I've looked at clouds from both sides now
From up and down, and still somehow
It's cloud illusions I recall
I really don't know clouds at all
- Joni Mitchell, "Both Sides, Now"
Healthcare has been a major issue in this year's presidential campaign, with Medicare at the epicenter of the debate. Our society's sound-bite orientation and the contentious tenor of the political dialog have resulted in oversimplification of the issues and obfuscation of the real facts. It's been "a campaign full of Mediscare."1 Both the Obama and Romney campaigns have sought to win the hearts and minds of voters-especially in the senior citizen-heavy swing state of Florida-by charging that the other campaign wants to slash Medicare. As a result of the campaign rhetoric and the media's generally superficial analysis, one has to wonder whether Medicare is a cloud that we don't know at all.
$716 billion. That was the one figure mentioned six times by Governor Mitt Romney and one time by President Barack Obama during the first presidential debate, held on Oct. 3, 2012, on the campus of the University of Denver in Colorado. President Obama actually was the first to bring it up, stating, "Seven hundred and sixteen billion dollars we were able to save from the Medicare program by no longer overpaying insurance companies, by making sure we weren't overpaying providers."2
But does Medicare overpay providers? Medicare reimburses physicians on average only 80 percent of their treatment costs.3 Even before passage of the Affordable Care Act (ACA), average hospital margins on Medicare were estimated at -5 percent in 2009 and were projected to reach -7 percent in 2011.4 According to the American Hospital Association (AHA), 61 percent of hospitals lose money on Medicare.5 And all these estimates are prior to the implementation of the majority of the ACA's increasingly challenging reimbursement reductions.
Rather than looking at the $716 billion as savings, Governor Romney described it as a cut to the Medicare program, stating, "But on Medicare, for current retirees he's cutting $716 billion from the program. Now, he says by not overpaying hospitals and providers, actually just going to them and saying we're going to reduce the rates you get paid across the board, everybody's going to get a lower rate. That's not just going after places where there's abuse, that's saying we're cutting the rates. Some 15 percent of hospitals and nursing homes say they won't take anymore Medicare patients under that scenario."6
The Devil's in the Details
So one person's savings is another person's cut. To find out which interpretation of the $716 billion is more accurate, one should go to the original source, the Congressional Budget Office (CBO) and Joint Committee on Taxation's 22-page report of July 24, 2012 to Speaker of the House John Boehner. The report was an analysis of the direct spending and revenue effects of H.R. 6079, the Repeal of Obamacare Act.
The report concluded that under H.R. 6079, "Spending for Medicare would increase by an estimated $716 billion over that 2013-2022 period."7 In other words, the ACA decreases Medicare spending by that amount.
It should be noted that the ACA's reduction to Medicare spending is not a new concept. One month after the health reform law went into effect, the chief actuary of CMS estimated that Medicare outlays would drop by $575 billion during 2010-2019.8
What accounts for the $716 billion reduction? It is the net result of cuts of $517 billion to Part A (Hospital Insurance) and $247 billion to Part B (Medical Insurance), partially offset by a $48 billion increase in net spending for Part D (Prescription Drug Benefit). 9
The ACA reduces Medicare fee-for-service sector (excluding physician services) outlays by $415 billion, the sum of lower payments of $260 billion for hospital services, $39 billion for skilled nursing services, $17 billion for hospice services, $66 billion for home health services, and $33 billion for other services.10 For 2013, the decrease in hospital reimbursements by Medicare will be roughly $20 billion.
In addition, the ACA changes how payment rates are set in the Medicare Advantage program, causing payment reductions totaling $156 billion, and it reduces disproportionate share hospital (DSH) payments from Medicare by $31 billion and from Medicaid by $25 billion. Last, the ACA has other provisions pertaining to Medicare, Medicaid, and the Children's Health Insurance Program (CHIP) that decrease spending by $114 billion.11
Drilling Down into the Cuts to Hospitals
What specifically accounts for a major portion of the $260 billion in lower payments for hospital services? On an annual basis, CMS updates its payments and cost limits, issuing market basket updates to reflect input price inflation facing providers in the provision of medical services. Section 3401 of the ACA imposed negative adjustments to CMS's Inpatient Prospective Payment System (IPPS) market basket update, specifying annual percentage reductions for FY2010 through FY2019. For FY2012, the reduction was -0.10 percent, and it will reach -0.75 percent for FY2017-2019. 12
In addition, section 3401 mandated to-be-determined productivity adjustments for FY2012 through FY2020 and beyond. In general, the productivity adjustments are to be equal to the 10-year moving average of changes in annual economy-wide private nonfarm business multifactor productivity.13, 14 The FY2012 productivity adjustment was -1.0 percent,15 and the FY2013 adjustment will be -0.70 percent.16
These across-the-board productivity adjustments are significant. According to the Social Security and Medicare Boards of Trustees, "Most of the ACA-related cost saving is attributable to a reduction in the annual payment updates for most Medicare services (other than physician services and drugs) by total multifactor productivity growth, which the Trustees project will average 1.1 percent per year."17 Hospital productivity has increased in recent years by only about 0.4 percent per year (and by negligible percentages over longer periods), and health provider productivity is unlikely to achieve improvements equal to the economy as a whole. 18 Thus, hospital margins will shrink more as productivity gains fail to offset the declines in Medicare reimbursement, placing greater financial pressure on hospitals.
As estimated by CMS's chief actuary in April 2010, the reductions to the market basket update and the productivity adjustments total $112.6 billion in Medicare savings (reduced reimbursements to hospitals) for 2010-2019,19 and one would expect the total for 2013-2022 to be greater, due to inflation.
As Governor Romney mentioned in the first presidential debate, faced with these reductions in Medicare payments, hospitals could stop taking Medicare patients. This stands to reason, and there are numerous historical precedents. For example, after losing $840 million treating Medicare patients in 2009, the Mayo Clinic announced in January 2010 that it would no longer accept Medicare patients at one of its primary care clinics in Arizona.20 Obviously, if healthcare providers stop taking Medicare patients, access to care-one of the main objectives of the ACA-will be impaired.
Alternatively, hospitals could try to offset the reductions in Medicare reimbursement by shifting costs to commercial payers, though that approach has become much less viable in recent years, as health plans have placed increasing pressure on providers to contain costs.
If hospitals try the "do more with less" approach-maintaining current levels of access to care for Medicare patients in spite of the reduced federal funding-they will need to cut costs, most likely headcount. In September 2012, the AHA, the American Medical Association and the American Nurses Association released the findings of a study by healthcare consulting firm Tripp Umbach. The study assessed the employment impacts of the Medicare cuts specified by the Budget Control Act of 2011 (BCA) or the so-called "debt deal." Under the BCA's sequestration procedure, Medicare will be cut by two percent per year over the next 10 years. For 2013, the total cut to Medicare is slated to be approximately $11 billion,21 of which almost $5 billion would be taken from hospitals.
Though it was intended to be an assessment of the negative employment effects of the BCA, the Tripp Umbach study also furthers our understanding of the general relationship between revenue and employment levels for healthcare providers. Per the study, every $1 billion in reduced funding of hospitals-absent other cost-saving measures-would directly necessitate the shedding of approximately 20,000 hospital jobs.
Thus, in 2013, the aforementioned ACA-mandated $20 billion cut to Medicare reimbursement of hospitals could directly result in the elimination of 400,000 hospital jobs, which would translate into the loss of over 100 positions for the average hospital.
What would be the likely impact of these staffing cuts on access to and/or quality of care? Bill Galston, a former adviser to President Bill Clinton and senior fellow at the Brookings Institution, commented, "Whether the providers will respond by reducing access to services or the quality of those services, or respond the way the administration hopes they will by continuing to deliver the services at a lower profit margin, remains to be seen."22 Wishful thinking aside, given the already-thin or negative profit margins of many hospitals and the enormity of the ACA-driven reimbursement reductions-over four times the possible cut resulting from the BCA in 2013-the former would appear to be the more likely outcome, ultimately to the detriment of Medicare beneficiaries.
Since hospitals will also be subject to numerous fee-for-value healthcare delivery reforms which provide economic carrots and sticks based on quality performance, they could very well find themselves sitting on the horns of a dilemma-tempted to reduce the volume and/or quality of patient services as a way to cope with the ACA's reimbursement cuts, while at the same time motivated to not cut corners and excel at the fee-for-value programs.
At a high level, Governor Romney proposes no changes for current retirees and near-retirees to Medicare. For future Medicare beneficiaries, his plan provides a defined contribution or premium support (a voucher program), allowing beneficiaries to choose in an open market between private plans and traditional Medicare. Unlike the ACA, the CBO has not scored the Romney plan nor the bipartisan proposal of Congressman Paul Ryan and Senator Ron Wyden which Governor Romney has applauded.
Speculation by Both Sides, Now
Neither President Obama nor Governor Romney is clairvoyant-they cannot predict with certainty how their respective Medicare reform plans will pan out. Thus, each of them is engaging in speculation, about his own plan as well as that of his opponent.
President Obama speculates that the ACA's multiple healthcare delivery reforms-especially accountable care organizations (ACOs)-will transform the system so that it is more effective and efficient, thus restoring Medicare's solvency for the long haul. He is betting on the come that hospitals will be able to meet the tall order of maintaining access to and quality of care in spite of reduced funding by the federal government. In some sense, he would like all of Medicare to be a successfully operating ACO. Though the results of ACO pilots have been limited and somewhat mixed, it is becoming clear that the broad accountable care movement is at a minimum a beacon pointing us in the right direction.
President Obama also contends that the Romney plan's voucher will not be able to keep up with healthcare inflation. He also fears that faced with free market competition by private plans, Medicare will be left with an older, sicker membership, which will result in its collapse.
Regarding his own plan, Governor Romney hypothesizes that introducing competition into the Medicare world will provide a choice of different plans, lowering cost and improving quality.
As mentioned previously, Governor Romney speculates that as a result of the ACA's across-the-board reductions to Medicare reimbursement, some hospitals and other providers will cease taking Medicare patients.
Having looked at Medicare reform from both sides, one must remember that voters will be the ultimate arbiters as to which presidential candidate has done a better job of articulating the more plausible and effective plan. Regardless of the outcome at the ballot box on Election Day, the marching orders for healthcare providers-to deliver higher-quality care as efficiently as possible-will remain the same.
Ken Perez is Director of Healthcare Policy and Senior Vice President, MedeAnalytics, Inc.
1. Robertson, Lori, "A Campaign Full of Mediscare," www.factcheck.org/2012/08/a-campaign-full-of-mediscare/, Aug. 22, 2012.
2. New York Times, "Transcript of the First Presidential Debate," www.nytimes.com/2012/10/03/us/politics/transcript-of-the-first-presidential-debate-in-denver.html?pagewanted=all, Oct. 3, 2012.
3. Matt Patterson, "Medicare Doctor Shortage Endangers Seniors' Access to Care," National Policy Analysis, www.nationalcenter.org/NPA602.html, February 2010.
4. MedPAC, "Report to the Congress: Medicare Payment Policy," March 2011, pp. 37, 60.
5. American Hospital Association, "Fragile State of Hospital Finances," 2009.
6. New York Times, loc. cit.
7. Elmendorf, Douglas W., letter to Speaker of the House John Boehner, www.cbo.gov/sites/default/files/cbofiles/attachments/43471-hr6079.pdf, July 24, 2012, p. 13.
8. Foster, Richard S., "Estimated Financial Effects of the 'Patient Protection and Affordable Care Act,' as Amended," www.cms.gov/Research-Statistics-Data-and-Systems/Research/ActuarialStudies/downloads/PPACA_2010-04-22.pdf, April 22, 2010, p. 8.
9. Elmendorf, p. 14.
12. Section 3401 of H.R. 3590, the Patient Protection and Affordable Care Act.
14. Goldberg, Larry, "CMS Issues Final FY 2011 Medicare IPPS Update with Market Basket Increase of 2.35 Percent and A Negative Coding Adjustment of 2.9 Percent," Washington Bulletin, www.grantthornton.com/staticfiles/GTCom/Health%20care%20organizations/Washington%20Bulletin/2010/WB_Aug%202_2010_CMS%20Issues%20Final%20FY%202011%20Medicare%20IPPS%20Update.pdf, Aug. 2, 2010.
15. Centers for Medicare & Medicaid Services, FY2012 IPPS final rule, Aug. 1, 2011.
16. Centers for Medicare & Medicaid Services, FY2013 IPPS final rule, Aug. 1, 2012.
17. Social Security and Medicare Boards of Trustees, "A Summary of the 2012 Annual Reports," www.ssa.gov/oact/trsum/index.html, June 4, 2012.
18. Shatto, John D. and M. Kent Clemens, "Projected Medicare Expenditures under Illustrative Scenarios with Alternative Payment Updates to Medicare Providers," www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/ReportsTrustFunds/Downloads/2012TRAlternativeScenario.pdf, May 18, 2012, p. 5.
19. Foster, op. cit., Table 3.
20. Wall Street Journal, "Medicare and the Mayo Clinic," http://online.wsj.com/article/SB10001424052748703436504574640711655886136.html, Jan. 8, 2010.
21. Tripp Umbach, "The Negative Employment Impacts of the Medicare Cuts in the Budget Control Act of 2011," Sept. 2011, p. 7.
22. Dwyer, Devin, "Fact Check: Romney's Plan to 'Restore' Medicare Spending Cuts," http://abcnews.go.com/blogs/politics/2012/08/fact-check-romneys-plan-to-restore-medicare-spending-cuts/, Aug.16, 2012.