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The Debate Over How to Rein in Medicare Costs

As we wait for the Supreme Court to rule on the health reform law’s mandate that all US individuals purchase health insurance, it’s a good time to turn our attention to other core elements of reform that will be debated hotly during this election year and beyond. One of these is Medicare—in particular, whether the program should be subjected to a real budget and, if so, how that budget should be enforced.

Stuart Butler, PhD

There’s a lot of resistance to direct budget controls on Medicare spending among seniors and health care professionals. But there’s also been a growing and bipartisan consensus among policy makers that we must switch from Medicare’s open-ended, benefit-driven spending dynamic (which covers a defined set of benefits, no matter the cost) to a fixed budget of some form. That’s because it is impossible to see how we can solve our debt and deficit problems without a tighter, predictable Medicare budget.

Four years ago, for instance, budget experts (including me and 3 former Congressional Budget Office directors) from a wide range of policy organizations joined in a call for setting a 30-year budget for Medicare with automatic policy “triggers” to keep it on track. While affordable health care for the elderly population is a major national goal, said the group, so is education for our children and the defense of the nation. We argued that federal spending for all these goals should be budgeted together with similar budget process rules for each program—not, as today, with Medicare and other entitlements effectively having first claim on federal taxes and borrowing.

It’s important to recognize that both the Affordable Care Act (ACA), the fiscal-year 2013 budget championed by Rep Paul Ryan (R, Wis) and passed in the House of Representatives, and other proposals include a long-term Medicare budget complete with steps to hold to it. So despite the rhetoric about “ending Medicare as we know it,” there is actually agreement on this critical element of reform.

Enforcing a Fixed Budget for Medicare

The real debate is now about the mechanism used to keep within a budget, not about the principle of an enforceable budget for Medicare.

The ACA adopts 1 enforcement option. Its distinctive budget-control feature is the newly created Independent Payment Advisory Board (IPAB). Starting next year, if the Chief Actuary of the Centers for Medicare & Medicaid Services projects that future Medicare spending will exceed the target growth rate, the IPAB will devise a package of changes in payments to providers in order to ratchet down spending. These cuts will go into effect automatically unless Congress can come up with another way to achieve the same savings.

The IPAB is a classic example of using wage and price controls in an attempt to hit a budget. And that is its profound weakness, exacerbated by restrictions imposed on it by Congress. We have decades—actually centuries—of using controls in an effort to hold down total spending for various goods and services. The results have been pretty dismal. Indeed, resorting to the IPAB is a recognition that Medicare’s current payment control system won’t keep spending down sufficiently. The history of price and payment controls is a constant game of catch-up as suppliers maintain their revenue by frustrating controllers through such devices as increasing volume or redefining the classification of their product or service. Physicians and hospital administrators are quite familiar with these games.

True, Congress has made life harder for the IPAB by limiting the tools it can employ to regulate Medicare spending. So the problem for the IPAB approach is this: to stand much chance of success, the IPAB’s powers would have to be increased next year, perhaps even including powers to control prices beyond Medicare to curb cost shifting. But it is almost unimaginable that Congress would grant such additional powers, given the visceral public opposition to powerful and quasi-independent health boards.

So even if the IPAB survives after the election, the inherent weaknesses of the approach means it will fail to keep down spending.

An Alternative Approach: Premium Support

But there is another way to keep to a budget. The IPAB’s payment control approach manipulates each payment or price in the hope that when all the transactions at those prices pan out they will add up to no more than the desired budget. The alternative approach—generally called “premium support”—is quite different. It starts with the desired budget and then distributes that budget to beneficiaries. So it has 2 crucial features. First, it controls Medicare total spending directly, not indirectly like payment controls. Thus, if the government doesn’t flinch, by definition it will constrain spending to the desired budget. And second, it places the decision-making power of the budget into the hands of beneficiaries. Seniors ultimately get to decide which plans or providers will get their money and how much, as opposed to an IPAB determining what their providers will be paid.

But what will determine whether the IPAB stays alive or is replaced with some form of premium support? It’s less likely to be driven by the distinctive institutional economics of the 2 approaches—notwithstanding charges framing these alternatives as “unelected boards” versus “privatization”—and more likely to depend on what Americans perceive to be the side effects of each strategy. The specter of some physicians dropping out of Medicare and the ones who remain constantly complaining about the inequities of the payment system—the predictable consequence of tighter controls—will have a big effect on the public’s perception of the IPAB and payment controls. For premium support, the challenge will be to convince beneficiaries that the strategy can be successful in bringing costs down rapidly enough to avoid seniors facing unacceptably high out-of-pocket spending.

Who will prevail? Unless the ACA is repealed, the IPAB will limp along in the next Congress, although I’d predict its powers will be reduced further, not strengthened. Meanwhile, the deficit and debt pressure to slow Medicare spending will continue to mount. It may take a few years, but I’d bet that pressure will ultimately lead Americans and Congress to accept premium support as the lesser evil.

About the author: Stuart M. Butler, PhD, is Director of the Center for Policy Innovation at the Heritage Foundation in Washington, DC, where he focuses on developing new policy ideas. Previously he served as Vice President for Domestic and Economic Policy Studies. He is also an Adjunct Professor at Georgetown University’s Graduate School.
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