Bernie Madoff Accounting for Medicare

On the eve of the release of this year’s Medicare Trustees report, the Obama administration released its own version of it. In the administration’s telling:

  • Health reform (ObamaCare) will save taxpayers $200 billion in the Medicare program through 2016.
  • About 90% of these savings will be produced by lowering “excessive payments” to Medicare Advantage plans, lower payments to doctors, hospitals and other providers to reflect their “improved productivity,” and through efficiencies gained by what is learned from “demonstration projects.”
  • The demonstration projects include pay for performance, bundling, Accountable Care Organizations, and other frequently discussed ideas.

But whereas the Trustees report is expected to be a serious document, reflecting accepted accounting principles, the administration’s document was clearly a piece of political propaganda — one that stretched the truth so much that the word “spin” would be a charitable description. For example, the administration’s document failed to mention that:

Seemed like the real thing only to find
Much of mistrust, love’s gone behind

  • The Congressional Budget Office has studied the demonstration projects on three separate occasions (here, here and here) and each time has concluded that they are producing no serious savings and are unlikely to do so in the future.
  • Medicare’s Actuary has determined that reductions in payments to Medicare Advantage plans will not only result in lower benefits for the one in four seniors who are in these plans, but that about 7 ½ million enrollees will actually lose their coverage and have to seek more expensive Medigap insurance elsewhere.
  • Medicare’s Office of the Actuary also has concluded that the projected savings are unrealistic and will not materialize — since they will result in hospital closings and seniors’ inability to find accessible health care — a judgment reaffirmed in the Chief Actuary’s own statement in the latest Trustees report.
  • Even if the $200 billion in savings did materialize, it would not be a saving to taxpayers; instead, these savings have already been pledged to create a new health insurance entitlement for young people — leaving taxpayers just as burdened as they were before.
  • The administration’s report also claimed that health reform has created $60 billion in new benefits for seniors, without mentioning that for every $1 of new spending beneficiaries will lose $10 of spending somewhere else.

On lower payments to providers, Chief Actuary Richard Foster produced a chart for the Trustees report showing what “$200 billion in savings” actually means. The projection assumes that:

  • Beginning in 2013, payments to physicians will drop by 31% to reach Medicaid levels.
  • Going forward, Medicare payments will fall further and further below Medicaid fees, with each passing year.

Remember, the biggest problem for Medicaid patients is finding a doctor who will see them. As a result, they frequently must turn to community health centers and the emergency rooms of safety net hospitals, where rationing by waiting is common. What we can look forward to is a world in which seniors (from a financial point of view) will seem less desirable customers than welfare mothers.

What about the administration’s preferred organizational form of health care delivery — Ac­countable Care Organizations? They have been rejected by the nation’s leading health plans, including those that the administration points to as examples of high-quality, low-cost service. What about other demand-side reforms: forcing/inducing/coaxing providers to adopt electronic medical records, to coordinate care, to integrate care, to manage care, to emphasize preventive care, to adopt evidence-based medi­cine, and so on?

In theory, you can make a reasonable argument for each of these ideas. Who can deny that piecemeal medicine, with dozens of doctors making in­dependent decisions about various aspects of a patient’s care, is likely to be wasteful? Wouldn’t it be better if the doctors all got together and coordinated their decisions? Doesn’t integrated care make more sense than nonintegrated care? Wouldn’t integrated care be easier if there were a medical home that kept all the patient records in one place? Wouldn’t it all be more efficient if all the doctors could go to a computer screen and see what every other doctor has done to the patient and is planning to do?

I don’t have a problem with any of this. In fact, I can point to ex­amples where some of this actually works. My problem is that wherever I find any of these techniques working, they originated on the supply side of the market, not the demand side.

Whenever these ideas are foisted on physicians by a government pilot pro­gram or by some other third-party-payer bureaucracy, they not only don’t work, they often backfire. Electronic medical records and other electronic informa­tion systems seem to work, and work well, when they are adopted by doctors to solve their specific problems. (After all, isn’t that how information systems get adopted in the rest of the economy?) They do not work well when they are designed and imposed by the buyers of care.

On the supply side, we have the islands of excellence (Mayo, Intermountain Healthcare, Cleveland Clinic, etc.). On the demand side, we have a whole slew of experiments with pay-for-performance and other pilot programs designed to see whether demand-side reforms can provoke supply-side behavioral improve­ments. And never the twain shall meet.

We cannot find a single institution providing high-quality, low-cost care that was created by any demand-side buyer of care. Not the Centers for Medi­care and Medicaid Services, which runs Medicare and Medicaid. Not by any private insurer. Not any employer. Not any payer, anytime, anywhere. As for the pilot programs, their performance has been lackluster and disappointing.

What about grading hospitals based on the quality of care? One recent study finds that Medicare’s reporting has had almost no impact on mortality. Another survey finds that quality report cards not only don’t work, they may do more harm than good. What about paying for results? The latest study of pay-for-performance finds that doesn’t work either. Accountable Care Organizations? The latest results show no reason to be hope­ful. Electronic medical records? The latest survey of all the academic literature shows they don’t improve quality or reduce costs. Indeed, a new study in Health Affairs found that when doctors can easily order diagnostic tests online, they tend to order more tests — increasing costs.

The fundamental problem in health care is that people in the system face perverse incentives. If we want to change the perverse outcomes, we must change the incentives that lead to them. Nothing else is going to work.

Comments (26)

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  1. Vicki says:

    I like the song pairing.

  2. Buster says:

    The administration’s report also claimed that health reform has created $60 billion in new benefits for seniors, without mentioning that for every $1 of new spending beneficiaries will lose $10 of spending somewhere else.

    It’s rather ingenious of proponents to tout increased benefits to seniors and then claim credit for cutting the deficit due to reduced provider fees for doctors that treat Medicare patients — and health plans that cover Medicare enrollees. Ignoring that these cuts will likely to reduce access to care (while signing the praise of the added benefits) is dishonest in my opinion.

  3. Brooke H.C. says:

    Excellent article, as always. It seems ironic that the current administration has not figured out the ultimate pitfall of this trajectory. Today (by and large), the government “controls” healthcare through CMS regulations. If Medicare is no longer a desirable payer; in time providers small and large will stop accepting Medicare, rendering the government’s regulatory power defunct. I would love to see your team dig deeper into the path toward this foregone conclusion.

  4. Joe Barnett says:

    In Newspeak: Less Is More.

  5. Charlie Bond says:

    Hi John:
    Once again you make an impeccable case for the fact that there is no cost-based pricing in health care. Whether we look at Medicare or the private sector, pricing is irrational and based on what the market will bear.

    Reports released in the last few days cited the variability for the price of an appendectomy, a procedure that has been done since the time of the ancient Egyptians. The report said that in California, the consumer’s/payor’s price for the procedure varied by tens of thousands of dollars–even at the same institution. How are actuaries expected to set premiums or predict the solvency of Medicare if the Hollywood accounting methodologies now employed by providers are allowed to persist?

    Not only are incentives perverted, but the normal checks and balances usually found in markets have not been in place for 80 years. The health plan market developed with the Baby Boom, so we were insuring a young healthy population. The early health plans had little regulation, and would literally set premiums by guesstimate and pay whatever bills were submitted. Kaiser has always shadow-priced, so even cost-driven systems have not been forced to build pricing from the ground up, as most businesses have to do. At the same time, because of the generous demographics, health plans paid fee-for-service willy nilly. As a result historic, but irrational pricing ballooned in the 50’s to the 70’s and these historical, but wildly inapt pricing patterns got built into the system that we now have and can’t shake even though it is bankrupting the country.

    The greatest perversity, for example, are regulations and contract provisions that prevent providers from giving”incentives” to patients. These regulations and provisions have actually been used to punish doctors and hospitals who want to lower prices to patients. We are lost if our health providers are not free to LOWER prices without fear of retaliation and punishment, while the system perpetuates crazy-quilt economics throughout the rest of the healthcare sector.

    Thank you as always for your fact-marshalling. We do not need to blame politicians for all of the pricing perversities. History has dealt this hand, and only clear non-partisan vision will correct it, and it will require every sector surrendering sacred cows for slaughter, The product, however, can be a rational, sustainably affordable health care system that is built on free market principles and is yet accessible to all. We just need the courage to exercise our American good sense.

    Charlie Bond

  6. Ken says:

    Excellent post.

  7. Earl Grinols says:

    With respect to these and similar federal documents, perhaps it is time to start using another word description.

    In my dictionary “a false statement made with deliberate intent to deceive” is a lie. The Medicare Chief Actuary should be commended for his reporting the truth about the projected savings.

  8. Kent Lyon says:

    It’s the third party payor system, buttressed by the deep pockets (so-called) of the federal government–which is now paying 10% of GDP for healthcare, with a rapid increase in this total in the near future.
    Only when that third party payor system is effectively ended will the perverse incentives end, and the system improve. Otherwise, it will continue to collapse slowly, or not so slowly, under its own weight of cost/debt/worsening outcomes/worsening access. Then we will see how health statistics look with rationed or limited or no care (might turn out to be an improvement!).

  9. Janice Michaud says:

    Excellent post, and as usual, your support links provide a means of comprehensive study.
    Thank you for helping me do my job.

  10. John Sweeney says:

    Geez! How can we get the word out on this disaster?

  11. Paul Nelson says:

    I suspect we have President Lyndon Johnson to thank for the continuing shell game that is used to analyze Medicare funding. The Medicare trust funds actually existed until he used the cash to pay for Viet Nam. Since then, the beltway Ponzi scheme continues on its merry way. Unfortunately, the continuing lack of trustworthy leadership is bankrupting our country. Misleading statements from the President’s Office about healthcare reform continue to erode any leadership authority he might have.

  12. Rick Jackson says:

    Great article John! This shows why the Government has no clue on how to run healthcare.

  13. Hana says:

    The entire Healthcare reform needs to go away, this is insane and unconstitutional, if you want universal coverage have everyone enroll in medicare and if the people want additional coverage they can buy a supplement plan, and for those that cannot afford a supplement plan then they can apply with medicaid for additional supplement coverage. Whats so hard about it; it does not take a rocket scientist to figure this out. The white house wasted too much time on this! Lets get this USA back on track by getting the economy back to work.

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  16. Lucas says:

    Well I think the government slhoud pay up for this because they make us pay Medicare and Social Security taxes out of each paycheck. Why slhoud we pay for something that won’t be available to us? In order to secure these programs, they have to stop all of this ridiculous spending, and actually use the money for what it’s for.Stop making us pay for prisoners with no chance of parole, to get a free education that they will never use.Stop funding places like Planned Parenthood and abortion clinics.Stop putting the funds that we pay for gas into foreign accounts, and instead utilize what we have here in the USA, and drill here!Stop trying to clear up our national debt, by making more! Bailouts, another stimulus plan you can’t pay Peter by robbing Paul.I could go on and on about different ways to free up money that could be used to help sustain the lifetime of these programs. Bottom line is to cut all of the frivolous spending!!!!!

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