In what has been a great surprise, Medicare is moving—without any discussion or public fanfare—from being an “open-ended entitlement program” to a program that, under the Affordable Care Act (ACA), will be allowed to grow only slightly faster than the gross domestic product (GDP), at least on a per capita basis. In fact, my guess is that there are very few people among the American public, aside from assorted policy wonks, who realize this transformation is under way.
Gail Wilensky, PhD
For years, economists and policy analysts have fretted over the lack of discipline associated with entitlement spending, particularly Medicare. For most government programs, spending in any year is limited to whatever amount the government appropriates for its use. For Medicare, the amount spent has reflected whatever number of services seniors have used multiplied by the price per unit of service used. Total Medicare spending is whatever results, and it can be higher or lower than what was expected or desired.
Medicare spending on physicians is supposed to be different—with the reimbursement for each particular procedure decreased (or increased) depending on whether spending for physician services per capita has grown faster (or slower) than the growth in the economy. But for each of the last 10 years, Congress has overridden legislated reductions in such payments in order to keep unit reimbursement approximately constant. Medicare income for a physician’s practice depends on the unit reimbursement and also on the volume and mix of Medicare services provided.
Medicare spending per capita is projected to grow approximately at the same rate as the economy—about 3.6% annually—for the rest of the decade as a result of the legislated payment reductions in the ACA. Even with this relatively slow growth rate in per capita spending, total Medicare spending is expected to grow at 6.6% per year because of the continuing retirement of baby boomers throughout the period.
As I have noted in earlier JAMA Forum posts(available here and here), questions have been raised by the Centers for Medicare & Medicaid Services actuary, Rick Foster, and others as to whether the ACA reductions will be sustainable without changes in how Medicare reimburses clinicians and health care institutions. To date, such changes are not part of the ACA. Even if the reductions do occur as legislated, they will expire at the end of the decade, and it is at that point it will become clear that the program will move away from being an open-ended entitlement.
President Obama and his administration have primarily discussed a desired future growth rate for Medicare of GDP plus 1 percentage point, although on occasion slightly lower rates of growth (such as GDP plus half a percentage point) have been used as a proposed threshold, mainly as part of a deficit-reduction strategy. The enforcement mechanism that the ACA provides—which does not yet exist—is the Independent Payment Advisory Board (IPAB). This will consist of 15 full-time members, appointed by the President and confirmed by the Senate, with expertise in health care economics and the health care system.
Unlike the Medicare Payment Advisory Commission (MedPAC) or other groups that have an advisory role for the Congress or executive branch, the IPAB will have unprecedented authority to lower spending, but it will be able to do this only by lowering or changing payments to clinicians and institutions or others who offer Medicare services. It will not have authority to change benefits or eligibility for Medicare coverage. Technically, the IPAB will only make recommendations to Congress about ways to lower Medicare spending. However, its recommendations will take effect after a short period if the Congress does not come up with a different set of changes that produce comparable savings. The difficulty in overriding its recommendations is what distinguishes the IPAB from other advisory bodies. It is also what makes it so controversial.
Whether or not the IPAB will make it into existence is not yet clear. Most Republicans and some Democrats regard it as a serious encroachment by the executive branch on the authority of the Congress, which of course it is. But it occurred only because the Congress chose to give away this authority in the ACA. Many observers have suggested that this provision would not have survived if the ACA had gone through the regular process used to reconcile differences between versions of legislation passed by the House and the Senate, but since that never occurred, the issue is irrelevant.
When the ACA was passed, the projected savings associated with the IPAB were small—about $13 billion over the decade—because most of the savings were built directly into law by the reductions in payments under Medicare. This is important, since voting to eliminate the IPAB early on will not require a lot of other offsetting savings, a problem that has plagued the Sustainable Growth Rate (SGR), a mechanism that is supposed to keep total spending for outpatient services below a target amount by adjusting physician payment levels. Current estimates indicate that eliminating the SGR, for example, would cost about $270 billion over 10 years. This will not be true once the IPAB becomes a serious mechanism for reducing Medicare payments, which is likely to be some time later in the decade. Exactly when will depend on whether the legislated reductions in Medicare occur as scheduled.
Republicans have attacked the IPAB as a “bunch of bureaucrats” endangering access to care for seniors under Medicare and clearly wish to dismantle it. Most Republicans also no longer support the notion of Medicare as an open-ended entitlement (although neither side phrases it that way) but have proposed achieving a prespecified growth in spending by converting Medicare into a premium support program, in which seniors would receive a fixed sum of money to purchase traditional Medicare or a private plan in a structured exchange type of setting. Exactly how that prespecified sum would be set has varied among plans—sometimes starting with the projected per capita spending on Medicare as of a given year and increasing it by a set rate of change, and sometimes by using a competitive bid strategy.
Democrats have charged Republicans with “ending Medicare as we’ve known it” and have been generally successful in making that claim stick in the mind of the public. The interesting fact is that Democrats have also “ended Medicare as we’ve known it”—that is, as an open-ended entitlement—but thus far, they seem to have escaped getting hit with the same label. If the IPAB ever actually goes into effect, it will be interesting to see whether they will continue to be successful at dodging their own charge.
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Gail Wilensky, PhD Gail Wilensky, PhD, is an economist and Senior Fellow at Project HOPE, an international health foundation. Dr Wilensky previously directed the Medicare and Medicaid programs and served in the White House as a senior adviser on health and welfare...