Health Reform's Senior Moment
A new government report says health reform will "jeopardize access" to Medicare.
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While everybody waits for the Congressional Budget Office to weigh in with a cost estimate for all or part of Senate Majority Leader Harry Reid's "blended" health care reform bill, the Center for Medicare and Medicaid Services' chief actuary, Richard S. Foster, has stolen the spotlight. In a Nov. 13 memo on the House-passed bill, Foster said it was "unrealistic" to assume that Medicare could make some of the budget cuts proposed in the House bill without causing doctors and hospitals to bail out of the program.
The provision at issue (Section 1103) concerns how the government calculates inflation in establishing Medicare spending from year to year. The House bill proposes for certain providers (among them hospitals and nursing homes) "a productivity offset in the form of a reduction in such increase or change equal to the percentage change in the 10-year moving average of annual economy-wide private nonfarm business multi-factor productivity." Translation: Cost-of-living increases should be adjusted downward to take into account productivity increases in the larger economy. According to the Congressional Budget Office, this and other changes would have the effect of lowering annual Medicare spending increases to 6 percent from the current 8 percent.
The trouble with the productivity offset, Foster argues, is that health care providers don't really operate like other businesses. Big productivity improvements in the larger economy tend to come from the manufacturing sector through the introduction of new technologies. Health care, on the other hand, is "very labor intensive. … Except in the case of physician services, we are not aware of any empirical evidence demonstrating the medical community's ability to achieve productivity improvements equal to the overall economy." According to one CMS study cited in the memo, productivity gains in health care have during the past two decades tended to be less than half those realized in the larger economy.
The productivity offsets mandated in the House bill would encourage health care providers to "maximize efficiency," Foster concedes. But over time Medicare payments would fall behind providers' costs, until those "for whom Medicare constitutes a substantive [he means "substantial"] portion of their business could find it difficult to remain profitable and might end their participation in the program (possibly jeopardizing access to care for beneficiaries)." (Italics mine.)
This last, italicized portion clarifies what's at stake. Health reform advocates insist that wasteful spending can be trimmed from Medicare in a way that doesn't affect Medicare beneficiaries (except for those participating in privately managed "Medicare Advantage" programs, a failed experiment in market economics that would be trimmed back under the law). Foster says that may not be true.
Why does Medicare have such difficulty accommodating a cut—no, wait, a trim to its annual spending increase—of two measly percentage points? Two words: baby boom. The pig has arrived at the python's tail, and pretty soon everyone will be on Medicare. Reducing future Medicare increases from 8 percent to 6 percent annually may not sound like much, but that will translate into a much more dramatic per capita reduction from 7 percent to 4 percent annually. The House bill, in other words, assumes Medicare's future annual cost increases will be about half what they've been, per person, in the past. And that doesn't take into account Medicare's recent expansion to provide drug benefits.
On the other hand, let's not forget who it is Richard Foster works for. Technically, he works for President Obama, health care reform's ultimate champion, and Kathleen Sebelius, secretary of health and human services. Really, though, Foster works for the Center for Medicare and Medicaid Services, an agency within HHS that would lose funding under health care reform. Please turn now to Page 47 of How Washington Really Works by my mentor, Charles Peters, founding editor of the Washington Monthly. Here Charlie recites the Firemen First Principle:
When faced with a budget cut, the bureaucrat translates it into bad news for members of Congress who are powerful enough to restore the amount eliminated. In other words, he chops where it will hurt constituents the most, not the least. At the local level, this is most often done by threatening reductions in fire and police protection.
Foster is an actuary, not a program administrator, so his pronouncements can be presumed to have a bit more integrity than the sort of character Peters describes here. Even so, it would be remarkable if his pronouncements were completely unbiased by any consideration of his agency's self-interest. Nancy-Ann DeParle, who ran this agency under Bill Clinton, and now directs Obama's office of health care reform, didn't quite say that to Politico. But she did say that making estimates about the impact of future budget trims on the delivery of health care services to Medicare beneficiaries is "not something they ordinarily do" in Foster's shop. She also pointed out that the 1997 federal budget included budget cuts along similar lines, but "there was not what I would call a disruption in service to beneficiaries." Then again, DeParle is not disinterested in calculating the potential pitfalls of health care reform, either.
Update, Nov. 17: Bloggers John Perr and Ezra Klein note that Foster was the guy whom Medicare administrator Tom Scully threatened to fire in 2003 if Foster made public his report predicting the new Medicare drug benefit then before Congress would cost $156 billion more than advertised by the Bush administration. Tony Pugh broke the story for Knight-Ridder, and I cited it in a column about the Bush administration's fact-suppression policies ("Information Is Treason"). I'd completely forgotten about this.
Timothy Noah is a former Slate staffer. His book about income inequality is The Great Divergence.