Another Budget Blow to Health Care Reform

Policymakers are discovering that the road to health care reform in anything but smooth. The latest speed bump involves the Administration’s proposal to rein in future Medicare costs by empowering a new panel (the Independent Medicare Advisory Council) to recommend future spending reductions. If accepted by future Presidents, the commission’s recommendations would take effect unless Congress intervened.

As I mentioned the other day, there is some logic to this approach. Politics sometimes play an unseemly — and costly role — in decisions about Medicare payment rates. Limiting Congress’s role in setting those rates might therefore by a money-saver.

The devil in the details, however, and earlier today the Congressional Budget Office concluded that the details don’t add up to much.

CBO estimates that the proposed legislation would save a paltry $2 billion over the next ten years, less than 1/500 of the 10-year cost of health reform. That estimate reflects CBO’s assessment of various possible outcomes:

[T]he probability is high that no savings would be realized, …, but there is also a chance that substantial savings might be realized. Looking beyond the 10-year budget window, CBO expects that this proposal would generate larger but still modest savings on the same probabilistic basis.

Advocates of the IMAC approach will clearly have to go back to the drawing board if they want to get larger savings in the first 10 years. The good news for them is that CBO explains why the estimated savings over the next ten years are so low and provides some guidance on what might be necessary to increase them.

  • The House health reform bill already includes substantial reductions in future Medicare payment rates. That limits the ability of a future IMAC to save much money by making further cuts.
  • The proposed legislation allows the council to reduce Medicare spending, but doesn’t require it to. In other words, if you want to convince CBO that the IMAC is going to cut spending, it would be helpful to create an IMAC whose job is to cut spending. Even better would be to establish a specific target for those savings.
  • It’s possible that the members of the council would favor provider interests. For example, the legislation would allow the majority (or even all) of the council members to be physicians. If you want to convince CBO that the council is going to cut spending, it would be helpful to include at least some budget hawks.
  • To achieve large savings, the council might have to recommend fundamental program changes (not just tweaks to payment rates), and it may have to do some research and experimentation to figure out what they should be. It is not obvious, however, that the council would have the resources necessary for such research, nor is it clear that the council and President would be sufficiently shielded from political pressure to undertake fundamental changes.

For those and other reasons, CBO concludes that the current proposal is unlikely to generate significant savings, particularly within the 10-year budget window. However, CBO does offer some optimism about a reworked proposal, at least in the long-run:

Looking beyond 2019, a much stronger IMAC-type proposal could reap considerably more savings, depending on which specific features identified above were included and how those features were crafted in legislation. In particular, if the legislation were to provide IMAC with broad authority, establish ambitious but feasible savings targets, and create a clear fall-back mechanism for instituting across-the-board reductions in net Medicare outlays, CBO believes the council would identify steps that could eventually achieve annual savings equal to several percent of Medicare spending. In the absence of a fall-back mechanism, CBO expects that the probability that the President would approve recommended changes that would lead to such significant savings would be lower.

For some related commentary see this article in Politco and this entry in Peter Orszag’s blog at OMB.

About Donald Marron 294 Articles

Donald Marron is an economist in the Washington, DC area. He currently speaks, writes, and consults about economic, budget, and financial issues.

From 2002 to early 2009, he served in various senior positions in the White House and Congress including: * Member of the President’s Council of Economic Advisers (CEA) * Acting Director of the Congressional Budget Office (CBO) * Executive Director of Congress’s Joint Economic Committee (JEC)

Before his government service, Donald had a varied career as a professor, consultant, and entrepreneur. In the mid-1990s, he taught economics and finance at the University of Chicago Graduate School of Business. He then spent about a year-and-a-half managing large antitrust cases (e.g., Pepsi vs. Coke) at Charles River Associates in Washington, DC. After that, he took the plunge into the world of new ventures, serving as Chief Financial Officer of a health care software start-up in Austin, TX. After that fascinating experience, he started his career in public service.

Donald received his Ph.D. in Economics from the Massachusetts Institute of Technology and his B.A. in Mathematics a couple miles down the road at Harvard.

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2 Comments on Another Budget Blow to Health Care Reform

  1. Let’s score this first, CBO !

    The House leaders reached a deal on Medicare payments: A “Pay for Value” reimbursement system that rewards doctors and hospitals that achieve the best outcomes at the lowest cost.

    As a result, The House gained a lot of votes, a lot of people who were withholding support.

    The federal Medicare program insures some 44 million elderly and disabled Americans at an annual cost of $450 billion, almost one-fifth of total U.S. health care spending.

    Supporters of the agreement say it could save the Medicare System more than $100 billion a year and improve care, that means $1trillian over a decade. (Please visit for detailed infos)
    The Times in a July 7 editorial argued “As much as 30 percent of all health-care spending in the U.S. -some $700 billion a year- may be wasted on tests and treatments that do not improve the health of the recipients,” Thus the remaining $239 billions over a decade do not matter.

    No one can disagree with this best outcome / evidence-based system, and private insurance, too, will be greatly influenced by this change with the focus on value over volume. !

    Dr. Armadio at Mayo clinic says, “If we got rid of that stuff, we save a third of all that we spend and that is 2.5 trillion dollars on health care. A third of that and that is 700 billion dollars a year. That covers a lot of uninsured people.”


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