Saving Costs in Medicare

Medicare is a constant target for any deficit reduction study. It is a large and growing program whose share in the federal budget seems destined to only grow larger. The simplest proposals suggest cutting benefits, but since this is one of the country’s most popular programs, one has to stop and ask whether this is really necessary. Given all the fraud and waste in our healthcare system, it could be possible to produce sufficient savings to protect the core benefits under the program. Paul Starr provides an excellent summary of Medicare’s history and enumerates a number of areas in which savings are possible—some of which may be unfamiliar to most. The article titled The Medicare Bind appears in The American Prospect.

Solving the problem by converting to a voucher system, as suggested by the Republicans, is easily dismissed. This proposal is merely a copout that tries to eliminate the problem rather than solve it. It merely transfers cost from the public to individuals and forces them to participate in a much more expensive healthcare arena. It would be a disaster for the individuals affected and it would require an even greater fraction of our economy be devoted to healthcare.

More moderate proposals include raising the eligibility age, and some forms of means testing. Raising the eligibility age actually increases the cost of healthcare in the country and would be devastating for many who had to spend an extra year or two searching for healthcare coverage at their advanced ages. Means testing could be part of general reform package, but, by itself, it is not likely to provide the needed savings.

A number of initiatives were included in the recent healthcare reform bill that aimed at reducing costs and making healthcare more effective. The net impact of these is yet to be known, but it is interesting to note that the rate of growth of Medicare costs has diminished considerably. It is as if the medical community has finally realized that something must be done and it has begun to act on its own before being required to. The encouragement to move to Accountable Care Organizations may not follow the government-encouraged path, but the efficiencies of integration into larger medical practice units is so obvious that it is happening already.

Starr reviews a number of proposals that have received considerable discussion such as negotiating drug prices and raising revenue by including a modest deductible or co-pay from Medicare participants. There is also the rise in Medicare tax that supports Part A that is programmed to occur.

"As of 2013, under the Affordable Care Act, there will be an additional Medicare tax of 0.9 percent on earned income over $200,000 for individuals and $250,000 for married couples. Furthermore, in a major shift, the full tax (3.8 percent) will also apply for the first time to interest, dividends, rents, and other unearned income over the $200,000 and $250,000 thresholds. These new revenues are a key element in the Affordable Care Act’s strengthening of Medicare’s finances...."

Starr’s greatest contribution to the subject is to point out a number of obscure, but expensive, aspects of Medicare’s implementation. Consider the funding of hospital construction.

"The decision in the 1980s to continue paying for capital costs was particularly important. Because Medicare beneficiaries represented roughly 40 percent of hospital revenue, Medicare defrayed 40 percent of the cost of any new hospital investment. The federal government did not cover 40 percent of a new school building that a local district wanted to build, but it paid for 40 percent of a new wing built by the local hospital, no questions asked. Although capital costs have now been folded into Medicare’s prospective rates, the long contrast in federal policy toward health care and education helps explain why so many communities in the United States have gleaming hospitals and run-down schools."

And then there is Medicare’s support for graduate medical education.

"Medicare payments to teaching hospitals include direct support, covering such things as residents’ salaries, and indirect support for expenses associated with teaching, such as extra tests residents may order. But, according to the congressionally established Medicare Payment Advisory Commission (MedPAC), the true indirect costs are substantially lower than what Medicare has been paying. Besides cutting back that excess, the report from the deficit commission chaired by Democrat Erskine Bowles and Republican Alan Simpson recommends limiting the top salaries paid to medical residents to 120 percent of the national average, for a total savings of $60 billion through 2020."

Medicare has congressionally imposed restrictions on what it can and cannot do in terms of determining which procedures and medications are reimbursable. This stymies attempts at cost effectiveness, but Starr suggests some modifications in reimbursement that he refers to as "reference pricing."

"Medicare should adopt "generic reference pricing": If a physician prescribes a brand-name drug when a generic equivalent is available, Medicare should pay only as much as the generic drug costs."

"The concept of "reference pricing" has wider relevance beyond pharmaceuticals: If one medical procedure is no more effective than another for a particular condition but the second is less expensive, Medicare should pay providers only the lesser amount. Reference pricing should receive a boost from one of the major initiatives in health-care reform—research on the comparative effectiveness of different treatments, which ought to begin providing better data on what works at what cost and what doesn’t work at all."

Starr also suggests that Medicare overpays specialists at the expense of primary care physicians, providing skewed incentives toward these two physician categories.

"In determining physician payment levels, Medicare has for years relied on a private body with no accountability—the subspecialist-dominated Relative Value Scale Update Committee of the AMA, now being challenged by primary-care physicians because of a pattern of decision--making that has contributed to a wide disparity in incomes within the medical profession. Primary-care physicians earn median incomes that run $135,000 a year less than what subspecialists make, amounting to a gap of $3.5 million over the course of a career. That difference has contributed to the skewed incentives encouraging too few doctors to enter primary care."

Medicare also has the issue of regional variance in cost of treatment. A city in one location could be charging much more per Medicare participant than a similar city a hundred miles away. Often there is no other explanation for this than different medical treatment habits or fraud. The more expensive location does not provide better care.

"In the effort to achieve savings by reducing overtreatment, Medicare should focus on the regions with the highest costs per beneficiary. Led by John Wennberg, researchers at Dartmouth have highlighted the striking geographic differences in the use of medical services and pointed to local physician--practice patterns as a likely cause. Drawing on that research, a 2008 CBO report suggested that Medicare could cut its spending by 30 percent if high- and moderate-spending areas could cut their costs to those of the low-spending areas."

Surprisingly, Starr ignores fraud as an expense that can be reduced. The FBI estimates that 3-10% of healthcare costs are fraudulent. Medicare is probably a major target. If 5% of its costs could be eliminated by reducing fraud, that would add up to about $250B over a decade.

In sum, these proposals are capable of generating enormous savings over time. They are changes that protect the basic healthcare that seniors are now provided, and should be acceptable to both liberals and conservatives. Let us not make hasty decisions until we pursue these avenues.