November/ December 2011 The Cure

The politics of debt have gotten so insane that both parties are on the verge of gutting Medicare. The moment might be right to actually fix it.

By Phillip Longman

The immediate answer might seem to be, “Because seniors would never stand for it!” But let’s examine that assumption, first by looking at the radical and far more painful alternatives that official Washington is now considering.

We’ve already seen how the Republican plan to “voucherize” Medicare would lead to seniors paying for nearly 70 percent of the cost of their health care, which is hardly insurance at all. This surely would save the federal government money, but it would bilk the American people. Nor would the plan do anything to improve the appallingly poor quality of health care received by Medicare beneficiaries. According to a study conducted by Medicare’s inspector general, every month 15,000 Medicare beneficiaries are victims of medical errors that contribute to their death. Another 8,000 a year do not survive hospital-acquired bloodstream infections, which the VA and other well-managed health care systems have shown are largely preventable. It’s hard to see how forcing Medicare patients to have more “skin in the game” will save them from being victimized by sloppy, dangerous, money-driven medicine—except, perhaps, by pricing more seniors out of access to infectious hospitals and the often fatal reach of money-chasing doctors.

Raising the Medicare retirement age to sixty-seven, a move favored by deficit hawks in both parties, might at first seem to be a reasonable adjustment. Since we are all living much longer, the idea goes, we can afford to wait longer to become entitled to Medicare. But the premise is false. For fully half of the U.S. population (specifically the poor and working-class Americans with earnings at or below the median), life expectancy at sixtyfive is virtually unchanged since the 1970s. In many parts of the country, including much the South, life expectancy at birth for black males is not yet even sixty-five, and in some places it is as low as fifty-nine.

As with plans to voucherize Medicare, the primary effect of increasing the age of Medicare eligibility would be to shift costs onto needy individuals, while also leading to worse health outcomes. Nor, in the grander scheme of things, would the proposal save the government much money, since most Medicare spending is concentrated on people well over the age of sixty-seven, and many of the people who would be cut from the Medicare rolls would wind up on Medicaid or qualifying for other means-tested government subsidies. The Kaiser Family Foundation estimates that if the proposal were fully in effect in 2014 it would generate only about $5.7 billion in net federal savings but would impose twice as much cost ($11.4 billion) on individuals, employers, and states.

Then we have the proposal generally favored by mainstream Democrats: cutting back on reimbursement rates for Medicare providers. To be sure, reimbursement rates need to be adjusted; Medicare pays far too much for many procedures of dubious value. By overpaying cardiologists relative to other providers, for example, the system encourages too many medical school students to go into cardiology rather than family practice. And in the process it also generates egregious rates of unnecessary and often harmful heart operations: as has been scientifically established for years, a million stents annually are placed in patients whose heart conditions would be better treated with drugs. By overpaying radiologists, Medicare fuels the unconscionable overuse of redundant scans that have little or no medical value and expose individuals to dangerous levels of radiation. But experience has shown that cutting back reimbursement rates doesn’t necessarily save money, let alone improve quality, so long as profit-maximizing providers remain free to game the system.

For example, after Medicare began restricting the amount it would pay for specific procedures in the mid-1980s, many providers responded by simply making it up on volume—by increasing the number of unnecessary tests and surgeries they performed. Often this takes the form of “up-coding,” the now widespread phenomenon whereby doctors diagnose patients as being sicker than they actually are so as to make more money on treating each one. Simply cutting prices in regions where Medicare spending is high due to overtreatment “will only cause providers in those regions to deliver more services,” notes Dr. Elliott S. Fisher, director of the Center for Health Policy Research at Dartmouth Medical School. Worse, cutting reimbursement rates, particularly if done crudely across the board, will create shortages of doctors who are willing to accept Medicare patients—especially vitally needed primary care doctors, who are already poorly compensated and in short supply.

At this point, defenders of the Affordable Care Act will be quick to assert that they have engineered solutions to these problems. First, they will point out that the act calls for the creation of the Independent Payment Advisory Board (IPAB), a new entity that will be charged with keeping the per capita growth in Medicare spending far below its historical average. IPAB will have extraordinary powers to fast-track cuts in reimbursement rates. Just as importantly, it will be able to use Medicare’s purchasing power to reform the way hospitals and health care networks do business—for instance, by the “bundling” of services into a single payment to encourage doctors to forego unnecessary tests.

While IPAB is arguably the most potent weapon the government has ever conceived to control Medicare spending and possibly improve its quality, there are strong reasons not to bet the farm on it. For one thing, Republicans are gunning to kill the proposed board with the usual talk of “death panels,” and more than a few Democrats are also conspiring to snuff it out. (See Sebastian Jones, “Friends Like These,” Washington Monthly, July/August 2011.) For another, the cost cutting will come slowly: IPAB can make no recommendations that affect reimbursement rates for hospitals until 2020, even though hospitals are the largest single category of Medicare spending. There’s also the ever-present danger that the board will eventually be captured, as many government oversight boards are, by the industries it’s meant to police. But even if IPAB survives politically and remains fiercely independent, it will be able to effect change only through the clumsy and imprecise leverage of Medicare reimbursement rules. Its new regulations might inspire the health care industry to reform itself, but, just as likely, providers will respond with new tactics to outfox the regulators, as they have in the past through schemes like making it up on volume. And given the magnitude of the cuts that would be required in the absence of vast improvements in the overall efficiency of the entire system, there is a serious possibility of creating severe shortages of physicians who will want to take Medicare patients.

But not to worry, say defenders of “Obamacare”; we’ve got a plan to speed up those reforms. The ACA contains billions of dollars to incentivize the creation of “accountable care organizations.” Just what are they? It’s hard to say, since the language of the bill on this subject is so vague. An essential feature, though, is that an ACO is an institution that contracts with Medicare to serve a specific population and promises to deliver specific quality metrics, such as keeping infection rates down or offering primary care services to patients. In return, it receives the right to retain a large share of any resulting savings.

Phillip Longman is a senior editor at the Washington Monthly and a lecturer at Johns Hopkins University, where he teaches health care policy. He is also a senior fellow at the New America Foundation, where Atul Gawande is a board member.


  • Jack Lohman on October 25, 2011 9:32 AM:

    Can we fix Medicare? Yes, but first we must stop politicians from taking campaign bribes from the insurance industry. See http://moneyedpoliticians.net/2011/10/17/can-we-fix-medicare/

  • Dave Roberts on October 25, 2011 12:46 PM:

    Another extraordinary diagnosis and prescription by Phillip Longman. Kudos to the Washington Monthly for continuing to provide insight without dogma.

  • kindness on October 25, 2011 1:08 PM:

    I have Kaiser. I like them a lot.

    Can someone come in and do cleanup on the spam that is the first post please?

  • Melissa on October 26, 2011 6:21 PM:

    "Going forward, Medicare should instead contract exclusively with health care providers like the Mayo Clinic, Kaiser Permanente, the Cleveland Clinic, Intermountain Health Care, the Geisinger Health System, or even the Veterans Health Administration."

    I LOVE this idea. My parents have been part of Kaiser since before I left home, about 22 years ago. Since then, their coverage, under the same plan, has expanded dramatically. Kaiser didn't used to cover glasses, hearing aids, or fertility treatments, to name a few. They do now. Unlike the plans I've been on (I would choose Kaiser in a heartbeat but there isn't one where I live)

    As for quality of care, my parents have been extremely fortunate. My dad has lived through an surgery for an aneurism, two kinds of cancer, and many other problems. They referred him out to a specialist when they needed to, and gave him excellent care otherwise. Last year, they paid for him to be in the nicest rehab place (not drugs, physical rehab) I have ever seen.

    My mother has also had good treatment for her problems, most recently breast cancer - the support group has been wonderful for her. (Her prognosis is excellent.) The only thing they haven't covered for her is a high-end osteoporosis treatment - I can't think of the name of the drug, but you have to inject it daily - and she is paying out of pocket, $10,000 for one year, and she's lucky she can stretch to afford it. But after all they've covered that doesn't seem unreasonable.

    My parents considered moving to be close to my husband and me but they didn't because it would mean they would have to leave Kaiser.

  • Rachel Karash on October 29, 2011 1:58 PM:

    Medicare doesn't have to stop reimbursing for-profit hospitals in order to stop reimbursing them on a fee-for-service basis, as it has reimbursed for-profit inpatient hospital health care providers according to the Inpatient Prospective Payment System since 1983 and has reimbursed for-profit outpatient hospital-based health care providers according to the Outpatient Prospective Payment System since 1997. The latter was part of the Balanced Budget Act, which also established PPSs for skilled nursing facilities, home health care, inpatient rehabilitation services, and outpatient rehabilitation services. As for Part B services, Medicare hasn't reimbursed those based on the charge since the passage of OBRA 1989, which established the Resource-Based Relative Value Scale (RBRVS). The Balanced Budget Refinement Act of 1999 established a PPS for long-term care hospitals.

    Inpatient psychiatric facilities are reimbursed based on the IPF PPS.

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  • Maggie Mahar on February 24, 2012 7:37 PM:

    Great piece.

    The idea of setting a target date when Medicare drops fee-for service payment is excellent.

    And I would love to see Medicare patients treated by larger, more efficient, collaborate non-profits that enjoy economies of scale as well as the market clout that comes with size.

    But in rural areas and sparsely populated states, Medicare patients will have to be cared for by smaller groups. These groups might become "virtual networks" and enjoy some economies of scale, particularly with regard to IT,
    but we can't expect that seniors in Oklahoma will be able to travel to a Kaiser, an Intermountain or a Mayo Clinic. Inevitably, in Oklahoma an institution that models itself on these institutions will be much smaller, and as a result may require more funding from Medicare.

    I would add that I don't think we should write off accountable care organizations. Some of them will work, and work well. But I would like to see them operate as non-profits. This shouldn't be that hard. Today, the vast majority of hospitals are non-profits (though admittedly, some of these non-profits seem to put profits first. Medicare will have to insist that they re-think their priorities.

    Also, since half of all seniors are living on total income of less than roughly $20,000, we really cannot expect them to pay out of pocket to go out of network. Already, the $35 co-pays that Medicare charges for specialist care is more than many can afford.

    Unless we want to set up two sharply different tiers of care--one for people who can afford to go out of network, another for people who can't--we should make sure that "in network" care is good enough to be the norm (and the gold standard) 98% of the time, except in those cicumstances where it is clear that the patient cannot get the care he needs in network. Then Medicare should cover "out of network.

    Of course, if a wealthy person wants to pay for something out of pocket that isn't covered by
    Medicare, he should be able to do that. But the vast marjority of practioners and all hospitals that want to be reimbursed by Medicare should have to meet the standards of a network (practicing evidence-based medicine,etc. and accepting the payments that Medicare offers to these network . ) Over time, as you point out, Medicare patients, like the rest, of us, will adjust to the idea that being able to choose your network is fine. You really don't need to choose an individual doctor. The days of having one doctor "my doctor" are past. In the future patients will be treated by teams of doctors and nurses who, by working together, will be able to provide better care.

    But these are quibbles. You've outlined a generous vision of where we should be heading. I hope many people read this.