The Agenda

NRO’s domestic-policy blog, by Reihan Salam.

Note on Medicare Cuts and SGR


The Center on Budget and Policy Priorities is a vitally important left-of-center organization that produces high-quality research and analysis. But I’d like to point out some potential wrinkles in a report they issued late last year. Like the CBO, much of what CBPP does in the in the realm of what you might call qualitative analysis, or subjective assessments of likely budgetary outcomes. Suffice it to say, we can agree to disagree on some of these questions. As evidence that the health reform proposals before Congress at the time — they continue to evolve, and that’s important to keep in mind — the report cites the following examples of cost containment measures. I’ve added emphasis and parentheticals below. 

In Medicare, the bills would scale back overpayments to private insurers,

I want to tread lightly here, but one issue is whether or not higher payments to Medicare Advantage plans can fairly be characterized as “overpayments.” If the increase in individual premiums in the group market under the CBO analysis of the Senate bill is not fairly characterized as an increase because, as the president noted, the new plans offer richer benefits thanks to new minimum federal standards, it’s worth noting that Medicare Advantage plans tend to offer richer benefits.

Now, this could be a needless luxury that shouldn’t receive public subsidy. But this also means that Medicare Advantage enrollees are less likely to use supplemental Medicaid coverage, which of course has an impact on federal expenditures. As the president noted during the summit, Medicare Advantage is not offered on a means-tested basis, so that’s hardly dispositive, though perhaps it shouldn’t be dismissed out of hand. Perhaps more importantly, Medicare Advantage enrollees tend not to use so-called private Medigap plans. Why does that matter? Well, Medigap plans insulate Medicare recipients from various cost-sharing measures, and thus tend to encourage more intensive use and less efficient use of Medicare-funded services. Walton Francis has argued that once we factor this in, Medicare Advantage saves the federal government money, though the program could definitely be improved. 

reduce annual payment updates for hospitals and other providers, and, in the House bill, lower prescription drug costs. To reduce costs across the entire health care system, the bills would promote competition among insurers by creating an insurance exchange, cut insurers’ administrative costs,

It’s worth asking whether or not the Coburn-Obama notion that carving waste and inefficiency out of the health system is as easy as it sounds. Like Coburn, I tend to think this will require a decentralized approach. But let’s think through this. In David Cutler’s Your Money or Your Life, he argues, very persuasively, that paying-for-quality across the health system will likely increase administrative expenditures, as it will require close monitoring and a new infrastructure for measuring quality. As Atul Gawande argued, “paying-for-quality” might be interpreted by medical providers as “docking-for-mediocrity.” And as Jerome Groopman has brilliantly argued in the New York Review of Books, it’s possible that we expect too much from the deployment of comparative effectiveness data, a subject that UVA political scientist Eric Patashnik is exploring at the moment.  

Tangent: One of my favorite journalists, Roger Loewenstein, wrote “The Quality Cure” for the New York Times Magazine in 2005, an intellectual profile of Cutler’s work. It is highly instructive, and outlines an approach that while similar in broad outline to that pursued by congressional Democrats, includes a number of important differences. 

As for eliminating waste, fraud, and abuse, a fixation for politicians of all political stripes, this will also tend to put upward pressure on administrative expenditures. Indeed, this is one reason why private plans tend to have higher administrative expenditures than public plans. 

Right now, politicians of both parties are seeking to achieve a number of contradictory goals. We could, through regulating medical loss rations, simply mandate that administrative expenditures be reduced by fiat. But if we intend to achieve various other goals that demand higher administrative expenditures, at least in the short to medium term, something will have to give. 

invest in preventive care,

Investing in preventive care is an excellent idea that might yield systemwide savings over time. Yet many credible sources, including CMS and CBO, have suggested that preventive care will increase costs. Preventive care expands utilization, yet the hope has been that it would lower the risks and costs associated with chronic illness and acute illness down the road. There’s a real debate on this issue, but it’s certainly not clear that preventive care will necessarily lower costs. Again, that’s not a case against it. It is, however, important to keep in mind. 

penalize hospitals with high readmission rates,

It is entirely possible, as the CBPP suggests, that this will not meet serious political resistance that will weaken the proposal over time. 

and establish pilot projects in various areas to help determine the best approaches to controlling health care costs (while giving federal health officials some new authority to implement some changes in Medicare based on the knowledge gained without having to enact new legislation).

This seems like an excellent idea, and it’s one that I’d endorse. Of course, this could be used to offset the cost of increasing physician payments. In describing the poorly-designed SGR, the CBPP report doesn’t note, in my reading, that SGR adjustment have been paid for through cuts and trims in the past, e.g., the last time SGR adjustment was funded with cuts to Medicare Advantage. Given the high cost of a lasting solution to the so-called “docfix,” it might make sense to apply all of the savings generated by the pilot projects, etc., to funding the docfix. Instead, the plan is to have the docfix increase the deficit while we create a large new entitlement. This could be a good idea for all kinds of reasons. But it does raise questions regarding the relationship between our long-term fiscal imbalances and the contours of health reform. 

In addition, the Senate bill would impose an excise tax on high-cost insurance plans to discourage overuse of health care and would create an independent board with the power to implement cost savings in Medicare.

I agree that delaying the excise tax to 2018 and raising the limits, etc., doesn’t mean that it won’t happen. And I think IMAC is a good idea.

As always, CBPP does a great job. My only concern is with writers and thinkers who — once they get the quick-hit answer they want — don’t look under the hood, so to speak. I’ve been in this category myself more than once, but I’m trying my best. 


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