So. About Those Medicare Cuts…

James Capretta, a former budget official in the Bush administration, testified before the House Budget Committee yesterday on the budgetary effects of the new health care overhaul. His testimony, which lays out problems with the health care overhaul in the context of the nation's larger budget problems, is worth reading in full. He's especially good on explaining exactly why the law's supposed Medicare savings are likely to prove illusory:

The largest spending reduction in Medicare comes from automatic reductions in the inflation updates for hospitals and other institutional providers of care. The notional rationale is that these cuts represent productivity improvement in the various institutions getting Medicare payments. The reductions, amounting to a 0.4-0.5 percentage point reduction off the normal inflation update for Medicare payments, will occur every year, in perpetuity. The compounding effect of doing this on a permanent basis would be massive savings in Medicare — if they really were implemented. CBO says the cuts will generate $156 billion over the first decade alone.

But there are strong reasons to suspect these cuts will not be sustained. Medicare's actuarial team, led by Richard Foster, has warned repeatedly that these cuts are not viable over the medium and long-term because they would jeopardize access to care for seniors. The cuts would push average Medicare payments to levels that are below what Medicaid is expected to pay, and the network of providers willing to take care of Medicaid patients is notoriously constrained. It is hard to imagine political leaders allowing Medicare to become less attractive to those providing services than Medicaid is today.

It's worth noting here that these cuts in payment rates do not constitute "delivery system reform," which the administration has often stated is what it is trying to achieve with the Medicare changes in the new law. These cuts in inflation updates will hit every institution equally, without regard to whether or not the institution is treating its patients well or badly. The savings that are expected from other reforms, such as Accountable Care Organizations, are minor by comparison.

So the official scores for the health overhaul assume that Medicare will end up like Medicaid, with payment rates so low that many doctors refuse to take new patients. And it assumes that at the same as these relatively radical cuts are being made, medical providers will somehow make their practices more efficient and cost-effective. Given that Congress has for years overridden Medicare provider reimbursements—reimbursement cuts called for by a plan that Congress implemented to rein in Medicare spending—even when they were relatively small, does this seem likely? 

Medicare costs need to be controlled, and an overhaul of the program's financing may well be necessary. But it's a mistake to think that cost control can be achieved by relying on a more extreme version of the sort of provider reimbursement cuts that Congress has historically refused to make.