare has rewarded providers for “Volume,” by paying them fee-for-service. But the Affordable Care Act contains financial carrots and sticks that reward doctors and hospitals for “Value”-- better outcomes at a lower price--while penalizing those that “do more” without improving patient outcomes. “Either we get volume under control, or prices paid both by private insurers and by Medicare will drop,” says Emanuel. “Hospitals know this. This is why they want to make their systems more efficient.”

Their goal is to squeeze some of the waste out of our health care system. Health care researchers estimate that one-third of Medicare’s dollars are squandered on unnecessary tests; ineffective, sometimes unwanted treatments, and preventable medical errors that lead to longer hospital stays--and another surgery to repair the damage done the first time around. Not all of the waste can be removed from the system. Sometimes it is just not clear whether another test or a new procedure will help a particular patient. Medicine is shot through with uncertainties. But if one-third of health care dollars are wasted, it is not unreasonable for hospital to hope that they can cut their costs (and thus the bills that they send to Medicare and other payers) by 10 to 15 percent.

Thus, those who bill Medicare are actually trying to “break the curve” of Medicare inflation by excising waste from the system. Doctors and hospitals can do this better than anyone else because they understand that the fat is marbled throughout the meat--it is not hanging out on the edge of the steak.  It needs to removed carefully with a scalpel, not a cleaver.

Health care providers are in the best position to reduce costs and lift quality by   changing  how care is delivered--using checklists, health Information Technology, shared decision-making (which gives patients the information they need to consider their options); palliative care and, perhaps most importantly, teamwork, as hospitals, doctors nurses and other health care professionals learn to collaborate with each other--and with patients-- to provide safer, more effective and more affordable  care,

Health care providers are in the best position to reduce costs and lift quality by  changing  how care is delivered--using checklists, health Information Technology, shared decision-making and palliative care (which give patients the information they need to consider their options), and, perhaps most importantly, teamwork, as hospitals, doctors nurses and other health care professionals learn to collaborate with each other--and with patients-- to provide safer, more effective and more affordable  care,

How Providers Are Cutting Costs

What is impressive is that many providers are showing their willingness to trim some of the excess in the way they practice medicine--even if this means losing money. For example, as a result of the debate over health care reform, many physicians are pausing to consider whether all of those diagnostic tests they have been doing really are necessary.

As Paul Levy, former President and CEO of Beth Israel Deaconess Medical Center in Boston, pointed out on The Health Care Blog about six months after reform legislation passed in 2010: “Recent trends in radiology imaging portend a dramatic and rapid reduction in this segment of a hospital's business plan.” Today, Medicare and other insurers pay for diagnostic imaging tests on a fee-for-service basis. The more tests a provider does, the more he is paid. Under health care reform, Medicare plans to move away from fee-for-service and toward global, or capitated payments which reward providers for better outcomes at a lower price. Thus if the hospital is able to diagnose the problem with fewer tests, and treat it successfully, it will earn more money, not less. But Levy reports, “even before capitated payments have come into full play there has been a large reduction in the number of some types of imaging studies in hospitals. 

“Our Chief of Radiology summarizes our experience--common to other hospitals as well--and provides some of the reasons: ‘The biggest hit has been in CT, the modality we are most dependent on for revenue. We are about 10% down in CT cases from last year, due to a combination of patient and physician fears about radiation exposure, more prudent ordering of studies by physicians, leakage out of the medical center, and the introduction of physician incentive programs (to minimize the amount of imaging) by some insurers.’

“'Also, and very surprising, we have not seen an upswing in ultrasound or MRI to match the CT volume drop. The drop in CTs is not due to the recession, Levy adds: “this occurred while our overall patient volume increased during the same period.”



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