Health Care

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.

The Benefits of Medicare Benefit Redesign

In a little over one month, lawmakers will face their second significant Fiscal Speed Bump of the year when the one-year "doc fix" expires. At that point, Medicare physician payments will be cut by 21 percent because of the long-standing Sustainable Growth Rate (SGR) formula. Policymakers have avoided the cuts since 2003 through temporary doc fix patches, but the relatively low cost of a permanent fix and a bipartisan, bicameral framework for replacement in the last Congress have increased the prospects that a permanent doc fix could finally happen.

In the run-up to the lame duck session last Congress, we released the PREP Plan, which outlined tax and health savings options to pay for a two-year tax extenders and permanent doc fix package. Ultimately, lawmakers added the cost of one year of tax extenders to the debt, but they have the chance to keep with precedent and pay for a Medicare physician solution. The PREP plan divides savings equally between beneficiary and provider changes, focusing on reforms that can improve incentives.

The beneficiary changes in our plan would modernize Medicare's cost-sharing system by simplifying Part A and B deductibles and coinsurance, while creating a new out-of-pocket limit on cost-sharing. At the same time, the plan would restrict first-dollar coverage by supplemental insurance like Medigap to discourage over-utilization of care, and provide additional assistance to lower-income beneficiaries who need it most. Similar reforms have been proposed by Simpson-Bowles, the Bipartisan Policy Center, the Brookings Institution, and the Center for American Progress, among others.

Heritage Offers Package of SGR Offsets

In two months, lawmakers will encounter their third Fiscal Speed Bump of 2015 when the "doc fix" expires, leading to a 21 percent cut in Medicare physician payments starting in April. Replacing the Sustainable Growth Rate (SGR) formula permanently would cost at least $131 billion through 2025, according to the Congressional Budget Office (CBO), or $177 billion if the bipartisan tricommittee bill agreed to in the last Congress is pursued.

At a House Energy and Commerce hearing recently, former Sen. Joe Lieberman (I-CT) stated that it was very unlikely any SGR replacement would pass in this Congress without offsets. To that end, the Heritage Foundation recently specified four reforms that could be used to offset the SGR.

    1. Reforming Medicare cost-sharing: Many Medicare reform plans have proposed to overhaul Medicare's cost-sharing. These policies would replace the many different deductibles, copays, and coinsurance in Parts A and B with a single deductible with unified coinsurance across services. These changes were usually accompanied by a restriction on cost-sharing coverage by supplemental coverage plans like Medigap and a limit on out-of-pocket costs to reduce exposure to exorbitant cost-sharing. CBO's latest estimate had one version of this policy saving $110 billion over ten years.
       

Trust Fund Deadlines Are Closing In

In addition to updating budget projections, CBO's baseline also looks at the state of various government trust funds over the next ten years. Two of the trust funds – the Highway Trust Fund (HTF) and Social Security Disability Insurance (DI) will have to be dealt with this year or next. The other two with later exhaustion dates – Social Security Old Age and Survivors' Insurance (OASI) and Medicare Hospital Insurance (HI) – have both seen a drop in the size of reserves. Here's a rundown of each of these four trust funds.

Highway Trust Fund

The last time lawmakers dealt with highway financing, they intended that the expiration of the highway bill and the exhaustion of the HTF both happen at the end of May. Now, it looks like there may be a little time between the two as the general revenue transfer to the HTF may last longer.

Previously, CBO expected there to be a $2 billion shortfall in FY 2015, but that gap has been wiped out in the newest projections by two developments: slightly higher gas tax revenue (from lower gas prices increasing demand) and slightly lower spending from lawmakers freezing spending in 2015 rather than letting it grow with inflation. These developments mean that lawmakers may be able to wait until the summer to deal with the HTF, thus theoretically allowing them to write a new highway bill without dealing with the financing gap for a little bit. These two developments also make a long-term solution slightly easier, reducing the trust fund shortfall by about $10 billion.

 

Disability Insurance Trust Fund

A Medical Device Tax Repeal Should Be Fiscally Responsible

The brand new 114th Congress is at it again. Only weeks into the term, a second fiscally irresponsible change to the Affordable Care Act (ACA) has been introduced -- a repeal of the law's 2.3 percent tax on medical devices sold in the U.S. that is expected to add roughly $25 billion to the debt over ten years.

The medical device tax was included in the ACA in order to help pay for the law's new health coverage subsidies and in part to compensate for the financial gains device companies could expect as a result of increased coverage.

Repeal of the tax, though, is one of the few ACA-related changes with bipartisan support -- an amendment to the FY 2014 Senate budget creating a deficit-neutral reserve fund for repeal passed by a 79-20 vote, with more than 30 Democrats joining every Republican in favor. Notably, this vote was different than outright repeal since the action was both non-binding and stipulated deficit-neutrality, but it indicated the support that repeal has in both parties. Yesterday, a bipartisan group of Senators introduced a repeal bill. If repeal is to happen, though, lawmakers need to make up the lost revenue.

Criticism of the tax generally focuses on the potential negative effects on the medical device industry, but there are also concerns about the economic inefficiency of selectively taxing one type of product and the Treasury's difficulty in administering the tax.

Marc Goldwein Testifies Before Energy and Commerce Health Subcommittee

Earlier today, CRFB Senior Policy Director Marc Goldwein testified before the House Energy and Commerce Health Subcommittee. The hearing, entitled "Setting Fiscal Priorities," discussed policy options to reduce health care spending. Also testifying were Executive Director of the Medicare Payment Advisory Commission Mark Miller, the American Action Forum's Director of Health Care Policy Chris Holt, and Georgetown Professor of Public Policy Judy Feder. The witnesses represented different perspectives and focused on different parts of the health care system.

Miller's appearance made up the first panel, and naturally, his testimony focused on Medicare. He gave some background on Medicare but focused on the types of savings policies that MedPAC has recommended in its reports. These policies include simple recommendations on annual payment updates (increases or decreases) or more far-reaching recommendations like site-neutral payments and bundled payments (two policies that were part of our PREP Plan). Questions for Miller spanned a far range of topics, including the Affordable Care Act's payment reductions.

The second panel had the other three witnesses. Goldwein's testimony focused on both the need to rein in health spending to control debt and the options available to do so. He noted the large run-up in debt that is projected to have in the coming decades and the central role health care plays in that.

For solutions, he focused on two different types of policies: "Benders" which have the potential to bend the health care cost curve and "Savers" which are not as transformative but lead to a better allocation of health care spending. In his oral testimony, he focused on the policies in the PREP Plan, which involve reforming Medicare's cost-sharing structure and provider payments to encourage more efficient care. His written testimony included many other options with the potential for bipartisan support.

CRFB's Plan to Offset Upcoming Policies

Congress and the President need to prep for some important upcoming fiscal moments, and CRFB has a plan to help them do just that. The Paying for Reform and Extension Policies Plan, or the PREP Plan shows a path to restoring the expired tax extenders and avoiding the Medicare Sustainable Growth Rate cuts without adding $1 trillion to the deficit.

The PREP Plan assumes (but does not endorse) the passage of the Tricommittee SGR reform bill and a two-year tax extenders package. The plan includes over $250 billion of offsets, roughly two thirds from reforming incentives to slow health care cost growth and one third from improving tax compliance, along with a fast-track process for tax reform.

You can read the full plan here and view some of the details in the table below.


`Due to interactions, policies can't be scored on an individual basis
*Savings are less than $500 million

In addition to putting forward a plan, CRFB released a number of principles that should apply to any effort to continue extenders or reform the SGR.

New CBO Estimates Set the Stage for "Doc Fix" Discussions

Following a final rule issued by the Centers for Medicare and Medicaid Services (CMS), CBO has updated its estimate of various "doc fix" policies to replace the Sustainable Growth Rate (SGR) formula. The new estimates show mixed news for policymakers depending on the type of approach they wish to take.

CMS determined that the SGR would cut Medicare physician payments by 21.2 percent in April when the current doc fix expires. Simply freezing physician payments at today's levels would cost $119 billion over ten years, somewhat less than the $131 billion CBO estimated in its August baseline. Providing 0.5 percent annual payment increases, as Congress did for 2014, would cost $140 billion.

Importantly, CBO re-estimated the bipartisan agreement on a permanent SGR replacement at $144 billion, $6 billion more than projected in February – and that estimate included $16 billion of new spending that was passed in the doc fix this past spring, although some of the savings within the SGR replacement bill were used to help offset the temporary fix. 

Another Way to Look at the Medicare Slowdown

A recent Health Affairs piece from CRFB's Loren Adler and Adam Rosenberg showed that the prescription drug benefit, Part D, has been responsible for a majority of the Congressional Budget Office's downward revisions to actual and projected Medicare spending since 2011 (although Part A, the hospital insurance component, also played a significant role).

But judging the slowdown by how much CBO projections have changed is only one way to look at the issue. Another way would be to compare the actual slowdown in annual growth rates of each Part of Medicare over the past few years. Not surprisingly, a similar story arises from this approach -- the slowdown has been most prominent in Part D, followed closely by Part A. 

From 2010-2014, Medicare per beneficiary spending actually shrank at an average annual rate of 0.3 percent (although total spending still increased as more and more baby boomers reached retirement). As illustrated below, both Parts A and D experienced negative per beneficiary growth over this window, while Part B grew only slightly slower than GDP per capita.

CBO Report Parses the Reasons for Part D's Slow Growth

The last few months have seen a number of new ideas to save money in Part D of Medicare by encouraging more efficient use of drugs by prescription drug plans and beneficiaries. But Part D has also grown significantly slower than expected since its inception.

On this blog and in Health Affairs, we've highlighted the disproportionate role that Part D has played in the federal health care spending slowdown. One quarter of the $900 billion downward revision in the Congressional Budget Office's (CBO's) health care spending projections through 2021 came from Part D. And Part D's downward revision was by far the largest as a percent of program spending (nearly one quarter) among the major health care programs. Looking back further, actual 2013 Part D spending ended up almost 50 percent lower than CBO's original projection when the law passed ($50 billion vs. $99 billion), and total spending over the 2004-2013 period ended up being 36 percent lower ($353 billion vs. $550 billion).

In their Health Affairs post analyzing the Medicare slowdown, CRFB analysts Loren Adler and Adam Rosenberg cited a CBO report breaking down the sources of the slowdown in Part D. In this post, we examine more closely that report, which not only goes into the reason for slower growth in Part D but also how Part D's design compares to Medicaid in controlling costs.

In analyzing the source of the slowdown, CBO's conclusion is clear:

Taken together, the faster-than-expected slowdown in national drug spending per person and the smaller-than-expected enrollment in Part D account for nearly all of the difference between CBO’s initial projection and actual Part D spending. CBO’s original projection reflected the agency’s judgment that elements of the program’s design that were intended to foster price competition between private plans would help to limit the costs of Part D, yielding lower costs per enrollee than would be expected for a similar population under a typical employment-based drug plan offered at that time.

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