Use Medicare To Hold Industry To Cost And Quality Promises

On June 1, leaders of the health care industry reaffirmed their pledge to reform a health care system that is rife with inefficiencies, costs too much, and fails to deliver the quality of care Americans expect.

There’s no disagreement about the importance of the industry’s proposals, which include better coordination of care, elimination of errors, reductions in unnecessary services, prevention of unnecessary hospital stays and management of chronic illness. And experts agree that these measures can substantially slow cost growth, enhance quality and help restore economic prosperity—as President Barack Obama’s Council of Economic Advisers’ reported.

But affordable health care for everyone is too important for policy makers to sit back and wait for the industry to achieve these goals. The industry needs a push, in the form of a little financial pressure.

So while providers of care are improving themselves, we need to pursue short term savings. Those savings will set us on the path to transforming the health care system over the longer run while making it possible to cover everyone in the near term.

Expanded coverage cannot be held hostage to industry pledges. Excess occurs throughout the system, but hospitals, which account for over 40 percent of all spending, offer a good place to start. The Medicare program can provide the necessary prodding—as it has in the past—through its payment policies.

Hospitals respond rapidly to Medicare changes. They have done so in the past and could do so again. In response to payment changes in the early 1980s, hospitals reduced their lengths of stay enormously. More recently, the Balanced Budget Act of 1997 constrained growth rates in hospital payments by reducing the annual payment increases for hospitals. Prices were frozen in 1998 and then constrained in growth for the next four years. These savings were expected to slow hospital spending by about $33 billion or about eight percent of expected spending over five years.

But savings turned out to be even larger. Within three years, the expected insolvency date for the Medicare Part A trust fund, which covers inpatient hospital care, was extended from four to 25 years. While some later adjustments were made to soften the impact, hospitals nevertheless were able to achieve enough productivity increases that Medicare has remained a reasonable payer of bills.

For the last six years, Medicare has applied no such constraints, leaving open the opportunity for achieving short run savings now.

Hospitals will challenge reductions in payment updates with claims that they lose money from Medicare. Medicare payment rates are indeed below those of private payers. But for about two-thirds of all hospitals, Medicare’s payments exceed the cost of care. Moreover, the Medicare Payment Advisory Commission has found that the hospitals that lost money on Medicare are in areas where private insurers aren’t pressuring them to reduce costs. Medicare payments exceed costs where hospitals are pressured to be more efficient. Geographic differences remind us that lower costs are possible and that “good” hospitals can be role models for the rest.

Hospitals have a legitimate objection to facing pressures from Medicare if they still must treat patients who cannot afford to pay. Covering all Americans needs to be part of the changes made.

Careful scrutiny of other aspects of the Medicare program can achieve additional savings. For example, the balanced-budget law reduced overall Medicare spending by about 12% over five years.

Although Medicare is no more inefficient than private insurers, it is the mechanism through which the federal government has leverage to increase the pace of change. Policy makers have no excuse not to use that leverage. Medicare savings of $450 billion—or eight percent over the next 10 years is a reasonable goal.

Judy Feder is professor of public policy, Georgetown University, and senior fellow, Center for American Progress.

Marilyn Moon is Vice President and Director, Health Program, American Institutes for Research.