Using a Medicare Scalpel

Tackling soaring health costs means coming to grips with hospital spending and physician compensation.


Article created by the The Century Foundation.

Just about everyone in Washington agrees that the president’s budget, released last month, is politically dead on arrival. Nowhere is this more true than in its proposed cuts to Medicare. The administration’s intent to make $36 billion in cuts over five years to Medicare (practically speaking, a reduction in the program’s annual growth rate by about three-tenths of one percent) has been blasted from all quarters, particularly from hospital executives and medical lobbyists.

In an election year, legislators on both sides of the aisle are reluctant to take on provider lobbies or to anger beneficiaries. The Bush administration is short of political capital. Moreover, the priorities expressed in the overall budget are so warped—such as making tax cuts permanent, raising defense spending, and touting Health Savings Accounts, which will drain money from the Treasury—that it is hard for progressives to take any of it seriously.

But the budget’s health care proposals should be taken apart with a scalpel, not dispatched with a bludgeon. First, because tackling rising health costs means beginning to come to grips with hospital spending and physician compensation. As government statisticians recently confirmed, hospital spending is the largest and fastest-growing item of the health budget. It is expected to remain so in the near future. Many of the proposed cuts in provider payments proposed in the budget are reasonable, especially those recommended by the respected and non-partisan Medicare Payment Advisory Commission. These would lower the baseline from which Medicare makes inpatient and outpatient payments to hospitals, and would reduce reimbursements to home health agencies, skilled nursing facilities, and inpatient rehab facilities. MedPac’s director Glenn Hackbarth reiterated his support for these reforms in testimony to Congress last week. (One MedPac recommendation that isn’t in the budget, but should be, is eliminating the regional stabilization fund for Medicare PPOs. This was on the chopping block last year and mysteriously survived.)

Such Medicare reforms resemble those made under the 1997 Balanced Budget Act that helped create a short-lived surplus. There’s little or no evidence that those modest cuts to providers led to beneficiaries getting worse care. While each proposed cut should be considered on its merits, the potential for harm to patients shouldn’t become a cloak for hospitals looking to expand their revenues and build new capital projects, unless such spending truly contributes to the public good.

It’s true that hospitals are facing new pressures thanks to efforts by all payers to control their costs. The cost-shifting that used to allow hospitals to overbill private payers to pay for uncompensated care, or for other social purposes, is being slowly squeezed out. The diminishing ability of hospitals to cross-subsidize means higher bills for individuals and small groups who don’t have the power to negotiate discounted fixed rates in advance. It also means that hospital administrators more fiercely resist any proposed reductions in government payments.

The budget doesn’t reverse a provision of last year’s Deficit Reduction Act that would result in an automatic 4.6 percent cut in physician payments in 2006. MedPac recently has called for reversing this cut and giving doctors a 2.6 percent increase instead. This recommendation, by contrast, deserves close scrutiny. American doctors make roughly twice as much as their counterparts in other developed countries, although this difference varies widely by specialty and by region. Although this differential may be partly justified by the longer training of U.S. physicians and the need to recruit talent to the medical profession, it suggests strongly that the deeper cuts may be justifiable.

Second, in an era of tight federal budgets, progress on needed health care reforms—including measures to help the uninsured—depends on stretching every existing dollar. Rubber stamping increased payments to providers sets a very bad example on this score. Moreover, it perpetuates a regrettable annual Washington ritual: approving Medicare payment hikes in lieu of discussing other critical health care issues, including overdue major health reforms. Even if the Bush budget isn’t the vehicle for reformer’s hopes, providers shouldn’t get the luxury of a free pass.

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