Sunday, July 02, 2017

Healthcare spending cuts, Democrat style. Healthcare spending cuts, Republican style

The cut to federal Medicaid spending that CBO estimates would result from the BCRA -- $750 billion over ten years -- superficially recalls ACA cuts to Medicare spending, estimated by CBO in 2010 at $455 billion. As Democrats raise the alarm about deep damage to Medicaid, so Republicans screamed for years that Democrats were cutting Medicare. But of course there are fundamental differences:
  • Democrats cut the growth in Medicare spending and spent the savings to extend health insurance to the uninsured. Republicans want to cut Medicaid to fund tax cuts for the wealthy and for healthcare companies.

  • The ACA specifies that the reductions it mandates in spending growth are not to reduce services provided to Medicare beneficiaries, but only payments to providers. The "Medicare guarantee" that has been stable in traditional (fee-for-service) Medicare for decades -- premium-free hospital coverage, 75% premium subsidy for physician services, actuarial value a bit over 80% for these services, and (since 2006), somewhat weaker drug coverage -- remained intact, and in fact strengthened on the drug front. 

  • The federal government shares Medicaid funding with the states but wholly funds Medicare. When the federal share of Medicaid funding is cut (via a cap on its growth tied to inflation measures), states are sure to reduce services. Unlike the federal government, 49 states are required by their constitutions to balance their budgets.* 

  • Medicare payment rates are more generous than Medicaid rates, which average 66% of Medicare.  There was therefore more room to cut in Medicare than there is in Medicaid. 97% of doctors accept Medicare, and 84% of doctors accept new Medicare patients, versus about 69% who accept new Medicaid patients.Shortages of specialists who accept Medicaid can be acute in some regions, and cuts to Medicaid payment growth rates are likely to affect service more acutely than the ACA's cuts to Medicare payment growth.

  • The largest cut, or group of cuts, was in reduced growth in payments to hospitals totaling $155 billion over ten years. The overall sum was agreed to in advance by the major hospital associations on the understanding that the cuts would be essentially offset by reductions in uncompensated care resulting from reduction of the uninsured population. As summarized by John McDonough in Inside National Health Reform, the cuts included $112 billion in rate reductions, $36 billion from reductions in DSH payments (payments for uncompensated care, which was expected to shrink), $7 billion from penalties for high hospital readmission rates, and $1.5 billion from penalties for high rates of hospital-acquired infections

  • The second largest cut, $136 billion over ten years, was in payments to insurers offering Medicare Advantage plans. Those payment rates had been generously boosted by Republicans in the legislation that established the Medicare prescription drug benefit, at which point the private Medicare market was in a worse contraction than the ACA marketplace ever experienced. The Medicare Modernization Act of 2003 boosted payment rates to MA plans to about 115% of rates paid in traditional Medicare. The ACA cut them back to somewhere in the neighborhood of 102% or even lower.  In the aftermath of the cuts MA has continued to thrive

  • Under the ACA, what Ron Wyden calls "the Medicare guarantee" that coverage would remain affordable and comprehensive to a point (covering about 80% of the average enrollee's costs), remains intact. The per capita caps that the BCRA imposes on Medicaid, in contrast, are designed to steadily shrink the federal government's share of funding while loosening the mandates requiring states to cover certain populations and services. The result is certain to be a steady erosion in service and eligibility.

  • The ACA includes a host of payment experiments and pilot programs, e.g. to incentivize integrated care. Many of these may not work well; some may be counterproductive, e.g. by giving further spur to hospital consolidation and physician practice buy-ups. But as Atul Gawande suggested in 2009, one or two or more may pay off big-time, like venture capital bets.

  • In 2010 CBO attributed a relatively skimpy $28 billion $15.5** billion in savings to the now dormant-to-moribund Independent Payment Advisory Board created by the ACA. IPAB is mandated to propose a package of savings when Medicare cost growth crosses a certain threshold (at present, the average of CPI-U and CPI-M; after 2020, GDP + 1% ) -- which it hasn't since ACA implementation. IPAB, demonized as a death panel by Republicans, is forbidden by statute to cut services or increase patient costs; it can only suggest changes to Medicare payment rates and methods, and Congress must either accept the changes or pass legislation saving an equivalent amount. IPAB has never yet been triggered, and Obama never appointed members, as Republicans promised to withhold confirmation. In the absence of an appointed board, the HHS secretary is required to fulfill IPAB's role when the mandate for savings is triggered -- as may happen this year, with a small cut being mandated.

  • The argument that the cap IPAB implicitly places on Medicare spending growth is like the the per capita caps imposed by the BCRA on Medicaid breaks down for the same reason the overall comparison between the two bills' methods of controlling spending break down. First, IPAB is statutorily barred from cutting services, and second, the federal government controls all the funding for Medicare. Thus, cuts have to come out of payments -- and again, hospitals signed off on the overall scale of ACA payment constraints -- though they did come out against IPAB in the months following ACA passage [bullet added 7/3].  

  • While Republicans lambasted the ACA's Medicare spending controls throughout the 2012 campaign, Paul Ryan included them in his yearly budgets. Neither the AHCA nor the BCRA touch them, though they do clip the long-term solvency of the Medicare Hospital Insurance Trust Fund by repealing the ACA's  0.9% Medicare surtax on wealth families.
For whatever combination of reasons, Medicare cost growth has been historically slow since ACA implementation. Average annual growth in total Medicare spending was 4.4% between 2010 and 2015, compared to  9.0% from 2000 to 2010, according to the Kaiser Family Foundation (reporting CMS data). No one is complaining about any degradation in service thus far, though hospitals may come under pressure in coming years. The story for Medicaid is likely to be a lot grimmer if anything like the BCRA becomes law.

Updated in stages 7/2
* Marc Goldstein of the Center for a Responsible Federal Budget points out to me that to some degree the federal/state split in Medicaid funding swings both ways, since states can make up for a cut in federal funds, and in fact CBO forecasts that states will preserve a quarter of the Medicaid expansion under the BCRA. Conversely, though, a quarter is... a quarter.

** On March 11, 2010 CBO scored IPAB savings in the Senate bill at $28 billion. On March 20, 2010, an updated score accounting for the effects of the House bill to be merged with the Senate bill via reconciliation, adjusted the score down to $15.5 billion.


  1. Re: Democrats cut the growth in Medicare spending and spent the savings to extend health insurance to the uninsured.

    Is that true?

    ACA language in Subtitle G is surprisingly clear and concise with respect to the general usage/application of the Medicare savings:

    Savings generated for the Medicare program under title XVIII of the Social Security Act under the provisions of, and amendments made by, this Act shall extend the solvency of the Medicare trust funds, reduce Medicare premiums and other cost-sharing for beneficiaries, and improve or expand guaranteed Medicare benefits and protect access to Medicare providers.

    I thought it was new tax on high earners that was used for extending coverage to the uninsured, and that the Medicare spending changes were to extend Medicare's solvency (as stated in the Act), as Medicare was projected to reach insolvency by 2016 prior to ACA passage.

  2. The Dems did pull a fast one here. The same dollars did double duty, both shoring up the Medicare trust fund and paying for the ACA subsidies at the same time.
    Both parties are fast and loose with how they pay for large programs.

    Overall, Medicare spending is considered 'good welfare', because it goes to seniors who have paid at least some dues, and no one worries about their 'work incentives.'
    Whereas Medicaid is considered 'bad welfare,' because it goes to people who might be just off the boat, and who might not work at bad jobs if they get benefits from Uncle Sam.