Obama's Big Idea: Bankrupt Medicare Faster

How can Medicare avoid bankruptcy? It cannot with the current approach or with H.R. 3200, "America's Affordable Health Choices Act of 2009."

The latest Republican initiative, Michael Steele’s contract with seniors, promises no cuts in Medicare. The President has spoken repeatedly about how well Medicare works and has promised seniors that Medicare will be strengthened by his plans. But Medicare is going bankrupt. It will be $37 trillion in deficit by the year 2050. Our current total national debt is $9 trillion. If anything is unsustainable it is Medicare. People need to understand the Medicare dynamic and we need to begin to deal with the problem now or the coming disruptions will make the Arizona town hall meetings seem like a Quaker Sunday service.

The first plan is just to cut payments to hospitals. The largest share of this proposed cut in the President’s budget is to assume “increases in productivity” so that $110 billion will be saved over 10 years. But Thomson Reuters Healthcare, a division of Thomson Reuters Corp, tracked more than 20 financial indicators at 439 small, medium and large U.S. hospitals. These included revenue and profit, or total margin for non-profit hospitals, employment levels, closures, inpatient volume, reimbursement rates, and frequency of elective medical treatments. It found:

• The median total margin among the 439 hospitals in the study was zero percent in the third quarter of 2008, the lowest ever seen.
• 50 percent of hospitals were unprofitable in the third quarter of 2008.
• Payments that hospitals received from Medicare, Medicaid and private insurers were growing but at a declining rate through the end of 2008.
• Median cash-on-hand reached an historic low in the third quarter of 2008, demonstrating the impact of the credit crisis on hospital liquidity.

It is pretty clear that simply cutting Medicare payments, the source of anywhere from 20 to 40% of the revenue of each hospital, makes absolutely no sense as a long term solution unless there is a dramatic change in the nature of clinical care.

How about payments to physicians? Physician payment makes up 3/5th of healthcare expenditures. Medicare has attempted to control physician payments by a price rationing system called the SGR or the sustainable growth rate. The plan has been to control physicians activity by reducing the amount Medicare pays for each unit of physician activity. But as Gail Wilensky, the former director of the Medicare program, has noted, "after intense lobbying from physician groups, Congress once again stepped in to prevent physicians who provide care to Medicare patients from seeing a 4.5% reduction in their fees... When the latest adjustment craters in January 2010, physicians' payments are supposed to revert to the lowest level they would have reached had it not been for the temporary patches; this would amount to a 20% reduction in fees." She goes on to point out the basic failure of this approach, "However, the most fundamental problem with the SGR is that its objective is inconsistent with the incentives it produces. The objective is to control total physician spending. The problem is that the SGR neither affects nor is driven by the spending of any individual physician. If anything, individual physicians are provided with an even greater incentive to increase spending, because nothing they do as individuals can affect overall spending, but their fees will be affected by what other physicians do collectively, irrespective of their own behavior."

What does H.R. 3200 prescribe for physician payments? There is an argument about this. The Lewin Group, a healthcare consulting company, predicts a $10.8 billion reduction in physician payments under the bill. The AMA, which has endorsed H.R. 3200 (and now we know why) claims that there will actually be a rather dramatic increase in physician payments since the bill states that the SGR targets will be eliminated ($228.5 billion for SGR repeal) and $20 billion in increased payments to physicians through a variety of new mechanisms.

It really does not matter who is correct here since in either case, a bankrupt system will still be spending more money than it has. In addition, if the Lewin Group is correct, it will be bankrupt but physicians will be avoiding new Medicare patients as Medicare generally pays less than the cost of an ambulatory encounter.

Reducing payments for the Medicare Advantage program is yet another strategy to reduce Medicare payments. Medicare Advantage Plans are health plan options that are approved by Medicare but run by private companies. They are part of the Medicare Program, and sometimes called "Part C." Medicare Advantage Plans generally enroll patients in some form of managed care with the benefit of managed care- reduction of premiums and reduction or elimination of the need for supplemental Medicare insurance (so called-Medigap) but the requirement for a narrow panel of providers or the need for referrals to see a specialist.

The government has paid about 15% more for this plan than it would have if the enrollees had just been in the regular Medicare program so it plans to reduce the payments so that the incremental costs are eliminated. Those seniors (10 million) who are in this plan will find increased bills in the future. Unfortunately, there is a real need for such management of care if costs are ever to be constrained. Gutting Medicare Advantage is probably the best example of a politically expedient approach that makes no sense in the long run.

Anyone who tells you that Medicare has done a pretty good job controlling costs or that it is the model plan to emulate is just not serious or worse. If you don’t want Medicare to change, just tell us who will buy the $37 trillion in U.S. bonds that will be needed to finance this model.