Today, “The National Commission on Fiscal Responsibility and Reform” a bi-partisan group that President Barack Obama appointed earlier this year, released the final version of a report recommending ways to rein in the budget deficit. I’m not going to try cover all of the Commission’s proposals in this post, but I think it’s important to compare how the Accountable Care Act reins in Medicare spending to the Commission’s more Draconian approach.
The commission takes aim at healthcare for seniors by hiking co-pays and deductibles for Medicare patients without considering what patients can afford. Under these proposals, many middle-class Medicare beneficiaries will not be able to afford health care. Those who are sickest would suffer most. The report then blindly freezes and ultimately cuts Medicare payments to all physicians–ignoring the fact that, today, some are underpaid for essential services. Finally, it calls for reinstating the dreaded sustainable growth rate (SGR) formula as a benchmark for reducing reimbursements to physicians, beginning in 2015.
Friday, the 18-member panel will vote on the plan. If 14 members of the group say “yea,” it will go to Congress for its consideration.
How the Fiscal Commission Would Reduce Medicare Payments to Doctors: The commission’s co-chairs, Alan Simpson and Erskine Bowles, released an outline of the report on November 10 which called for "modest reductions" in Medicare reimbursement for physicians, but did not specify an amount. Today's full-fledged report unveils the numbers.
Over the short term, the Commission would freeze Medicare payments to doctors through 2013, and then trim payments by 1% in 2014. The Group also “directs the Centers for Medicare and Medicaid Services (CMS) to develop an improved physician payment formula that encourages care coordination across multiple providers and settings and pays doctors based on quality instead of quantity of services.” http://www.kaiserhealthnews.org/Stories/2010/December/02/fiscal-commission-medicare-recommendations-document.aspx
The Affordable Care Act (ACA) already calls for pilot projects that would pay doctors for value in the form of better outcomes rather than rewarding them for volume through fee-for-service payments. The ACA also gives the Secretary of HHS the power to roll out successful pilots nationwide, without needing to go through Congress. (In the past, Congressional lobbyists have blocked expanding programs that would reduce spending.)
But the Commission goes one step further: “In order to maintain pressure to establish a new system and limit the costs of physician payments,” the proposal would reinstate the much hated “Sustainable Growth Rate” SGR formula in 2015 (using 2014 spending as the base year) “until CMS develops a revised physician payment system.”
The SGR formula, which was devised in the late nineties, requires that if increases in Medicare’s total payments to physicians exceed GDP growth by a certain amount in a given year, reimbursements must be sliced the next year. When Congress approved the formula, GDP growth was much higher than it is today. But by 2003, economic growth had fallen to a point that the formula kicked in, calling for across-the-board reductions in Medicare’s payments to doctors.
Knowing that some Medicare doctors are underpaid–and fearing that they might stop seeing Medicare patients if they could not cover their costs– Congress was unwilling to lower fees for all services. Instead, each year it kicked the can down the road, postponing the day of reckoning.
The Medicare Payment Advisory Commission (MedPAC) has recommended ditching the SGR. And liberals in Congress have voted to repeal it, but fiscal conservatives have blocked repeal. So each year, the SGR cuts are debated, and each year, Congress has been able to muster only enough votes to postpone slashing Medicare payments. Meanwhile, virtually everyone in Washington understands that the SGR formula will never be implemented. It has become a political tool that those who oppose health care reform use to frighten doctors that under “Obamacare” their incomes will fall. In fact, when President Obama took office he did not include the SGR savings in his budget.
Nevertheless, the deferred cuts have accumulated, and the SGR formula now directs Congress to whack all Medicare reimbursements to physicians by 25% % next year. Everyone realizes that this is unthinkable. If asked to take such a hit, many doctors would stop taking Medicare patients.
Let me be clear: the Fiscal Commission does not propose lowering payments by 25% . It would “re-set” the formula making 2014 the baseline, but going forward, physicians would be subject to across-the-board reductions in payments for all services.
By contrast, the Affordable Care Act recognizes that while some doctors are over-paid for certain services, others are underpaid. Taking an axe to all reimbursements is a crude solution. Instead, the ACA calls for adjusting payments with a scalpel, giving the Secretary of HHS the authority to reduce payments for particular services that are overvalued, while lifting reimbursements for services that are undervalued. In addition the law calls for a 10% hike in pay for primary care physicians and other doctors who provide primary care, effective January 1, 2011.
Finally, if Medicare spending is growing significantly faster than consumer prices (using the Consumer Price Index plus 1% as a benchmark) the Independent Payment Advisory Board (IPAB) is charged with reducing Medicare spending–without cutting benefits or raising co-pays and deductibles. It’s likely that this would mean trimming fees for some tests and treatments. (Congress could override IPAB”s recommendations only if it could realize equal savings, again without reducing benefits or increasing cost-sharing. Otherwise, IPAB’s proposals automatically become law.)
Shifting the Burden to Seniors:The Commission aims to raise $110 billion by requiring seniors to pay for the first $550 of visits to doctors and hospitals. In other words, Medicare would not reimburse for patients for any doctors’ bills or hospital bills until the patient had shelled out $550 of his own money.
In addition, the Commission would keep a 20% co-pay on spending above the $550 deductible–with no cap on total out of pocket costs until the beneficiary has spent $7,500 out-of-pocket
This would no doubt lower Medicare spending; many seniors would have a hard time scraping together $7,500, and so would put off needed medical care. To make sure that even the sickest Medicare patients cut back on healthcare, the report prohibits private Medigap plans (designed to fill some of the holes in Medicare) from covering the first $500 of an enrollee’s cost-sharing liabilities and limits coverage to 50 percent of the next $5,000 in Medicare cost-sharing.
The Commission ignores the fact that median income among seniors is $18,000 a year. That includes Social Security, pensions, dividends, capital gains–every penny that comes into the household. In other words, half of Americans over 65 live on less than $18,000 a year. “Middle-class” seniors (those on the third step of a five-step income ladder) are making do with roughly $15,000 to $21,000 a year. In many parts of the country, this means that they are barely getting by. If they spent $7,500 out-of-pocket in co-pays, medical care would be eating up as much as 50% of their income.
By contrast, the Accountable Care Act eliminates co-pays for preventive care recommended by the U.S. Preventive Services Task Force. The goal is to reduce Medicare spending and improve the quality of care by encouraging seniors –many of whom suffer from two or three chronic diseases– to receive preventive care before they land in a hospital. If they visit a doctor, also will receive counseling on how they can help manage their chronic diseases. In 2011, the ACA also provides a 50% discount on covered brand name drugs if a senior hits the prescription drug “donut hole” and covers a free annual wellness visit.
Late this afternoon, it didn’t look likely that the report will garner the needed 14 votes. Even if it did, these recommendations would not make it through the House. Nevertheless, the Commission’s proposals are important because they offer a revealing snapshot of what Congressional conservatives would like to do. . .
I think the concept of raising the Medicare deductible to $500-$600 coupled with a limit on out-of-pocket expenses in the $6,000-$7,500 range is reasonable and would be a considerable improvement over the current system which has no out-of-pocket cap on Part B services and requires a deductible of more than $1,000 for each hospitalization.
I reject the notion that people should be able to meet all of their out-of-pocket medical expenses from current income without ever having to touch their savings. In the current environment of near zero interest rates, it’s possible to have savings of hundreds of thousands of dollars generating interest income of as little as less than $100 per year to, at most, 1% of the principal balance. Moreover, most people don’t have large medical expenses most of the time. In any given year, for example, only about 15% of seniors reach the Part D prescription drug donut hole and it’s not the same people from one year to the next. Some people could have a significant medical event like a heart attack in one year and then recover needing little treatment beyond a few generic drugs, a periodic checkup and perhaps a stress test. Only a tiny percentage of the elderly population has significant medical expenses every year.
It’s also important to note that for many of the elderly, living costs are far lower than they are for young adults. If their home is fully paid for, the children are grown and on their own, and they no longer have job related expenses like commuting costs, they can live far less expensively than young families with a mortgage, children to feed and educate and job related expenses. Housing costs in many retirement communities away from major employment centers are extremely inexpensive compared to, say, the NYC metropolitan area. Every age cohort has one expense that looms large in its budget. For young families, it’s buying and furnishing a home. For the middle aged, it’s paying for college and saving for retirement. For the elderly, it’s healthcare. I think the elderly as a group can pay for a lot more of their healthcare costs than you suggest.
Many of the lower income elderly live with their adult children or other relatives and have their housing and food costs paid for them if they can’t pay themselves. For those poor enough to qualify for Medicaid as well as Medicare (dual eligible), out-of-pocket costs could be waived for them. In short, we could design an insurance system that incorporates higher deductibles coupled with a reasonable out-of-pocket maximum that protects the poorest of the elderly but requires the middle class and upper income elderly to contribute more toward their healthcare costs even if they have to use some of their savings to do so.
Barry —
I see the point you are trying to make, but there are some issues that intervene.
First, the notion that seniors can pay for health care costs out of savings ignores the fact that over half of seniors effectively have no savings other than their house, and that 30% of seniors don’t even own a house. This trend is due to continue or get worse, since recent surveys indicate that 50% of baby boomers have no savings for retirement and that 75% have less than $70,000.
In addition, although it is correct that most seniors do not have “large” medical expenses, large numbers of seniors have very substantial expenses. Given the complexity of most seniors’ health situation — growing old is a bitch — expenses in the $3000 to $5000 a year range are not atypical. Noting that the $18,000 a year figure is a median — half of people are below that level — paying even a thousand dollars more a year could be a hardship. Unless the plan is to throw larger and larger numbers of seniors on to Medicaid, which would clearly be not useful in lowering the deficit, there is no way that this program would not impose the risk of financial hardship on many seniors.
Finally, and most important, is the notion that the awareness of the potential financial burden of seeking medical care would have a chilling effect on many seniors’ willingness to seek health care. That, of course, is its purpose. This would not only have potentially disasterous effects on the health and even survival of seniors, but would also lead to higher costs for the system as people turned up sicker, having been led to make decisions to bypass their doctors office but end up in intensive care.
Study after study has shown that insurance programs that create incentives to avoid care by forcing large payments on patients lead to greater, not lesser, spending in the end. This is especially true of vulnerable populations like the elderly, as well as children, pregnant women, and people with complicated health problems like the people who are now on Medicare due to disability rather than age.
One of the recurring themes of foreign health care systems compared with our own — discussed ad infinitum on this blog — is that they have a greater utilization of outpatient provider services, especially primary care, and that then leads to lower costs for the systems overall. To take the already skewed US system and introduce changes to make it even more biased toward dramatic interventions in health disasters and even less involved in early and inexpensive interventions to prevent health disasters would be a plan for even greater costs and even worse outcomes.
Barry–
I wrote a response to your comment Thursday night, but then mangaed to lose it. (Cyberspace ate it.)
But Pat S. has covered many of my points.
The bottom line is that a senior living on an income of $18,000 doesn’t have savings.
If you think about it– if he/she had, say $300,000 socked away(not enough to last through retiriment, but for the moment, let’s ignore that fact.) With $300,000 in savings, these days, it’s not too difficult to earn 5% in a solid, well-managed bond fund (mutual fund or closed-end fund) or on covertibles or preferred stocks.
$300,000 in savings would tranlsate into $15,000 in dividends. When added to Social Secuirty, that takes the senior way above $18,000 in total income.
As Pat points out, half of all seniors have no savings except their house–and 30% don’t even have a house.
When I wrote my oriignal reply, I looked up net worth for individuals 65 to 74 and over 75. Median net worth is roughly equal to the median value of home in most part of the country.
As you know “net worth” includes all assets–including your home and savings–minus debts.
In other words, these middle-class seniors (living in a median value home with median income)have little or no savings.
Barry, we are not talking about “poor” seniors– we are talking about middle-class seniors.
Why do these people wind up with no savings? Is it because they spent their earnings on vacations, SUVs or going out to dinner once a week?
No. Upper-middle-class Americans can afford these luxuries. The middle-class cannot.
Middle-class Americans raise 1.7 children on a median joint income (before taxes) of roughly $59,000 (in today’s dollars)
They do try to save some money; they put it into a savings account to cover unexpected expenses: paying for a new hot water heater, a new roof, emergency medical expenses.
The rainy day fund is wiped out with some reglarity. (Hot water heaters, etc. do need to be replaced.) If they rent, the rent goes up with some regularity. But, over the last 3 decades their wages have not gone up as much as the rent.
Finally, consider how middle-income households spend their income.
I’ve written about this before, but if you look at govt data on consumer expenditures by income and by type you will find that middle-income households (around $60,000 joint) spend the bulk of their income on housing, utilities, car repair (they don’t buy new cars), food, medical expenses, and other necessities.
The typical middle-class (median income) household spends very little on “entertainment,” vacations, etc.
I think one also needs to mention the fear AND OFTEN THE REALITY of nursing home poverty suffered by the “well” spouse. Nursing home care in Mass. is about $10,000 a month or more, so if one of the spouses has to go in to a home, it does not take long to go through middle class savings. Now sure there is Medicaid for the spouse in the home after poverty is reached, but what about the life of the well spouse. This scenario scares many elderly out of their wits, but they cannot afford insurance that can pay this much. That is ONE OF THE 800 pound catch 22s in the discussion!
NG–
You’re right.
The good news is that the Affordable Care Act includes a provision that creates voluntary long-term care insurance.
Beginning in 2014, a small tax will be taken out of your paycheck once a month, and that money will go into a long-term care fund.
Everyone will be automatically enrolled in the program, but if you don’t want to participate, you can opt out.
The amount coming out of your paycheck would be small –small enough that many people will barely notice it.
You have to participate for at least 5 years before you can receive benefits.
Ideally, people will start making contributions when they are very young, and so even though the contributions are small, the miracle of compounding will mean that very small contributions can keep the fund solvent.
The fact that everyone is automatically enrolled unless they opt out means that a large number of relatively young and middle-aged people will be contributing. This is why CBO thinks that the premiums will be very low.
The Dept. of Health and Human Services hasn’t yet worked out the details of premiums and benefits, but the legislation says that when people get to the point where they need long term care (becuase they are chronically ill or disabled) benefits will be no less than $50 a day.
The level of benefits will depend on how much help you need– someone to come in a few hours a day to cook and help you bathe, or 24-hour nursing home care.
The average cost of a nursing home in the U.S. is now $76,000 a year. CBO doesn’t expect that CLASS will pay that much, but health care reformers hope that more and more people will receive long-term care at home, or in “community group homes.”
Even if a person is getting only $1500 a month ($50 a day) that would be a good start toward part-time at-home care.
And if a senior has an extra bedroom and could provide room and board for a care provider, $1500 a month or $18,000 a year would go a long way toward a cash salary . . .
Finally, if enough people participate benefits will be significantly higher.
The problem with private long-term care insurance is that most people don’t purchase it until they are in their 50s, and at that point it is very expensive. This is enforced savings which uses the leverage of time and compoounding.
I’m pretty hopeful about CLASS, though if too many younger people opt out, then we may have to make it mandatory. Going forward, as the boomers age, long-term care is going to be a big problem..
Maggie,
Will this new Class program be able to help already retired elderly??
NG–
No– it’s for people who have put money in for at least five years while working.
There is no way that the program could afford to provide benefits for people who haven’t been contributing.
Ideally, we would have created a savings program for long term care 20 years ago (when the Clintons were trying to reform care.)
But we didn’t. The majority of Americans (boomers and cohorts that are younger than boomers) just weren’t that concerned about long term care–or universal care–at that point in time.
CLASS is a long-term solution for aging boomers –who are now in their early/ mid 40s to early 60s.
AS some one who is on Medicare I can verify that the $550 deductable would be a real problem for many people and the cap of 7500 would destroy a lot of seniors. It is obvious that the idiots on the debt reduction panel are clueless about the real world. It is my understanding that their cuts would save about 3.9 Trillion over several years and that if they would simply let the Bush tax cuts expire it would produce 4 Trillion in revenue. Are there no reasonable people left?
John H.
I agree that at many of the folks on the Fiscal Commission seem to live in a bubble, completely unaware of how little money most seniors have. . ..