Health Care

The Path to $165 Billion of Savings

We have spent much space on this blog highlighting the fact that temporary delays of the cuts dictated by Medicare's Sustainable Growth Rate (SGR) formula have almost always been offset (98% of the time since 2004), producing $165 billion in deficit reduction all told, almost entirely from health care programs.

And despite assertions to the contrary, these health savings shouldn’t be dismissed lightly. There have been numerous recommendations put forward by the Medicare Payment Advisory Commission (MedPAC), Health and Human Services' Office of the Inspector General (OIG), the Government Accountability Office (GAO), and others that likely would have been ignored but for the need to replace savings from the SGR.

MedPAC, for instance, has warned for years that Long-Term Care Hospitals (LTCHs) and Inpatient Rehabilitation Facilities (IRFs) are paid more than is necessary for many of the cases they handle. To offset the 10% cut dictated by the SGR in 2008, Congress adopted MedPAC recommendations to reduce payment updates for both IRFs and LTCHs, and also modified the prospective payment system for LTCHs. Then again in the 2013 “doc fix” bill, in line with recommendations under discussion by MedPAC at the time, Congress applied site-neutral payments for certain conditions treated in LTCHs.

The latest “doc fix” exemplifies this trend. The largest savings in the bill, from allowing the Department of Health and Human Services (HHS) to collect and use data on values of physician services to more accurately set Medicare payments, is a variant of a direct recommendation from MedPAC the last two years.

SGR Bill Would Add $500 Billion to Long-Term Debt

Earlier today, the Congressional Budget Office (CBO) released its score of the Medicare Sustaintable Growth Rate (SGR) reform bill under consideration in the House. According to CBO, the legislation would increase federal deficits by $141 billion through 2025 and much further in the second decade. By our rough calculations, including interest, that means the SGR reform bill would add over $500 billion to the debt by 2035.


More specifically, CBO estimates the spending increases in the legislation will total $210 billion over the next decade. Only about one-third ($70 billion) of this spending would be offset, with a combination of provider reductions, increased means-testing of Medicare premiums, and other minor reforms. (Details are available in the table at the bottom of this blog.)

As we had predicted, savings would then grow in the second decade but not by enough to pay for costs. In fact, according to CBO it would most likely barely be enough offset the additional costs beyond a payment freeze.

Assuming Costs Away Doesn’t Make SGR Deal Free

Now that we have shown that the "doc fix" proposal in the House will likely add to the debt in the longer term – refuting a key argument for not fully offsetting the ten-year cost of the bill – supporters of the legislation have come up with a cynical new argument.

SGR Plan Will Likely Increase, Not Reduce, Long-Term Debt

Note: The analysis below is based on an earlier version of the SGR plan, which has since been adjusted to include modestly larger offsets and – more significantly – slower growth in physician payments beyond 2025. Our latest analysis shows that debt would increase by $500 billion by 2035.

Proponents of the SGR reform plan currently under discussion have suggested that lawmakers ignore its $140 billion ten-year cost and focus instead on the legislation’s long-term effects. Over time, they argue, spending reductions in the legislation will grow and thus reduce long-term debt levels. Unfortunately, this claim appears to be false – the legislation would add to the debt both this decade and next. Even accepting optimistic savings estimates, we estimate that debt would increase $400 billion by 2035 (including the cost of interest) as a result of this deal.

According to recent reports, the SGR reform bill currently under consideration would cost about $210 billion through 2025, while offsetting $65 billion – leading to about $140 billion of net costs. Some have argued that the savings will grow over time and thus the legislation will be fiscally responsible over the long-run. Yet while it is true that the savings will be greater in the second decade, costs will grow as well – and under the current framework, costs will most likely remain higher than savings in the second decade as well as the first.

In other words, proponents of the “second-decade theory” appear to be looking only at one side of the ledger. They are counting the long-term savings while ignoring the long-term costs.

To the plan's credit, Medicare savings from the offsets in the reform package will grow over time. Although some of the savings are temporary, some of the changes are not only permanent but will likely save much more in the second decade than the first, including changes to post-acute care payments, Medicare means-testing, and Medigap reform. (Importantly, much of the reason is not because the savings grow faster over time, but because these policies don’t begin for a number of years and therefore generate savings over less years in the first decade than the second).

According to one estimate by Doug Holtz-Eakin of the American Action Forum, Medicare means-testing and Medigap reform could save $230 billion in the second decade. Notably, these numbers appear to us to be significantly higher than likely savings, but even accepting these numbers, total savings over two decades would be about $300 billion.[1] Meanwhile, the total costs could total more than $550 billion.

Support Grows for Fiscally Responsible Doc Fix

As doc fix discussions continue in Congress, three opinion pieces recently declared support for fully offsetting the cost of a replacement for the Sustainable Growth Rate (SGR) formula. Editorials in the Washington Post and National Review plus an op-ed in The Hill by Heritage Foundation Senior Fellow Robert Moffit all called for an SGR fix to be fully offset, in contrast to the current discussions that apparently would only offset part of the cost.

The National Review wrote:

The unpleasant fact is that there is no way to make our current entitlement programs sustainable absent deep structural reform. But if Congress is unwilling to undertake that reform, then keeping SGR as is, or fully offsetting the cost of repealing it, would be the next best outcome.

The worst outcome — abandoning those spending restraints while doing little or nothing to mitigate the fiscal impact of doing so — is, unfortunately, what is currently under consideration. If presented with that option, conservatives should put their foot down — on the neck of this profligate, deficit-swelling deal.

CBO Delivers Good News for the Affordable Care Act

The latest CBO projections show a slight improvement on our fiscal situation over the previous ones made in January, and lower projected health insurance premiums are at the center of that improvement. Not surprisingly, then, the agency's latest estimate of the coverage provisions of the Affordable Care Act improved as well.

The net cost of coverage -- the coverage expansions net of mandate penalties, revenue from the Cadillac tax, and related effects -- dropped by $142 billion over ten years, from $1.35 trillion to $1.21 trillion. Simultaneously, CBO projects that there will be 4 million fewer people uninsured in 2025 than they did in January. There are plenty of different effects at work, so let's take a closer look at what happened with their ACA estimates.

The largest factor, lower private health insurance premiums, comes about as CBO takes into account the slower-than-expected premium growth from 2013 and puts greater weight on the slow growth since 2006. CBO now anticipates a slower bounce back in premium growth than they expected before as the economy continues to recover. As a result, projected 10-year spending on subsidies for health insurance purchased through the exchanges dropped by one-fifth, from $1.06 trillion to $850 billion.

At the same time, though, the lower premiums mean that the Cadillac tax on high-cost insurance plans will now raise $62 billion less than expected, continuing a trend of downward revisions to projected Cadillac tax revenue (the 2023 projected revenue is now 60 percent less than was expected two years ago). The lower premiums also translate to lower revenue as a result of the fact that people losing employer coverage due to the ACA will have less compensation shifted into taxable income (lower anticipated premium growth similarly increased CBO's projections of baseline wages and salaries).

CRFB Publishes Updated PREP Plan Outlining Responsible SGR Reform

In light of the upcoming Fiscal Speed Bump when the most recent doc fix patch expires on March 31, yesterday we released an update to our Paying for Reform and Extension Policies (PREP) Plan, which illustrates how to responsibly replace the Medicare Sustainable Growth Rate (SGR) with a permanent solution. In just 3 pages, we describe a fiscally sustainable approach to finally solving the decade-long problem of the large physician payment cuts that the SGR proscribes (21 percent in the current iteration).

Building upon the bipartisan, bicamerial tricommittee bill introduced last year to replace the SGR with alternate payment models, we go one step further by proposing $215 billion of offsets to pay for the replacement and a package of "health extenders." Not only would this avoid adding to deficits, it would also provide greater incentives for high-quality, coordinated care and help to bend the health care cost curve.

Click here to read the paper.

King v. Burwell and the Federal Budget

The Supreme Court ruling on the King v. Burwell case being argued before the Court today will have major policy and political ramifications that have been widely discussed. But a ruling for the plaintiff (King) could also have significant budgetary implications that could complicate action on a legislative response to the Court ruling as well as any legislation to repeal and replace the Affordable Care Act.

The plaintiffs in King v. Burwell argue that language in the Affordable Care Act referring to subsidies to individuals purchasing health insurance in “an Exchange established by the State” means that individuals in the 34 states without a state-run exchange who purchased insurance through the federally-operated exchange are not eligible for the subsidies under the Affordable Care Act. If the Supreme Court rules in favor of the plaintiffs and strikes down subsidies for individuals in those 34 states, the number of people eligible for subsidies and total spending on subsidies would be significantly lower than it is under current law. According to estimates prepared by the Urban Institute, eliminating subsidies for individuals in all 34 states would affect 9.3 million people in 2016, reducing spending on subsidies for insurance premiums and cost sharing reductions by $28.8 billion in 2016 and $340 billion over ten years.

Fisher, Gregg, and Weinstein: A Prescription for What's Ailing ACOs

Dr. Elliott Fisher, former Senator Judd Gregg (R-NH), and Dr. James Weinstein penned an op-ed published in Modern Healthcare discussing the need to move away from fee-for-service and towards accountable and effective care in Medicare. They discussed findings of a collaboration between the Dartmouth Institute, Dartmouth-Hitchock Health, and the Campaign to Fix the Debt to create a number of suggestions for establishing better Accountable Care Organizations (ACOs) through improving the financial model and patient engagement. The full findings are available as a white paper, released yesterday.

They noted the quick timeline that the Department of Health and Human Services (HHS) has established for moving to new payment models and the difficulties ACO implementation has faced thus far:

HHS is seeking to tie 85% of traditional Medicare payments to quality or value by the end of 2016 and 90% by the end of 2018; and having 30% of Medicare payments in alternative payment models—such as ACOs—by the end of 2016 and more than 50% by 2018.

Transitioning away from fee-for-service payment at such a pace, however, will require major improvements to alternative payment models and additional reforms, some of which may require Congress to act.

ACOs in Medicare—the largest alternative payment model—continue to grow in number, with 424 organizations now serving roughly 7.8 million beneficiaries, mostly within the Medicare Shared Savings Program. However, while the early results of the Medicare ACO programs are in many ways promising, they also highlight the need for further changes. Initial data on financial performance show that only about one-quarter saved enough money to generate shared savings. Many ACO beneficiaries are unaware that they are receiving care from the ACO and seek it from non-ACO specialists or healthcare agencies, making it difficult for the physicians in their ACO to coordinate and improve their care.

The solution to fixing ACOs, they write, lies in two separate strategies.

First, the financial model for ACOs should offer them a greater share of their initial savings (to help fund start-up costs), provide stronger incentives to induce and maintain participation from low-cost provider organizations, and foster alignment of payment schemes across all payer types—not just in Medicare. This strategy will encourage the growth of shared-savings models and motivate high-performing healthcare systems to join the ACO programs.

The second strategy would improve patient engagement in ACOs by modifying how Medicare beneficiaries are assigned to an ACO: Beneficiaries should be given the opportunity to choose to join their ACO; for those not actively choosing, those eligible should be assigned at the beginning of the year (so that their ACO can contact them). Medicare should also test a benefit design that uses modest financial incentives to encourage patients to seek care within their ACO or from providers outside the ACO whom the ACO recommends. Simultaneously, to make such incentives possible, supplemental Medicare plans should be restricted from covering first-dollar beneficiary costs for non-ACO services.

Medicare Slowdown at Risk: The Imperative of Fixing ACOs

Today, Fix the Debt, Dartmouth-Hitchcock Health, and Dartmouth College released a paper titled Medicare Slowdown at Risk: The Imperative of Fixing ACOs. At an event on Capitol Hill this morning, stakeholders from the Administration, private sector, and the academic community commented on the ideas in front of an audience of Congressional staff, press, and policy experts.

You can read the paper here, and a 2 page summary here. We also previously commented on accountable care organization (ACO) results that were released last September.

The paper represents the culmination of work that began this past September at the Dartmouth Summit on Medicare Reform, a conference that Fix the Debt, Dartmouth-Hitchcock Health, and Dartmouth College hosted in Hanover, NH.

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