Obama’s Medicare Cuts by Region

There’s been a lot written about the $741 billion in spending cuts in the Medicare program that are used to finance insurance exchange subsidies and Medicaid expansion for younger Americans.  The reality of the cuts provides a powerful argument for the need to reform traditional fee-for-service Medicare to ensure its long-run viability. 

Robert Book and Michael Ramlet explore a different aspect of the cuts by estimating the regional impact of the Medicare spending reductions introduced by the Affordable Care Act (ACA).   Their study, a part of the University of Minnesota’s Carlson School working paper series, uses data from the analysis presented to Congress by the Congressional Budget Office (CBO) on June 24, 2012. 

According to CBO estimates the $741 billion cuts are achieved by reducing payments to hospitals ($260 billion), other providers except physicians ($155 billion), Medicare Advantage ($156 billion), disproportionate share hospital (DSH) payments ($25 billion), and miscellaneous other provisions ($114 billion).  Physicians don’t escape completely.  A 30% reduction in their payments is scheduled to go into effect on January 1, 2013, amounting to almost $250 billion over the next decade.  (To be fair, the physician payment cuts are not part of the ACA.) 

The reductions hit parts of the US where seniors congregate, including California, Texas, and Florida.  Combined losses in those three states represent 20% of the total, or $148 billion.  Pennsylvania, Illinois, Michigan, Ohio, New Jersey, North Carolina, and Massachusetts complete the top ten.  Their losses total $142 billion meaning that these ten states lose $290 billion, or approximately 40% of the total. 

Cuts are good right?  Remember that someone’s spending is someone else’s income.  These spending cuts represent cuts in revenues to hospitals, hospices, home health agencies, skilled nursing facilities, and private insurance companies.  To the extent that these payment changes result in greater efficiency in health care delivery, they are a good thing.  However, Medicare actuaries estimate that 40% of all US hospitals will face insolvency by the end of the decade because of these cuts.  They simply will not be able to adjust their practices quickly enough to avoid the consequences. 

Good luck in finding a provider all you seniors . 

Book and Ramlet’s study is available at http://www.carlsonschool.umn.edu/medical-industry-leadership-institute/publications/documents/BookandRamletpaperonMedicare.pdf.  The CBO report can be found at http://www.cbo.gov/sites/default/files/cbofiles/attachments/43471-hr6079.pdf.

Private Medicare that Works

I told my undergraduate health economics class today that only members of Congress read the New York Times.  Well, for the second day in a row I’m writing about a Times article.  I’m not a member of Congress so I must be wrong about the newspaper’s readership.  I’ll admit that I’m not in agreement with much of the editorial content of the New York Times, but when I do agree I should acknowledge that fact.

Robert Pear writing this past weekend (“Despite Democrats’ Warnings, Private Medicare Plans Find Success”) looks at the success of Medicare’s two privately-run programs, Medicare Advantage and its out-patient prescription drug program, Part D.  Both have proven quite popular and relatively successful in controlling spending.  Medicare Advantage provides primary insurance coverage to over 12 million enrollees, over 25% of the eligible population.  The competitive bidding process for 2013 recently concluded and for the third consecutive year premiums remained constant.  Similarly, Part D, which is exclusively private coverage, provides drug coverage for a premium that is 30% lower than predicted when the program began.

Competition and choice are powerful partners providing incentives to improve efficiency and hold down spending.  These are the same incentives that Paul Ryan believes can accomplish similar results for the rest of Medicare.

But Ryan has his doubters.  When Part D was being debated in the House 10 years ago, then Speaker Nancy Pelosi said: “Most seniors will be worse off.  This is the beginning of the end of Medicare as we know it.”

In the same vein Democrat Senator Tom Harkin said: “We hear the claim that private-sector competition will drive down costs and save Medicare.  Nonsense!”

I don’t give much credence to bloviating, partisan politicians.  I tend to agree with serious scholars like Roger Feldman, University of Minnesota health insurance professor, when he said: “Competitive bidding could save a substantial amount of money, helping solve Medicare’s fiscal crisis.”

Ryan’s premium support plan to reform Medicare is based on competitive bidding.  Instead of relying on the US taxpayer to shoulder the entire financial risk associated with the growth in Medicare spending (the case with traditional Medicare), why not let private insurers share in that risk (like in Medicare’s Advantage and Part D programs)?  Maybe Paul Ryan is on to something.

Note to self: Don’t be so hard on the New York Times.  Occasionally, they get it right.

The Ryan-Wyden Medicare plan

A lot has been said about the Ryan-Wyden plan to reform Medicare.  Much of it is exaggerated, some just downright false.  It’s a voucher plan.  Seniors will have to pay $6,400 more for their health care.  The plan will make Medicare beneficiaries responsible for solving Medicare’s fiscal crisis.  Is all this true?  How could Ryan be so callous?

A limited number of factual studies have emerged analyzing the workings of a premium support system for Medicare.  (The best label for the Ryan-Wyden plan.)  One of the most recent (coauthored by Harvard economist and Obama healthcare adviser, David Cutler) looks at the competitive bidding in the Medicare Advantage program (in practice since 2006).  Plans across the country submit a premium they are willing to accept to cover seniors in a specific region.  Ranking premiums mirrors the results of a “reverse auction.”  Under the Ryan-Wyden plan, the second lowest premium establishes the “benchmark” payment rate.  Seniors could choose any plan they preferred and receive the benchmark amount to help them pay the premium.  If they choose the lowest cost plan, they keep the savings.  If they choose the benchmark plan, they pay nothing out-of-pocket for their insurance.  If they choose any other plan, they pay the difference.

Using data from Massachusetts, Cutler and his colleagues (“Potential consequences of reforming Medicare into a competitive bidding system,” Journal of the American Medical Association, August 1, 2012) found that in 2009, the benchmark plan bid was 9% below the cost of traditional Medicare.  In fact, traditional Medicare had the tenth-lowest bid.  Let’s be clear about this hidden nugget.  There were 9 private insuance plans available to Massassacusetts seniors that were cheaper than traditional Medicare.  Seniors choosing any one of these plans would have received the same benefits as traditional Medicare (and in some cases more benefits), and saved the taxpayer money.

Would such a plan force seniors to solve Medicare’s fiscal crisis?  As someone who reaches the magic threshhold of 65 within the year, I’m more than happy to do my part in helping to solve Medicare’s fiscal crisis.  What’s the alternative plan?  More on that tomorrow.