Analyzing the Gimmicks in Warren’s Health Care Plan

Six weeks ago, this publication published “Elizabeth Warren Has a Plan…For Avoiding Your Health Care Questions.” That plan came to fruition last Friday, when Warren released a paper (and two accompanying analyses) claiming that she can fund her single-payer health care program without raising taxes on the middle class.

Both her opponents in the Democratic presidential primary and conservative commentators immediately criticized Warren’s plan for the gimmicks and assumptions used to arrive at her estimate. Her paper claims she can reduce the 10-year cost of single payer—the amount of new federal revenues needed to fund the program, over and above the dollars already spent on health care (e.g., existing federal spending on Medicare, Medicaid, etc.)—from $34 trillion in an October Urban Institute estimate to only $20.5 trillion. On top of this 40 percent reduction in the cost of single payer, Warren claims she can raise the $20.5 trillion without a middle-class tax increase.

Repealing “Son of Obamacare”

The election of Donald Trump brings conservatives an opportunity to repeal a misguided piece of health care legislation that cost hundreds of billions of dollars, will blow a major whole in our deficit, has led to thousands of pages of regulations, and will further undermine the integrity of the doctor-patient relationship.

Think I’m talking about Obamacare?

I am — but I’m not just talking about Obamacare.

I’m also talking about the Medicare and CHIP Reauthorization Act (MACRA), which passed last year (with a surprising level of Republican support) and contains many of the same flaws as Obamacare itself.

Just as Republicans are preparing legislation to repeal and replace Obamacare, they also need to figure out how to undo MACRA.

Last month, the Obama administration released a 2,398-page final regulation — let me say that again: a 2,398-page regulation — implementing MACRA’s physician reimbursement regime.

In the new Congress, Republicans can and should use the Congressional Review Act to pass a resolution of disapproval revoking this massive new regulation. They can then set about making the changes to Medicare that both Paul Ryan and Donald Trump have discussed: getting government out of the business of 1) fixing prices and 2) micro-managing the practice of medicine.


Since the administration released its physician-payment regulations — nearly as long as Obamacare itself – some commentary has emphasized (rightly) the burdensome nature of the new federal regulations and mandates.

But the more fundamental point, rarely made, is that we need more than mere tweaks to free doctors from an ever-tightening grip exercised by federal overseers. After more than a half century of failed attempts at government price-setting and micro-management of medical practice, it’s time to get Washington out of the business of playing “Dr. Sam” once and for all.

In fact, even liberals tend to acknowledge this occasionally. In a May 2011 C-SPAN interview, Noam Levey of the Los Angeles Times asked then-administrator of the Centers for Medicare and Medicaid Services Donald Berwick why he thought the federal government could use Medicare as it exists to reform the health-care system:

In nearly half a century of federal-government oversight, the federal government hasn’t succeeded in two really important things: Number one, Medicare costs are still growing substantially more quickly than the economy; and number two, that fragmented [health care] system . . . has persisted in Medicare for 46 years now. . . . Why should the public, when it hears you, when it hears the President say, “Don’t worry, this time we’re going to make it better, we’re going to give you a more efficient, higher-quality health care system,” why should they believe that the federal government can do now what it essentially hasn’t really been able to do for close to half a century? [Emphasis added] 

Dr. Berwick didn’t really answer the question: He claimed that fragmented care issues “are not Medicare problems — they’re health system problems.” But in reality, liberal organizations like the Commonwealth Fund often argue Medicare can be leveraged as a model to reform the entire health care system — and that is exactly what MACRA, in defiance of historical precedent, tries to do.

When a 2012 Congressional Budget Office report examined the history of various Medicare payment demonstrations, it concluded that most had not saved money. A seminal study undertaken by MIT’s Amy Finkelstein concluded that the introduction of Medicare, and specifically its method of third-party payment, was one of the primary drivers of the growth in health-care spending during the second half of the 20th century.

After five decades of failed government control and rising costs driven by the existing Medicare program, the solution lies not in more tweaks and changes to the same program.

The answer lies in replacing that program with a system of premium support that gets the federal government out of the price-fixing business entirely.

The notion that the federal government can know the right price for inhalation therapy in Birmingham or the appropriate reimbursement for a wart removal in Boise is a fundamentally flawed and arrogant premise — one that conservatives should whole-heartedly reject.

Unfortunately, most critics of MACRA have not fully grasped this. A law that prompts the federal bureaucracy to issue a sprawling regulation of nearly 2,400 pages cannot on any level be considered conceptually sound.

Believing otherwise echoes Margaret Thatcher’s famous maxim about consensus politicians and conviction politicians: Some analysts, seeking a consensus among their fellow technocrats, push for changes to make the 2,400-page rule more palatable. But our convictions should have us automatically reject any regulation with this level of micro-management and government-enforced minutiae.


It bears worth repeating that, in addition to perpetuating the statist nature of Medicare, MACRA raised the deficit by over $100 billion in its first ten years — and more thereafter — while not fundamentally solving the long-term problem of Medicare physician-payment levels.

More than a decade ago, after President Bush and a Republican Congress passed the costly Medicare Modernization Act (MMA), creating the Part D prescription-drug entitlement, conservatives argued even after the law’s passage that the new entitlement should not take effect. If the MMA was “no Medicare reform” for including only a premium-support demonstration project, conservatives should likewise reject MACRA, which includes nothing – not even a demonstration project — to advance the premium-support reform Medicare truly needs.

Any efforts focused on building a slightly better government health-care mousetrap distract from the ultimate goal: removing the mousetrap entirely. In his 1964 speech A Time for Choosing, Reagan rejected the idea “that a little intellectual elite in a far distant capital can plan our lives for us better than we can plan them ourselves” — and Republicans should do the same today.

In the context of health care, this means not debating the details of MACRA but replacing it, sending power back to where it belongs — with the people themselves.

Last week’s election results give the new Congress an opportunity to do just that, by disapproving the MACRA rule and moving to enact comprehensive Medicare reform in its place. After more than five decades of the same statist health care policies, it’s finally time for a new approach. Here’s hoping Congress agrees.

This post was originally published at National Review.

What the VA Scandal and Medicare Cost Issues Have in Common

The federal government adjusts its payment policies, the health-care system tailors its practices to meet those new policies, and a variety of unexpected—and perverse—consequences result.

This isn’t just one aspect of the VA scandal. It also describes the effects of physician payment policies in Medicare.

In the case of the Department of Veterans Affairs, decisions to tie performance bonuses to patient waiting times apparently resulted in attempts to manipulate the appointment system. Incidents reported in Pennsylvania, Wyoming and New Mexico illustrate how compensation and bonuses drove decisions about patient care. The New York Times reported that one Albuquerque whistleblower alleged:

Clinic staff were instructed to enter false information into veterans’ charts because it would improve the data about clinic availability. . . . The reason anyone would care to do this is that clinic availability is a performance measure, and there are incentives for management to meet performance measures.

In Medicare, the sustainable growth rate (SGR) mechanism established in 1997 placed an overall cap on physician spending, with an eye toward cutting payments in future years if Medicare spending exceeded the defined thresholds. But this measure, ostensibly to cut costs, only pushed the problem elsewhere. Doctors have responded to the prospect of cuts in reimbursement rates by increasing the volume of services provided. Physician spending per beneficiary increased more than 70 percent from 2000 to 2011, while reimbursement rates grew only 11 percent in the same period. Congress routinely acts to undo the projected reimbursement cuts, and the SGR has not appreciably reduced Medicare’s overall costs.

So how do these stories tie together? Clearly, health-care systems respond to incentives set by the federal government. But Washington has not proved nimble enough to avert the unintended consequences of those responses. While Gen. Eric Shinseki’s resignation as secretary of veterans affairs may stanch the political bleeding for the Obama administration, the underlying problems go far beyond one man—and even the VA. Both issues will take big-picture thinking, and actions, to repair.

This post was originally published at the Wall Street Journal Think Tank blog.

Medicare’s Sustainable Growth Rate: Principles for Reform

A PDF of this Backgrounder can be found on the Heritage Foundation website.

Congress may soon revisit the issue of Medicare physician reimbursement payment. Much of the legislative discussion will focus on the sustainable growth rate (SGR) formula. The SGR was enacted as part of the Balanced Budget Act in 1997 as a mechanism to update yearly Medicare physician reimbursements. Under that formula, the federal government computes an annual target for Medicare physician spending based in large part on annual changes in economic growth as measured by gross domestic product (GDP). Physician spending exceeding the growth in GDP in any given year will result in a proportional and automatic cut in Medicare physician reimbursement the following year.

In theory, the SGR was a major improvement over the volume control updates that Congress enacted in 1989. In practice, the SGR mandated deep and politically unacceptable cuts in future years’ Medicare payments. The reason: Physician spending routinely exceeded annual targets. It was quickly becoming clear that the SGR was unworkable. Since 2003, majorities in Congress have routinely blocked the fundamentally flawed SGR formula from going into effect because the applicable cuts would threaten seniors’ access to care. For 2014, the formula calls for a Medicare physician reimbursement cut of almost 25 percent. Not surprisingly, many policymakers have concluded that the SGR must be repealed or replaced.

A Chance for Real Reform. The House Energy and Commerce Committee recently released a revised discussion draft of legislation regarding physician payment,[1] on the heels of a statement of principles initially released by the House Ways and Means and the Energy and Commerce Committees in February.[2] Likewise, the chair and Ranking Member of the Senate Finance Committee recently issued a request for “stakeholder” comment about the future of physician payment.[3]

While Congress’s immediate focus on the SGR is right and proper, it should not be shortsighted. The SGR is merely representative of a much larger problem: Medicare’s outdated system of administrative pricing, price controls, and inefficient central planning. This system both underpays and overpays doctors and other medical professionals, encourages cost shifting and gaming among providers, distorts the medical market, and undercuts the delivery of efficient and effective care. The overriding policy issue is whether Congress will view the SGR narrowly, as something to be “fixed”; or whether the debate can be the platform for a broader discussion of the need for a much better Medicare future, where administrative pricing is replaced by price competition, central planning is replaced by market-driven innovation, and the delivery of high-quality patient care is the product of the best professional judgment of members of the medical profession.

The ultimate policy objective, therefore, should be to transform Medicare into a defined-contribution (“premium support”) system, based on the free-market principles of consumer choice and competition—a system where medical services are priced through private negotiations between plans and providers, reflecting the true market conditions of supply and demand. In the meantime, as part of a transition to such a program, Medicare physician payment should be frozen at current levels for three to five years. Any additional costs to the taxpayer should be offset by savings from well-vetted reforms of the current program, plus a lifting of existing payment caps, a requirement for transparent pricing, and expanded options for doctors and patients.

A Crude and Clumsy Attempt to Break Spending

The SGR mechanism, as noted, links aggregate Medicare payment to changes in the general economy as measured by GDP. If spending exceeds the GDP target, the SGR adjusts physician reimbursements downward; if spending remains below target, the SGR increases physician reimbursements accordingly.[4]

By linking specific Medicare payments to the general performance of the economy, Congress established a fiscal target bearing little resemblance to the actual cost of medical goods and services. Other targets, such as the consumer price index (CPI) or the medical economic index, provide a clearer link to price inflation and general health cost growth. Moreover, the SGR’s explicit link to the size of the economy means that in economic downturns, the target—and thus physician reimbursement levels—will actually decline.

The fact that the SGR remains an aggregate spending target also presents a collective action problem for the Medicare program. Because the SGR targets physician spending as a whole, and not the spending patterns of individual physicians or physician practices, individual doctors have a strong incentive to maximize their own volume of services performed, and thus their own reimbursement levels.[5]

For all these reasons, Congress has consistently modified the SGR targets over the past decade. While the slowdown in health costs surrounding the move to managed care plans in the late 1990s prevented the SGR targets from being hit in the program’s first few years, spending soon exceeded the statutory targets. Although Congress allowed the SGR’s reimbursement cuts to take effect in 2002, in 2003 (and each year since) Congress overrode the statutory reductions with a series of freezes, or modest payment increases, in SGR target levels.[6]

The annual, albeit temporary, payment increases mandated by Congress since 2003 have resulted in a series of fiscal cliffs for physicians and the Medicare program. Because prior Congresses overrode the SGR targets only for short periods, doctors have faced the prospect of increasingly large reimbursement cuts should Congress not forestall the reimbursement cuts.[7] For instance, should Congress not act before January 1, 2014, the SGR will reset at its lower, statutory target, resulting in an immediate reduction in reimbursement levels of over 24 percent, with additional cuts in succeeding years.[8] According to the Congressional Budget Office (CBO), permanently freezing SGR target levels would cost $139.1 billion over 10 years[9]—a significant sum, but about half the $273.3 billion that the CBO estimated an SGR freeze would cost in July 2012.[10]

As a mechanism to contain costs, therefore, the SGR has fallen short. While physicians have received below-inflation updates in Medicare payment levels since 2003, evidence strongly suggests that doctors have compensated for these lower reimbursement levels by increasing the volume of services provided. According to data from the Medicare Payment Advisory Commission, while physician updates grew by less than 10 percent between 2000 and 2011, overall physician spending per beneficiary grew by more than 70 percent over the same period, largely because the volume of services provided to beneficiaries rose rapidly.[11]

However, as a mechanism to control overall spending on Medicare, the SGR has provided an impetus for re-examining spending priorities within other portions of the Medicare program. While generally ineffective at controlling physician spending, the annual SGR target has nonetheless forced Washington policymakers continually to re-examine overall Medicare spending, and encouraged continued debate on structural Medicare reform as well as generated intense discussion on incremental but meaningful reforms in the current program.

Members of Congress have generally insisted on paying for the annual “fixes” to the SGR, as such legislation would otherwise raise Medicare spending and increase the deficit. In 2009, the Senate considered legislation that would have permanently increased Medicare physician reimbursements without offsetting spending reductions.[12] When confronted with an unpaid “doc fix,” a bipartisan majority of 53 Senators rejected this legislation,[13] which would have increased federal deficits by $247 billion over 10 years,[14] and up to $1.9 trillion over 75 years.[15]

Over and above the basic principle that Congress should not increase Medicare spending at a time of record deficits, the SGR has provided a vehicle to enact modest reforms to the Medicare program on an annual basis. For instance, legislation addressing the “fiscal cliff” expanded Medicare competitive bidding to diabetes supplies, and enacted new anti-fraud measures, to help finance a one-year “doc fix” for 2013.[16]

When considering SGR legislation this year, Congress must balance the competing interests of the physician community and the Medicare program as a whole. While the SGR has not slowed cost growth, and the annual “doc fix” exercise has caused uncertainty for physicians, the Medicare program as a whole faces massive deficits—the Medicare trust fund lost $105.6 billion over the past five years, deficits that are expected to continue and accelerate as the baby-boom generation retires.[17] Simply repealing the SGR without fundamentally reforming Medicare would have significant unintended consequences for future taxpayers and beneficiaries alike.

More or Less Government Control Over Medical Practice?

Designing a replacement for the SGR formula brings with it many of its own problems. Proposals to replace the SGR with a system of reimbursing doctors based on quality measures—“pay for performance,” for example —will necessitate an even stronger role for the Medicare bureaucracy in dictating physician behaviors than the current flawed system.

Well before the creation of the SGR mechanism for updating reimbursement, Medicare physician payment has, over the past 25 years, been defined by the heavy hand of bureaucratic micromanagement. In 1989, Congress enacted a resource-based relative value system (RBRVS) for determining physician payments, which focused on determining the “right” payment for a particular service by calculating the cost of performing that service when compared to other services.[18]

Based on a “social science” measurement, the RBRVS attempted to quantify the “value units” of providing medical services, such as the time, energy, and effort that goes into providing a medical service, adjusted by geographic costs and malpractice expenses. A patient with a simple ear infection would require different amounts of a physician’s time than a patient with chronic heart failure, for example, and the RBRVS intended to compensate doctors “fairly” for each service. Organized medicine, particularly the American Medical Association, initially endorsed the new fee schedule as a way of redistributing income from high-priced specialists to lower-paid general practitioners.

In theory, the RBRVS was widely hailed by its proponents as a “scientific” answer to the perennial problem of physician payment.[19] In practice, the result has been a highly politicized process of rent-seeking, as lobbyists of different provider groups feverishly scrambled to secure higher reimbursements through the political process. However well-intentioned, the past quarter century has demonstrated the failure of the RBRVS as an accurate method of compensating physicians who participate in Medicare. Even as the federal government attempts to find the “right” price of every physician service, it has seemingly failed to remember the value of any of them. Unsurprisingly, the creation of more than 7,000 separate procedure codes has not ensured that nearly 850,000 Medicare providers are being compensated fairly for their services.[20] Indeed, the RBRVS has failed in one of its central goals: Created 25 years ago to help increase the relative value of allegedly underpriced primary care services, the RBRVS system has only exacerbated price disparities between primary and specialist care.[21]

In the aftermath of this failure, some in Congress have proposed a new system no less audacious—and no less reliant on the hand of government. Instead of the RBRVS method of pricing services partially based on the archaic labor theory of value—that compensation for physician services should be determined by the amount of time and resources put into the work—the new proposals attempt to quantify the “value” to patients of a particular service by measuring its “effectiveness.”

Pay for Performance or Compliance? Generally speaking, the new theory of pay-for-performance medicine attempts to determine physicians’ “value” and thus reimbursement through compliance with, and performance on, a series of metrics and guidelines determined by federal bureaucrats, medical societies, or a combination of the two. For instance, the House’s discussion draft discusses an “update incentive program” under which the Secretary of Health and Human Services (HHS) would be required to publish a “competency measure set” of quality measures, and then “develop and apply…appropriate methodologies for assessing the performance of fee schedule providers” on those measures.[22]

The language in the House discussion draft—linking Medicare physician pay to compliance with government-established guidelines—accelerates a troubling trend reinforced by Obamacare itself. The national health care law, with 165 provisions affecting Medicare,[23] not only retains the SGR, but, like the SGR, it also imposes a hard cap on the growth of all Medicare spending. It creates an Independent Payment Advisory Board (IPAB), which will have the power to enforce the cap, and recommend even more Medicare reimbursement cuts for physicians and other medical professionals. It creates new institutions to change Medicare payment and delivery through administrative action, such as the Center for Medicare and Medicaid Innovation, with demonstration programs designed to end traditional fee-for-service (FFS) payments. Beyond these new institutions, the health law creates new Medicare “quality” programs and extends the Physician Quality Reporting Initiative (PQRI), which will enforce new bonus and penalty payments for physician compliance. As the Congressional Research Service (CRS) reported in its first evaluation of the statute, the new law “makes several changes to the Medicare program that have the potential to affect physicians and how they practice in ways both small and large, immediately and over time.”[24]

For example, Obamacare mandates a 2 percent reduction in Medicare physician payments for doctors that do “not satisfactorily submit data” to Washington officials,[25] and a 1 percent reduction for physicians who fail to follow bureaucrat-defined “cost” metrics.[26] In separate legislation also signed by President Obama, the Administration received the authority to reduce payments to physicians by a further 3 percent if they do not follow Washington-imposed guidelines for electronic health records.[27]

To their credit, the authors of the House discussion draft emphasize the role of medical specialty societies in determining quality metrics, thereby hoping to assuage concerns about federal bureaucrats’ direct involvement in the practice of medicine. This does not, however, solve the fundamental problem. The entire premise of a Medicare pay-for-performance regime—which is really a payment for compliance—directly contradicts the opening verbiage of the original Medicare statute:

Nothing in this title shall be construed to authorize any federal officer or employee to exercise any supervision or control over the practice of medicine or the manner in which medical services are provided, or over the selection, tenure, or compensation of any officer or employee of any institution, agency, or person providing health services; or to exercise any supervision or control over the administration or operation of any such institution, agency, or person.[28]

The threshold question is this: Should government officials “exercise any supervision or control” over the practice of medicine? It matters not whether some physicians choose to comply with Washington’s mandates on their practices, or whether some leaders of some specialty societies see value in serving as arbiters of some new Medicare pay-for-performance structure. Under the original Medicare statute, all physicians should have the freedom to practice medicine using their own professional judgment in treating a patient, without meddling—whether in the form of new federal mandates, “quality” metrics, or other bureaucratic criteria—from either the federal government or its intermediaries.

The flaws in Medicare’s pay-for-performance approach have been well defined elsewhere.[29] The myriad regulations and mandates that such criteria spawn interfere in the practice of medicine, placing an invisible barrier amid the already attenuated relationship between doctor and patient. Worse, the one-size-fits-all methodologies imposed by Washington-enforced mandates directly contradict the great promise of the growing movement toward personalized medicine.[30]

Despite its inherent flaws, a bureaucracy-driven compliance regime remains a shibboleth of leftist health policy analysts who believe that a new system of federal micromanagement can fix the flaws of the old one. Former Senator Tom Daschle (D–SD), President Obama’s first choice for Secretary of HHS, wrote in 2008 that government interference in medical care was not the problem, it was the solution:

We won’t be able to make a significant dent in health-care spending without getting into the nitty-gritty of which treatments are the most clinically valuable and cost effective. That means taking a harder look at the real costs and benefits of new drugs and procedures.[31]

Obamacare epitomizes this governing philosophy of administrative control, giving the Secretary almost 2,000 separate orders with which to micromanage the health care system.[32] Members of Congress who rightly criticized Obamacare for granting the Secretary nearly unprecedented discretionary authority over the financing and delivery of medical care should be greatly concerned with enacting SGR replacement legislation that would further expand the Secretary’s control.[33]

Principles for Congressional Action

As it has since 2003, Congress likely will consider legislation later this year addressing the deep cut mandated by the SGR formula. Absent changes in current law, a cut of nearly 25 percent will take effect on January 1, 2014.

Based on the proposals released to date, leaders on key committees intend to use this year’s legislation to construct a permanent replacement for the SGR, with a new reimbursement model heavily focused on quality metrics. The goal of securing a higher quality of services for taxpayer dollars is clearly laudable. But Congress should remain mindful of the consequences of additional intrusion in the doctor–patient relationship, and of the fact that the SGR constitutes merely one piece of a larger entitlement structure in need of fundamental reform.

When considering Medicare physician payment legislation, Congress should:

  • Reject any provisions that micromanage the doctor–patient relationship. Whether under the name of pay-for-performance, clinical guidelines, or quality metrics, programs emphasizing physician compliance with government-imposed standards are inconsistent with the original intent of the Medicare statute, which safeguards the professional independence and integrity of the medical profession and sacrosanct character of the doctor–patient relationship. Placing additional authority in the hands of government bureaucrats to dictate the practice of physicians undermines these principles as well as patient trust.
  • Restore balance billing and the right to private contracting. Consistent with a return to free-market principles, Congress should remove the current statutory prohibitions on balance billing—when doctors bill patients for the part of the health-service charge not reimbursed by Medicare—while also repealing the oppressive restriction that prohibits doctors who engage in any transactions with beneficiaries outside Medicare’s parameters from receiving Medicare reimbursements for two years.[34] Keeping the heavy hand of government out of the doctor–patient relationship requires removing regulatory restrictions that prevent senior citizens from engaging physicians on financial terms that both find fair and advantageous. When coupled with transparency guidelines ensuring that seniors clearly understand the prices and the terms of these contractual arrangements, balance billing and private contracting can remove many of the financial pressures imposed by Medicare’s top-down, government-dictated pricing system.
  • Insist that fundamental, long-term SGR reform be paired with fundamental, long-term Medicare reform. Experts on all sides of the political spectrum agree that the flawed SGR mechanism should be replaced. The best replacement for the SGR and the entire system of current Medicare financing lies in a defined-contribution (premium support) system that fundamentally reforms and enhances the entire Medicare program. In the short term, Congress can take several important incremental steps to re-structure the traditional Medicare program as part of a transition to a premium support system.[35] However, Congress should not attempt to enact a fundamental change to the SGR coupled solely with incremental reforms to the larger Medicare program. To do so would remove an impetus for the major structural reforms that Medicare needs in order to ensure its solvency for future generations.


Congress once again appears poised to grapple with a problem of its own making—namely, the SGR formula for physician reimbursement. Members in both the House and Senate have solicited proposals for alternatives, and have committed to considering SGR proposals this year.

However, when constructing alternatives to the SGR, Congress should heed the lessons of experience. The system of administrative pricing for Medicare physician payment, in effect for nearly 25 years, has proven cumbersome, bureaucratic, and unworkable. Moving further in the direction of pay-for-performance medicine, as some proposals have suggested, would merely substitute medical societies for the role currently played by omnipotent government bureaucrats, attempting to impose one-size-fits-all medical care from Washington.

Conversely, while the SGR has not succeeded in its initial goal of containing Medicare physician spending, the perennial “doc fix” bills have forced Congress to enact changes in the Medicare program, many of which constituted real progress in reforming entitlement spending. Completely repealing or replacing the SGR, without first ensuring fundamental reform of the entire Medicare program, would actively subvert attempts to make the program sustainable for future generations.

The SGR debate presents Members of Congress with both an opportunity and a challenge. The opportunity lies in enacting reforms that can expand market forces in Medicare and enhance the program’s viability. The challenge lies in resisting the siren call that yet another form of federally micromanaged health care can succeed when all past iterations have failed. Seniors and future generations should hope that Congress chooses to embrace the opportunity and rise to the challenge.


[1] House Energy and Commerce Committee discussion draft of Medicare physician payment legislation, June 28, 2013, (accessed July 11, 2013).

[2] House Energy and Commerce Committee and Ways and Means Committee joint framework for Medicare physician payment reform, “Overview of SGR Repeal and Reform Proposal,” February 7, 2013, (accessed July 11 2013).

[3] News release, “Baucus, Hatch Call on Health Care Providers to Pitch in and Provide Ideas to Improve Medicare Physician Payment System,” U.S. Senate Committee on Finance, May 10, 2013, (accessed July 11, 2013).

[4] Mark Miller, “Moving Forward from the Sustainable Growth Rate (SGR) System,” testimony before the Finance Committee, U.S. Senate, at a hearing on “Advancing Reform: Medicare Physician Payments,” May 14, 2013, p. 2, (accessed July 11, 2013).

[5] Ibid., p. 3.

[6] The full list of statutory adjustments to the SGR conversion factor enacted by Congress since 2003 can be found in amendments to the United States Code, 42 U.S.C. 1395w-4(d)(5) et seq.

[7] Beginning with the Tax Relief and Health Care Act of 2006 (P.L. 109–432), Congress provided that temporary payment increases overriding the SGR cuts would not be used in setting the SGR targets for future years—thus ensuring a “cliff” when the target re-sets at the lower level.

[8] The Centers for Medicare and Medicaid Services has estimated a preliminary SGR conversion factor update of 24.4 percent for calendar year 2014. Centers for Medicare and Medicaid Services, “Estimated Sustainable Growth Rate and Conversion Factor for Medicare Payments to Physicians in 2014,” April 2013, p. 8, Table 5, (accessed July 11, 2013).

[9] Congressional Budget Office, “Medicare’s Payments to Physicians: The Budgetary Impact of Alternative Policies Relative to CBO’s May 2013 Baseline,” May 14, 2013, (accessed July 11, 2013).

[10] Congressional Budget Office, “Medicare’s Payments to Physicians: The Budgetary Impact of Alternative Policies Relative to CBO’s March 2012 Baseline,” July 31, 2012, (accessed July 11, 2013).

[11] Miller, testimony before Finance Committee, U.S. Senate, Figures 1 and 2, p. 4.

[12] Medicare Physician Fairness Act of 2009, S. 1776 (111th Congress).

[13] Senate Roll Call 325 of 2009, October 21, 2009, (accessed July 11, 2013).

[14] Congressional Budget Office, cost estimate for S. 1776, October 26, 2009, (accessed July 11, 2013).

[15] Andrew Rettenmaier and Thomas Saving, “How the Medicare ‘Doc Fix’ Would Add to the Long-Term Medicare Debt,” Heritage Foundation WebMemo No. 2695, November 13, 2009,

[16] American Taxpayer Relief Act of 2013, Public Law 112–240, Sections 636 and 638.

[17] Centers for Medicare and Medicaid Services, 2013 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, May 31, 2013, p. 58, Table II.B4, (accessed July 11, 2013).

[18] Section 6102 of the Omnibus Budget Reconciliation Act of 1989, Public Law 101–239, established a Medicare physician fee schedule based on the RBRVS, effective in January 1992.

[19] Robert E. Moffit, “Back to the Future: Medicare’s Resurrection of the Labor Theory of Value,” Regulation (Fall 1992), pp. 54–63.

[20] Medicare Payment Advisory Commission, Report to the Congress: Medicare Payment Policy, March 2013, p. 79, (accessed July 11, 2013).

[21] Ibid., p. 95.

[22] House discussion draft, pp. 3–5.

[23] Centers for Medicare and Medicaid Services, 2013 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, p. 2.

[24] Patricia A. Davis et al., “Medicare Provisions in PPACA (P.L. 111–148),” Congressional Research Service Report for Congress No. R41196, April 21, 2010, (accessed July 12, 2013).

[25] Patient Protection and Affordable Care Act, Public Law 111–148, Section 3002(b).

[26] Ibid., Section 3007.

[27] American Recovery and Reinvestment Act, Public Law 111–5, Section 4101(b).

[28] 42 U.S.C. 1395.

[29] Richard Dolinar and Luke Leininger, “Pay for Performance or Compliance? A Second Opinion on Medicare Reimbursement,” Heritage Foundation Backgrounder No. 1882, October 5, 2005,

[30] Ibid.

[31] Tom Daschle, Scott Greenberger, and Jeanne Lambrew, Critical: What We Can Do about the Health Care Crisis (New York: Thomas Dunne Books, 2008), pp. 172–173.

[32] Michael Leavitt, “Health Reform’s Central Flaw: Too Much Power in One Office,” The Washington Post, February 18, 2011, (accessed July 11, 2013).

[33] For further information on the HHS Secretary’s powers, see John S. Hoff, “Implementing Obamacare: A New Exercise in Old-Fashioned Central Planning,” Heritage Foundation Backgrounder No. 2459, September 10, 2010,

[34] Section 4507 of the Balanced Budget Act, Public Law 105–33.

[35] Robert E. Moffit, “The First Stage of Medicare Reform: Fixing the Current Program,” Heritage Foundation Backgrounder No. 2611, October 17, 2011,

A Revised Review of Deficit Reduction Plans

Wanted to follow up my earlier missive this week with a preliminary analysis of the co-chairs’ revised plan.  In general, when compared to the first draft, the revised plan adds the CLASS Act to the list of entitlement programs that must be reformed or repealed, strikes caps on non-economic damages (while retaining other liability reforms), and includes sundry other savings proposals to finance CLASS Act repeal and lower estimated savings from liability reform.  The plan also goes further in reforming – and ultimately repealing – the employee tax exclusion for employer-provided health insurance, echoing some of the proposals made by the Rivlin-Domenici Bipartisan Policy Center plan.  Details of the plan include:

Sustainable Growth Rate:  The plan largely retains the earlier draft’s proposals to pay for a long-term fix to the Medicare physician reimbursement formula though savings elsewhere within Medicare – coupled with the development of a new formula that “encourages care coordination across multiple providers…and pays doctors based on quality instead of quantity of services.”  The final plan provides a bit more specific detail than the draft, proposing a freeze in physician payment levels through 2013 and a one percent cut in 2014.  The final plan also heavily criticizes the SGR mechanism, noting that current budget projections rely on “large phantom savings from a scheduled 23 percent cut in Medicare physician payments that will never occur.”

CLASS Act:  This program – which was not addressed at all in the draft document – is criticized in the report as fiscally dubious: “it is viewed by many experts as financially unsound,” because of the significant adverse selection risks inherent in a voluntary long-term care program.  The report’s conclusion: “Absent reform, the program is therefore likely to require large general revenue transfers or else collapse under its own weight.  [Therefore the] Commission advises the CLASS Act be reformed in a way that makes it credibly sustainable over the long term.  To the extent this is not possible, we advise it be repealed.”  Additional savings to fund the repeal (because the CLASS Act will collect premiums that technically reduce the deficit in its first several years) are suggested in the final report, as outlined below.

Liability Reform:  The final report does recommend reforms on 1) collateral source damages (meaning outside benefits like worker’s comp should be considered when awarding damages), 2) a uniform statute of limitations, 3) joint-and-several liability (defendants only responsible for the portion of damages directly correlating to their share of responsibility), 4) specialized health courts, and 5) safe harbors for providers following best practices.  The plan however does NOT propose a cap on non-economic damages, instead recommending “that Congress consider this approach and evaluate its impact.”  Because the damage caps were removed from the final plan, the estimated deficit reduction under this proposal falls to $17 billion, as opposed to more than $60 billion under the draft proposal.

Employee Tax Exclusion for Employer-Provided Health Insurance:  The tax section of the final plan goes further than the draft, proposing to cap the value of the exclusion at the 75th percentile of premium levels, beginning in 2014.  The cap would NOT be adjusted for inflation after 2018, and the newly capped exclusion would be phased out (the specific details of which are unclear) by 2038.  In exchange, the value of the “Cadillac tax” included in the health care law for years beginning in 2018 would be reduced from 40% to 12%; it is unclear how the “Cadillac” tax would interact with the newly capped exclusion under the proposal.  As part of this tax reform proposal, the existing brackets would be rolled into three brackets, of 12%, 22%, and 28%.  Also of note: The revised plan increases the amount of net revenues devoted to deficit reduction (i.e., net tax increases) from $80 billion per year in the draft plan to $80 billion in 2015 and $180 billion in 2020.

Other Savings Proposals:  To fund SGR reform and CLASS Act repeal, the plan includes a series of savings proposals, many of which appeared in the earlier draft plan (all scores cited are total savings through 2020):

  • Increase in Medicare anti-fraud funding and authority: Not included in the initial draft; saves $9 billion.
  • Reform to Medicare cost-sharing, along with restrictions to supplemental insurance: The final plan takes the initial proposal (a version of CBO’s Budget Option 83) and extends proposed restrictions on first-dollar cost-sharing in Medigap plans to ALL forms of Medicare supplemental coverage, including Tricare for Life, FEHB retirees, and retirees in private employer-sponsored coverage.  The modification saves an additional $38 billion, for a total of $148 billion over ten years.
  • Part D drug rebates:  Similar to the draft plan, the revised version would extend Medicaid pharmaceutical rebates to Part D beneficiaries; however, for reasons that are unclear, the revised plan predicts smaller savings ($49 billion compared to $59 billion in the draft version).
  • Graduate Medical Education:  Reduces both graduate medical education (GME) and indirect medical education (IME) payments to hospitals, saving a total of $60 billion (compared to $54 billion in the draft plan).
  • Medicare bad debt:  The final plan would phase out over time Medicare payments to hospitals for unpaid cost-sharing owed by beneficiaries, saving $23 billion (compared to $15 billion in the draft plan).
  • Home health:  The plan accelerates savings proposals included in the health care law by beginning productivity adjustments for home health agencies in 2013, and phases in rebasing of the home health prospective payment system by 2015 (instead of 2017 under current law), saving $9 billion through 2020. (The draft plan proposed accelerating Medicare Advantage and DSH cuts in addition to home health reductions, but the final plan omitted MA and DSH provisions.)
  • Medicaid provider taxes:  The plan criticizes as a “tax gimmick” states that utilize provider taxes to receive additional Medicaid federal matching funds, and proposes “restricting and eventually eliminating this practice,” saving $44 billion (down from $49 billion in the draft).
  • Medicaid managed care:  Proposes “giving Medicaid full responsibility for providing health coverage for dual eligibles and requiring that they be enrolled in managed care,” saving $12 billion (compared to $11 billion in the draft).
  • Medicaid administrative costs:  Eliminates federal funding of Medicaid administrative costs “that are duplicative of funds originally included in the Temporary Assistance for Needy Families (TANF) block grants,” saving $2 billion (down from $17 billion in the draft).
  • FEHB premium support:  Rather than increasing cost-sharing for federal retirees, as the draft proposed, the final plan “recommends transforming the Federal Employees Health Benefits program into a defined contribution premium support plan that offers federal employees a fixed subsidy that grows by no more than GDP plus one percent each year.”  This proposal mirrors the premium support systems that the Rivlin-Ryan and Rivlin-Domenici plans suggested could be applied to Medicare – and the final Simpson-Bowles proposal suggests using the FEHB as a test model for premium support, including a “rigorous external review process to study the outcomes,” with an eye toward a possible premium support program for Medicare.

Other Short-Term Policies:  The final plan also includes a few proposals that do not have a cost/deficit impact.  First, the plan proposes extending the reach of the Independent Payment Advisory Board (IPAB) created in the health care law to all providers, removing the temporary exemptions for some providers included in the law.  The plan also encourages the acceleration of state Medicaid waivers and payment reform options within Medicare, including accountable care organizations.

Long-Term Savings:  The final proposal largely tracks the earlier draft plan’s concept of adopting a cap for all federal health care spending (including Exchange subsidies, Medicare, Medicaid, SCHIP, and the employee health insurance tax exclusion) equal to GDP growth plus one percent from 2020 forward.  The plan also suggests – but does not officially recommend – additional options should spending exceed the targets, including premium support proposals for Medicare, “giving CMS authority to be a more active purchaser of health care services using coverage and reimbursement policy to encourage higher value services,” extending IPAB’s scope beyond Medicare, converting the federal share of Medicaid into a block grant, raising the Medicare retirement age, a “robust” government-run health plan in Exchanges, or an all-payer system for health care.

Health Care Law:  Finally, an interesting passage in the report notes the divergence of opinion among commission members about the new health care law:

Some Commission members believe that the reforms enacted as part of ACA will “bend the curve” of health spending and control long-term cost growth.  Other Commission members believe that the coverage expansions in the bill will fuel more rapid spending growth and that the Medicare savings are not sustainable.  The Commission as a whole does not take a position on which view is correct, but we agree that Congress and the President must be vigilant in keeping health care spending under control and should take further actions if the growth in spending continues at current rates.

A Review of Deficit Reduction Plans

This Wednesday’s deadline for the fiscal commission to report a deficit reduction plan provides an opportunity to examine the health care components of the three proposals that have been released thus far:

  1. The Simpson-Bowles plan, named for the co-chairs of the fiscal commission, who released their own draft recommendations just after the midterm election;
  2. The Rivlin-Domenici plan, named for former CBO Director Alice Rivlin and former Senate Budget Committee Chairman Pete Domenici (R-NM), who released their own proposal as chairs of an independent commission operating under the aegis of the Bipartisan Policy Center; and
  3. The Rivlin-Ryan plan, which Alice Rivlin and House Budget Committee Ranking Member Paul Ryan released as an alternative to the Simpson-Bowles proposal, as both Dr. Rivlin and Rep. Ryan also sit on the fiscal commission.

CBO has conducted a preliminary analysis of the Rivlin-Ryan plan (the above link includes both the plan’s summary and score), and the Simpson-Bowles plan incorporates CBO scoring estimates where available.  However, it is unclear where and how the Rilvin-Domenici plan received the scores cited for its proposals.  The timing of the plans also varies; the Rivlin-Domenici plan postpones implementation of its plan until 2012, when the authors believe the economy will be better able to sustain a major deficit reduction effort.

The following analysis examines the similarities and differences of the three plans’ health care components in both the short term and the long term.  Keep in mind however that these are DRAFT proposals, which may a) change and b) be missing significant details affecting their impact.  Note also that the summary below is not intended to serve as an endorsement or repudiation of the proposals, either in general terms or in their specifics.

Short-Term Savings

Liability Reform:  All three plans propose liability reforms, including a cap on non-economic damages.  The Rivlin-Ryan and Simpson-Bowles plans both rely on specifications outlined in CBO’s October 2009 letter to Sen. Hatch; both presume about $60 billion in savings from this approach.  The Rivlin-Domenici plan is less clear on its specifics, but discusses “a strong financial incentive to states, such as avoiding a cut in their Medicaid matching rate, to enact caps on non-economic and punitive damages.”  Rivlin-Domenici also proposes grants to states to pilot new approaches, such as health courts; overall, the plan estimates $48 billion in savings from 2012 through 2020.

Prescription Drug Rebates:  Both the Simpson-Bowles and Rivlin-Domenici plans would apply Medicaid prescription drug rebates to the Medicare Part D program.  The Simpson-Bowles plan estimates such a change would save $59 billion from 2011 through 2020, whereas the Rivlin-Domenici plan estimates this change would save $100 billion from 2012 through 2018.  The disparity in the projected scores is unclear, as both imply they would extend the rebates to all single-source drugs (i.e., those without a generic competitor) in the Part D marketplace.  The Rivlin-Ryan plan has no similar provision.

Changes to Medicare Benefit:  All three plans propose to re-structure the Medicare benefit to provide a unified deductible for Parts A and B, along with a catastrophic cap on beneficiary cost-sharing.  The Rivlin-Ryan and Simspon-Bowles plans are largely similar, and echo an earlier estimate made in CBO’s December 2008 Budget Options document (Option 83), which provided for a unified deductible for Parts A and B combined, a catastrophic cap on beneficiary cost-sharing, and new limits on first-dollar coverage by Medigap supplemental insurance (which many economists believe encourages patients to over-consume care).  Conversely, the Rivlin-Domenici proposal provides fewer specifics, does not mention a statutory restriction on Medigap first-dollar coverage, and generates smaller savings (an estimated $14 billion from 2012 through 2018, as opposed to more than $100 billion from the Rivlin-Ryan and Simpson-Bowles proposals).

Medicare Premiums:  The Rivlin-Domenici plan would increase the beneficiary share of Medicare Part B premiums from 25 percent to 35 percent, phased in over a five-year period, raising $123 billion from 2012 through 2018. (When Medicare was first established, seniors paid 50 percent of the cost of Part B program benefits; that percentage was later reduced, and has been at 25 percent since 1997.)  The Rivlin-Ryan and Simpson-Bowles plans have no similar provision.

“Doc Fix:  The Simpson-Bowles plan uses the changes discussed above (i.e., liability reform, Part D rebates, and Medicare cost-sharing), along with an additional change in Medicare physician reimbursement, to pay for a permanent “doc fix” to the sustainable growth rate (SGR) formula.  The Simpson-Bowles plan would generate the final $24 billion in savings necessary to finance a permanent “doc fix” by establishing a new value-based reimbursement system for physician reimbursement, beginning in 2015.

The introduction to the Rivlin-Domenici plan notes that it “accommodates a permanent fix” to the SGR, but the plan itself does not include specifics on how this would be achieved, nor what formula would replace the current SGR mechanism.  Likewise, the Rivlin-Ryan plan does not directly address the SGR; however, the long-term restructuring in Medicare it proposes means the issue of Medicare physician reimbursement would become a moot point over several decades.  (See below for additional details.)

Other Provisions:  The Rivlin-Domenici plan would impose an excise tax of one cent per ounce on sugar-sweetened beverages; the tax would apply beginning in 2012 and would be indexed to inflation after 2018. (This proposal was included in Option 106 of CBO’s December 2008 Budget Options paper.)  The plan estimates this option would raise $156 billion from 2012 through 2020.

The Rivlin-Domenici plan also proposes bundling diagnosis related group (DRG) payments to include post-acute care services in a way that allows hospitals to retain 20 percent of the projected savings, with the federal government recapturing 80 percent of the savings for a total deficit reduction of $5 billion from 2012 through 2018.  Finally, the Rivlin-Domenici plan proposes $5 billion in savings from 2012 through 2018 by removing barriers to enroll low-income dual eligible beneficiaries in managed care programs.

The Simpson-Bowles plan includes a laundry list of possible short-term savings (see Slide 35 of the plan for illustrative savings proposals) in addition to the savings provisions outlined above that would fund a long-term “doc fix.”  Most of the additional short-term savings proposed would come from additional reimbursement reductions (e.g., an acceleration of the DSH and home health reductions in the health care law, and reductions in spending on graduate medical education), or from proposals to increase cost-sharing (e.g., higher Medicaid co-pays, higher cost-sharing for retirees in Tricare for Life and FEHB).

Long-Term Restructuring

Employee Exclusion for Group Health Insurance:  In its discussion of tax reform, the Simpson-Bowles plan raises the possibility of capping or eliminating the current employee exclusion for employer-provided health insurance.  (The Associated Press wrote about this issue over the weekend.)  One possible option would eliminate the exclusion as part of a plan to lower income tax rates to three brackets of 8%, 14%, and 23%; however, this proposal presumes a net $80 billion per year in increased revenue per year to reduce the deficit.  The plan invokes as another option a proposal by Sens. Gregg and Wyden to cap the exclusion at the value of the FEHBP Blue Cross standard option plan, which would allow for three income tax rates of 15%, 25%, and 35%, along with a near-tripling of the standard deduction.  Separately, the Simpson-Bowles plan also proposes repealing the payroll tax exclusion for employer-provided health insurance as one potential option to extend Social Security’s solvency.

The Rivlin-Domenici plan would cap the exclusion beginning in 2018, at the same level at which the “Cadillac tax” on high-cost plans is scheduled to take effect in that year.  However, the proposal would go further than the “Cadillac tax” (which would be repealed) by phasing out the income and payroll tax exclusion entirely between 2018 and 2028.  (This proposal would also prohibit new tax deductible contributions to Health Savings Accounts, on the grounds that health care spending would no longer receive a tax preference under any form.)  Notably, the Rivlin-Domenici plan accepts that some employers might stop offering coverage from this change to the tax code, and projects some higher federal spending on Exchange insurance subsidies as a result; however, if more employers drop coverage than the authors’ model predicts, the revenue gain from this provision could be entirely outweighed by the scope of new federal spending on insurance subsidies.

Although Rep. Ryan has previously issued his “Roadmap” proposal that would repeal the employee exclusion, the Rivlin-Ryan plan does NOT address this issue.

Medicare:  The Rivlin-Domenici program would turn Medicare into a premium support program beginning in 2018.  Increases in federal spending levels would be capped at a rate equal to the average GDP growth over five years plus one percentage point.  Seniors would still be automatically enrolled in traditional (i.e., government-run) Medicare, but if spending exceeded the prescribed federal limits, seniors would pay the difference in the form of higher premiums.  Seniors could also choose plans on a Medicare Exchange (similar to today’s Medicare Advantage), with the hope that such plans “can offer beneficiaries relief from rising Medicare premiums.”

The Rivlin-Ryan proposal would turn Medicare into a voucher program beginning in 2021.  (Both the Rivlin-Domenici premium support program and the Rivlin-Ryan voucher program would convert Medicare into a defined benefit, whereby the federal contribution toward beneficiaries would be capped; the prime difference is that the premium support program would maintain traditional government-run Medicare as one option for beneficiaries to choose from with their premium dollars, whereas the Rivlin-Ryan plan would give new enrollees a choice of only private plans from which to purchase coverage.)  The amount of the voucher would increase annually at the rate of GDP growth per capita plus one percentage point – the same level as the overall cap in Medicare spending included in the health care law as part of the new IPAB.  Low-income dual eligible beneficiaries would receive an additional medical savings account contribution (to use for health expenses) in lieu of Medicaid assistance; the federal contribution to that account would also grow by GDP per capita plus one percent.

The Rivlin-Ryan plan would NOT affect seniors currently in Medicare, or those within 10 years of retirement, except for the changes in cost-sharing described in the short-term changes above.  However, for individuals under age 55, the plan would also raise the age of eligibility by two months per year, beginning in 2021, until it reached 67 by 2032.

While the Rivlin-Domenici and Rivlin-Ryan plans restructure the Medicare benefit for new enrollees to achieve long-term savings, the Simpson-Bowles plan largely relies on the health care law’s new Independent Payment Advisory Board (IPAB) to set spending targets and propose additional savings.  The Simpson-Bowles plan suggests strengthening the IPAB’s spending targets, extending the IPAB’s reach to health insurance plans in the Exchange, and allowing the IPAB to recommend changes to benefit design and cost-sharing.  The plan also suggests setting a global budget for all federal health spending (i.e., Medicare, Medicaid, exchange subsidies, etc.), and capping the growth of this global budget at GDP plus one percent – the same level that IPAB capped spending in Medicare.  If costs exceed the target, additional steps could be taken to reduce spending, including an increase in premiums and cost-sharing or a premium support option for Medicare.  The plan also suggests overhauling the fee-for-service reimbursement system, or establishing an all-payer model of reimbursement (in which all insurance carriers pay providers the same rate) if spending targets are not met.

Medicaid:  The Rivlin-Domenici plan suggests that in future, Medicaid’s excess cost growth should be reduced by one percentage point annually.  The plan implies some type of negotiation between states and the federal government over which services in the existing Medicaid program that the state should assume and fund and which services the federal government should assume and fund.  While specifics remain sparse, the overriding principle involves de-linking Medicaid financing from the open-ended federal matching relationship as a way to reduce future cost growth by one percentage point per year.

The Rivlin-Ryan plan converts the existing Medicaid program into a block grant to the states, beginning in 2013.  The size of the federal block grant would increase to reflect growth in the Medicaid population, as well as growth in GDP plus one percent.  The costs of the new Medicaid expansion would be covered according to current law through 2020; in 2021 and succeeding years, the Medicaid expansion would be rolled into the block grant.

The Simpson-Bowles plan includes conversion of Medicaid into a block grant as one option to generate additional savings; however, it does not explicitly advocate this course of action.

CLASS Act:  The Rivlin-Ryan plan would repeal the CLASS Act.  The Rivlin-Domenici and Simpson-Bowles plans do not discuss any changes to this program.  This is the ONLY provision in the three deficit reduction plans that proposes elimination of any part of the health care law’s new entitlements.

Peter Orszag on Access to Treatments and Malpractice Reform

On a New York Times blog yesterday, former OMB head Peter Orszag writes in support of a David Leonhardt column about ways to reduce Medicare spending, specifically by limiting access to new, costly treatments.  Both Orszag and Leonhardt discuss an article (subscription required) in this month’s issue of Health Affairs, which proposes a reimbursement regime whereby Medicare would pay for new treatments for three years, at which point a given drug or therapy would have to prove its worth relative to other, cheaper alternatives in order to justify higher payments from Medicare.   Orszag approvingly notes that “the newly created Independent Payment Advisory Board could propose this type of payment change in order to help reduce costs and improve quality in Medicare.  The change would then take effect by default – if Congress ignored the board’s proposals, if one house voted them down, or even if both houses voted them down and then the President vetoed that legislation.”

Given the approval of Dr. Orszag – who was intimately involved in health care reform from the first days he joined the Administration – to this approach restricting access to treatments, and Medicare Administrator Donald Berwick’s prior support for “rationing with our eyes open,” it’s worth asking: Does the Obama Administration support these types of proposals to have unelected bureaucrats on a federal board withholding access to important but costly treatments – and are these types of access-limiting initiatives the kind we can expect from the Independent Payment Advisory Board created by the law?

Separately, Dr. Orszag used his regular column in the Times yesterday to point out what Republicans have long known: namely, that the health care law “does almost nothing to reform medical malpractice laws.”  Orszag dismisses the idea of caps on non-economic damages – which many Republicans advocate – but he does support “provid[ing] safe harbor to doctors who follow evidence-based guidelines.”  This is a curious statement, as Republicans offered multiple amendments to enact exactly the types of liability reforms that Dr. Orszag – at the time one of the most influential experts on health care within the Administration – supports, yet none of them made it into the legislation.  Former Vermont Governor Howard Dean previously provided one possible explanation as to the omission: “The reason that tort reform [was] not in the bill is because the people who wrote it did not want to take on the trial lawyers in addition to everyone else they were taking on.  And that is the plain and simple truth.”

Medicare’s Coverage of Life-Saving Treatments

In the New York Times today, liberal columnist David Leonhardt writes about ways to reduce Medicare spending, specifically by limiting access to new, costly treatments.  Most of the column focuses on an article (subscription required) in this month’s issue of Health Affairs, which proposes a reimbursement regime whereby Medicare would pay for new treatments for three years, at which point a given drug or therapy would have to prove its worth relative to other, cheaper alternatives in order to justify higher payments from Medicare.

The Times article quotes the Commonwealth Fund’s approving comments that the proposal would “make the market work.”  But there are numerous drawbacks to such an approach:

  • Both the Times article and the Health Affairs piece note that three years could prove an insufficient time to gather evidence about a therapy’s worth (or lack thereof) when compared to other treatments.  This problem would prove especially acute when analyzing long-term effects of drugs that may not be readily apparent in a few years’ time – or the effects on specific sub-groups (i.e., children, African-Americans, etc.) that may respond differently to treatments.
  • Conversely, setting a different “approval time” for each drug or service to justify its use would lead to other inequities – to say nothing of possible political manipulation – and would probably lead to innovators choosing to focus on the fields in which higher Medicare reimbursements would be guaranteed for longer pieces of time.
  • The Health Affairs piece admits that this proposed policy “would lead to much slower diffusion of more expensive interventions,” a policy the authors believe is justified because “limiting the rapid dissemination of…a service is likely to be in the best interest of most patients.”

Of particular note – and concern – is a final passage in the Health Affairs piece in which the authors note “our proposed payment model could be incorporated into Medicare processes without running afoul of the language” in the health care law.  While it remains to be seen whether the Administration would seek to implement this policy in practice – and whether it would attempt to do so by administrative fiat, rather than through consultations with Congress, as the paper implies Medicare could do – such a new policy would be consistent with Centers for Medicare and Medicaid Services Administrator Donald Berwick’s prior support for “rationing with our eyes open.”

Glossary of Key Health Care Terms

In anticipation of a debate on comprehensive health reform later this year, we have prepared a list of important terms surrounding the debate.

Administrative Pricing:  Reimbursement mechanisms for doctors and hospitals determined by legislative or regulatory fiat, rather than through the free market.  Critics of administrative pricing note that the “take it or leave it” philosophy imposed by Medicare and Medicaid results in numerous distortions within the health system—the price paid by the federal government has only a notional relation to the cost borne by the provider, often leading to cost shifting whereby individuals with private insurance end up offsetting the shortfalls in providers’ federal reimbursement levels.

Adverse Selection:  A phenomenon caused by a high proportion of sicker individuals enrolling in a particular insurance pool, often leading to higher premiums for all participants in the pool.  In extreme cases, a “death spiral” can result, whereby high premiums encourage healthy individuals to drop coverage—resulting in higher overall costs, yet more premium increases, and further lost coverage.  Economists have argued that guaranteed issue and community rating regulations—either without an individual mandate to purchase insurance, or with a poorly-enforced one—could result in significant adverse selection increasing the cost of coverage for healthy individuals.

Capitation:  A form of reimbursement that bases payment levels on a flat, regular (often monthly) payment, often risk-adjusted to reflect an individual’s health status.  Payments to Medicare Advantage plans are made on a capitated basis.  Supporters of capitation believe that it removes the perverse incentives present in fee-for-service reimbursement to over-bill for care, while critics voice concerns that capitation could encourage doctors and hospitals to under-provide care to save costs.

Comparative Effectiveness:  Research comparing the relative merits of two drugs or methods of treating an illness.  Of particular concern is the distinction between clinical effectiveness—which examines the merits of various treatment options without respect to their cost—and cost-effectiveness research.  Critics of government-sponsored effectiveness research have voiced concern that cost-effectiveness judgments could be used to determine reimbursement for government-funded health plans—leading to federal bureaucrats denying treatment options on cost grounds.

Cost Shift:  In health care, cost shift refers to two related phenomena—doctors and hospitals charging patients with health insurance to pay for uncompensated care provided to those without coverage, and providers charging those with private coverage more to pay for below-cost reimbursement by government programs.  With respect to the former issue, the Congressional Budget Office has testified that uncompensated care represents a minor fraction of total health spending, and its impact “appears to be limited.”  With respect to cost-shifting from public to private payers, CBO notes that reimbursement rates in Medicare and Medicaid are anywhere from 20-40% lower than rates paid by private payers.  One study estimates that, as a result of the low rates paid by government programs, families with private insurance pay approximately $1,800 per year more for their health coverage.

Crowd Out:  A phenomenon whereby individuals drop their private health insurance to enroll in government programs.  One recent example of crowd out occurred in Hawaii, where Governor Linda Lingle ended the Keiki Care program for children’s health coverage because, in the words of one official, “People who were already able to afford health care began to stop paying for it so they could get it for free.”  Due in large part to its expansion of government-run health insurance to higher-income families, the Congressional Budget Office found that the recent State Children’s Health Insurance Program legislation signed by President Obama would result in more than one-third of those children who would obtain government-run coverage—2.4 million of the 6.5 million newly enrolled—would drop private health insurance to enroll in the government program.

Delivery System Reform:  A general term for efforts to slow the growth of health costs by reforming the way health care is delivered in order to generate efficiencies.  Many of these proposals would leverage the federal government’s role in financing Medicare and Medicaid by linking hospital and physician reimbursement to certain behaviors or practices.  Critics of these proposals caution that they may not generate significant savings to the federal government, but will further entangle federal bureaucrats in the practice of medicine.

Employee Exclusion:  Dating from an Internal Revenue Service ruling during World War II, all health and related fringe benefits provided by an employer are excluded from income for purposes of both payroll and income taxes without limit. (Note however that for the employer, both wages and health benefits are tax-deductible business expenses.)  The Joint Committee on Taxation estimates that in 2007, the exclusion resulted in more than $246 billion in foregone income and payroll tax revenue to the federal government.  Many economists of varying political stripes argue that—because a marginal dollar of cash income is taxable to employees, while a marginal dollar of health insurance is completely tax-free—the exclusion encourages the purchase of overly generous insurance policies, and in turn leads to the over-consumption of health care.

ERISA:  Acronym describing the Employee Retirement Income Security Act of 1974, which enacted rules regarding employee benefit plans.  Section 514 of ERISA pre-empts “any and all State laws insofar as they…relate to any employee benefit plan,” permitting employers who self-insure their group health plans from complying with (potentially conflicting) State benefit mandates and other regulatory requirements.  Small employers who “fully insure”—that is, purchase coverage from another company without assuming insurance risk—remain subject to State regulatory requirements.

Exchange:  Also called a “Connector,” any of a variety of proposals designed to provide comparison shopping of health insurance products for individuals.  President Obama and Democrats in Congress have further proposed empowering an Exchange to serve as a “watchdog” on consumers’ behalf.  Supporters of Exchanges argue that they could enhance individuals’ plan choice as well as portability of insurance coverage from job to job.  While Exchanges can allow free markets for health insurance to flourish, they could also be used to impose price controls or other regulations, by restricting access to the Exchange for those companies who do not comply with bureaucratic mandates.

Fee-for-service:  A method of reimbursement that bases payment levels on a discrete episode of care—for instance, a single office visit or procedure performed.  Traditional Medicare and many forms of private insurance bill on a fee-for-service basis.  Critics of fee-for-service medicine argue that reimbursement policies discourage doctors to provide more efficient care—since physicians generally receive none of the savings resulting from procedures they did not perform.

Group Insurance:  Health coverage provided by employers—the largest source of coverage nationwide, with approximately 160 million individuals (more than 60% of the non-elderly population) enrolled.  Coverage is offered to all eligible employees within a given classification and can be self-insured or fully-insured by an employer—in the latter instance, the employer purchases coverage from a carrier and assumes no insurance risk.  States and the federal government also divide the group market into small and large groups, with the small groups classified as those with 2-50 employees.

Guaranteed Issue:  A requirement that insurance carriers accept all applicants, regardless of health status.  Generally coupled with community rating—a further requirement that carriers charge all individuals the same rates, with few variations.  Critics argue that the two policies, particularly when enacted in concert, encourage individuals not to purchase health insurance until they encounter significant medical expenses, and likewise—by raising premiums for all individuals—discourage young and healthy individuals from buying insurance.

High-Risk Pools:  A form of coverage for the medically uninsurable, currently offered in 34 States.  Coverage is generally extended to those rejected for coverage on the individual market.  Premiums are higher than rates for healthy individuals, but lower than the actual cost of most participants’ health care—State general fund appropriations, grants from the federal government, and/or surtaxes on insurance premiums finance the pools’ operating losses.  Supporters of these mechanisms believe that a more robust system of State-based risk pools could offer coverage to all medically uninsurable individuals, without the adverse market effects connected with a requirement that insurance companies accept all applicants (see Guaranteed Issue above).

Individual Insurance:  Health coverage purchased for an individual (or family) outside the group setting.  Individual insurance is subject to State regulation (including benefit mandates), and must generally be purchased with after-tax dollars.

Mandates, Benefit:  Laws requiring all insurance policies sold to offer coverage for a particular treatment (e.g., in vitro fertilization, hair prostheses) or access to a particular type of medical provider (e.g., dentists, massage therapists).  One survey found that as of 2008, States had enacted nearly 2,000 discrete benefit mandates.  Critics of benefit mandates argue that mandates both individually and collectively raise the cost of health insurance, making coverage less accessible to individuals.  Federal group policies regulated under ERISA are exempt from State benefit mandates.

Mandates, Employer:  Proposals requiring employers to provide health insurance benefits to their employees, and/or pay a tax to finance their workers’ health coverage.  Also commonly called “pay-or-play,” after a requirement instituted as part of the Massachusetts health reforms that employers must “play” by offering health coverage to their workers or “pay” a tax to cover the costs of their employees’ uncompensated care.  Critics cite an NFIB study that an employer mandate could result in 1.6 million jobs lost as evidence that mandates would negatively impact the American economy.

Mandates, Individual:  A requirement that all individuals have health insurance, subject to some type of enforcement by the State.  Massachusetts’ health reform law required individuals to purchase health insurance or face penalties on their tax returns.  Critics argue that mandates are not easily enforced, could result in interest groups lobbying for an overly generous definition of “insurance” for purposes of compliance with the mandate, and may penalize individuals who cannot afford health insurance by taxing them for not buying it.

Medicaid:  A State-federal partnership providing health coverage to certain vulnerable populations.  Eligibility requirements vary by State, but often include low-income women and children as well as elderly and disabled populations.  The federal government finances Medicaid through the Federal Medical Assistance Percentage (FMAP), a match rate linked to States’ relative income level that has averaged 57% of total Medicaid spending in recent years.  While low-income individuals and children constitute the majority of Medicaid beneficiaries, most Medicaid spending funds long-term and related care to elderly and disabled enrollees.

Medical Loss Ratio:  A requirement that insurance carriers dedicate a minimum percentage of premiums to paying medical claims, in an attempt to restrict “excessive” administrative costs or profits by insurance companies.  However, the Government Accountability Office has noted that “there is no definitive standard for what a medical loss ratio should be,” and White House adviser Ezekiel Emanuel has previously written that “some administrative costs are not only necessary but beneficial.”  Critics of this approach argue that imposing de facto price controls on insurance companies will only exacerbate problems in the health sector, by discouraging carriers from monitoring their patients outside a hospital or physician’s office.

Medicare:  A single-payer (i.e. government-funded) health insurance plan that offers coverage to seniors over age 65, Social Security disability recipients (after a two-year waiting period) and individuals with end-stage renal disease.  Part A (hospital services) is mandatory for all seniors, while Part B (physician and outpatient services) and Part D (prescription drug coverage) are voluntary. (Medicare Part C is Medicare Advantage, an alternative to traditional Medicare described below.)  Medicare generally pays doctors and hospitals on a fee-for-service basis, reimbursing based on a discrete office visit, procedure performed, or hospital stay.

Medicare Advantage:  Health coverage provided by private insurance companies and regulated by the federal government, in lieu of the traditional Medicare benefit.  Plans receive capitated (per-beneficiary) payments from the federal government that are adjusted according to enrollees’ risk and based on their bids against a statutorily-defined benchmark.  Plans which bid below the benchmark may use the savings to provide extra benefits—reduced cost-sharing, lower premiums, and/or vision and dental coverage—to beneficiaries.

Medigap:  Insurance products designed to supplement the traditional Medicare benefit, offered by private companies according to standardized benefit designs implemented and regulated by the federal government.  Many economic analysts—including the Congressional Budget Office—have concluded that, by insulating beneficiaries from financial exposure to deductibles and co-payments, Medigap policies encourage seniors to over-consume health care, resulting in higher costs for the Medicare program.

Pay-for-Performance:  Proposals designed to increase or decrease Medicare or Medicaid reimbursement levels to quality outcomes.  Several programs exist linking incentive payments to reporting of selected quality measures, but reimbursement has yet to be directly linked with outcomes.  Critics of this approach argue that pay-for-performance could discourage providers from accepting patients with complications that could lead to poor outcomes.

“Public Option”:  An insurance plan run and/or funded by a governmental entity.  Democrats have proposed several different ideas as to how such a plan may be structured—a Medicare-like insurance plan operated by the Department of Health and Human Services, a more independent entity where a third-party administrator makes operational decisions, or State-based governmental plans, perhaps including a buy-in to State employee health insurance offerings.  Independent actuaries at the non-partisan Lewin Group found that a government-run plan reimbursing at Medicare rates would cause about 120 million Americans to lose their current health coverage.  Regardless of the particulars of its structure, opponents may echo the concerns of CBO Director Elmendorf, who testified that it would be “extremely difficult” to have a “public plan compete on a level playing field,” such that Democrats would create inherent biases in favor of the government-run plan.  Some may also be concerned that such a plan could exercise increasing control over patients’ health decisions, leading to delays in obtaining critical treatments or outright denials of care.

Sustainable Growth Rate:  A mechanism instituted as part of the Balanced Budget Act of 1997 regarding physician reimbursements, which calls for reductions in future years’ reimbursement levels if physician spending exceeds the SGR target.  Critics note that, because the target applies to aggregate levels of spending, individual physicians have a micro-level incentive to increase the number of services they perform in order to overcome a lower per-service payment under the SGR.  On the other hand, supporters of entitlement reform argue that while imperfect, the mechanism has forced Congress to find offsets to finance increases in the SGR, resulting in a higher level of scrutiny of the Medicare program than would otherwise have been the case.

Tax Treatment of Health Insurance:  Health insurance provided through an employer is not taxable, while health insurance outside the employer group market generally must be purchased with after-tax dollars.  Three exceptions to this rule exist: 1) self-employed individuals may deduct health insurance premiums from their income (but not payroll) taxes; 2) Health Savings Account contributions may be deducted from income (but not payroll) taxes; and 3) health insurance expenses may be taken as an itemized deduction for income tax purposes, but only to the extent that total health expenses exceed 7.5% of adjusted gross income.  Critics of the current policy argue that individuals without access to employer-sponsored insurance have to pay 30-50% more for their coverage, resulting in more uninsured individuals.

Baucus White Paper on Delivery System Reform

As you may know, Finance Committee Chairman Baucus released last night a white paper outlining potential options for reforming the health delivery system.  Release of the document precedes a discussion among Finance Committee Members of both parties scheduled to be held today.  Further discussions will be held on access and financing in the upcoming weeks, with white papers on those issues to be released in advance of those meetings.

The two biggest issues addressed in the delivery reform white paper surround Medicare Advantage (MA) and physician reimbursement.  On the former, the white paper proposes linking some portion of MA plan payment to pay-for-performance results on quality measures, as well as new overall payment methodologies that would result in lower payments to plans.  One approach would result in arbitrary reductions such that MA plan payments would be tied to fee-for-service Medicare spending, while the second approach would apply competitive bidding to MA plans—but traditional Medicare will not be required to compete.  Some Members may also note that the white paper discusses “simplifying the amount and type of extra benefits offered by MA plans”—suggesting that Chairman Baucus may want to limit plans’ attractiveness to beneficiaries by restricting their ability to provide services to seniors that traditional Medicare does not.

With respect to physician reimbursement and the Sustainable Growth Rate (SGR) mechanism, the white paper proposes a 1% update (i.e. increase) in physician reimbursement levels for 2010 and 2011, followed by no increase in 2012, and a reversion to current law formulas in 2013.  One proposal would establish a floor for the SGR, preventing physicians from receiving greater than a 3% cut in reimbursement levels (or 6% in areas with high growth rates of fee-for-service spending).  The white paper implicitly acknowledges the significant cost associated with both proposals, noting that “the Committee is continuing to explore other options” due to the high price tag associated with SGR reform.

Other highlights of the Baucus proposals include:

  • Establishment of pay-for-performance methodologies for hospitals, home health agencies, and skilled nursing facilities, with payment based on standards related to certain quality measures—the performance pool for hospitals would constitute up to 5% of existing inpatient reimbursement levels;
  • Expansion of the Physician Quality Reporting Initiative to require physician certification, as well as new quality reporting initiatives for inpatient rehabilitation facilities and long-term acute care hospitals;
  • Adoption of appropriateness criteria with respect to imaging services;
  • A 5% payment bonus for primary care physicians and general surgeons practicing in (newly defined) rural scarcity areas—paid for by an across-the-board reduction in reimbursement levels to other physicians, or other potential offsets;
  • Creation of a hospital re-admissions policy that would withhold up to 20% of hospital reimbursements for institutions with high levels of preventable re-admissions, along with a long-term move to bundled payment for all post-acute care services occurring within 30 days of discharge;
  • Creation of accountable care organizations (ACOs) in an attempt to deliver more integrated care, that would allow provider groups to share half of the potential savings to Medicare if operating efficiencies generate savings levels greater than 2%;
  • Expanded eligibility for health IT incentive payments created in the “stimulus” to include nurse practitioners, physician assistants, and other providers;
  • Creation of an independent institute to govern comparative effectiveness research—along with safeguards that, while attempting to recognize the personalized nature of health care, would permit government programs to use the research for reimbursement purposes in some circumstances;
  • New reporting requirements on drug manufacturers to disclose financial relationships and transactions with providers, and make such information publicly available;
  • A prohibition on physician-owned specialty hospitals, along with significant new restrictions on the expansion capabilities of current hospitals;
  • Additional requirements related to nursing homes, including ownership disclosure, compliance and ethics requirements, reporting of staff position categories and expenditures, independent monitoring, a standardized complaint form, and state-based complaint processes;
  • Re-distribution of unused residency training slots to encourage primary care or general surgery training, along with other provisions to increase and re-allocate the health care workforce;
  • Additional provider screening and data matching to combat fraud and abuse, along with a requirement for providers to implement compliance programs, additional penalties for violations, and enhanced fraud and abuse funding.