Some of the largest cuts in President Obama’s proposed package of Medicare savings target areas where Medicare does, in fact, over-spend. Unfortunately, these are the reforms that Congress is least likely to adopt. In each case a powerful lobby representing those who profit from Medicare’s largesse will howl, and many legislators may well bow to their wishes. Nevertheless, it is useful for the President to call attention to areas where Medicare can save money—without cutting benefits.

• Prescription Drugs: The President’s plan would save $135 billion over ten years, starting in 2013, by requiring that drug companies provide additional discounts, or rebates, to Medicare for prescription drugs bought by low-income beneficiaries enrolled in the Part D Low-Income Subsidy program. In the past, I have written about the drug industry’s double-digit profit margins. In theory, the industry needs these margins in order to innovate. In fact, the number of new and effective drugs coming out of the pharmaceutical industry has slowed in recent years. Too often, they focus on creating “me too” drugs that they know will find a large market.

Alternatively, they develop cancer drugs that can be sold for a $100,000 to a small, desperate market of people who might live another month or two if a doctor prescribes the new nostrum.  As Dr. Francis S. Collins, director of the National Institute of Health told the New York Times not long ago, “the drug industry’s research productivity has been declining for 15 years,” in large part because the industry lacks the “will” to follow up on “promising discoveries” that might lead to treatments for diseases like Parkinson’s. We cannot continue to pay exorbitant prices for prescription drugs. This is a step in the right direction.

• Nursing Homes, Home Health Agencies and Rehabilitation Hospitals: The new deficit reduction package would reduce overpayments to these institutional providers over 10 years, saving $42 billion. According to the Medicare Payment Commission March 2011 report, between 2008 and 2009, increases in payments to skilled nursing facilities (SNFs) outpaced increases in providers’ costs. In 2009, the average Medicare margin for freestanding SNFs was 18.1 percent. Margins vary widely, but MedPAC noted “We also examined relatively efficient SNFs and found that it is possible to have costs well below average, above-average quality, and more than adequate Medicare margins.” In other words, as we have seen in the case of hospitals, higher quality care and lower provider costs go hand in hand, leaving these more efficient providers with comfortable profit margins.

Payments to Home Health Agencies and Inpatient Rehabilitation Facilities follow the same pattern. MedPAC’s March 2011 report shows that Medicare payments to home health agencies “have consistently and substantially exceeded costs.” In 2009, Medicare margins for freestanding providers averaged 17.7 percent. Meanwhile, MedPAC reports “widespread fraud” in this sector. As for rehabilitation hospitals, MedPAC’s 2010 data book shows that from 2002 through 2008 profit margins at free-standing facilities averaged more than 18 percent.

• Teaching Hospitals: Here again, MedPAC’s analysis suggests that Medicare is overpaying. Medicare is the single largest funder of graduate medical education (GME), laying out $9.5 billion in 2009. The goal is to compensate teaching hospitals for the indirect costs stemming from inefficiencies created from residents “learning by doing.” But MedPAC reports that these Indirect Medical Education (IME) add-on payments are significantly greater than the additional patient care costs that teaching hospitals experience. For example, MedPAC’s June 2010 report reveals that in 2009, Medicare paid $3.5 billion more than the empirically calculated indirect clinical costs associated with teaching. The Fiscal Commission also recommended reducing the IME adjustment. The President’s proposal would trim the IME adjustment by 10 percent beginning in 2013, and save approximately $9 billion over 10 years.  If one assumes that the $3.5 billion overpayment in 2009 was typical, Medicare would need to cut IME adjustments by $35 billion over 10 years in order recoup lost tax dollars. Using that benchmark, a $9 billion cut does not seem Draconian.

Nevertheless, Dr. Darrell Kirch, president and CEO of the Association of American Medical Colleges,  charges that  lower payments to teaching hospitals will “exacerbate the national physician shortage.”   Not everyone agrees, however, that we face a doctor shortage. While there is a widespread consensus that we need more primary care physicians, many suggest that we do not need more specialists in most areas. Moreover, when it comes to shortages, the biggest problem is not how many doctors we have, but how they are distributed. Having more physicians in Manhattan and Miami will not solve the nation’s health care problems. Finally, the Affordable Care Act provides generous funding to train more nurse-practitioners, and to provide loans and scholarships for many who could not otherwise afford nursing school.

As I have reported in the past, according to Managed HealthCare Executive “nurse practitioners are the only healthcare professionals” who are pursuing primary care in “increasing numbers.” We need health care providers who want to be on the front line of managing chronic disease. NPs don’t seem deterred by the relatively low pay. Wealth is relative: while NPs, like most professionals, would appreciate raises, they are not comparing their incomes to the $450,000 that an orthopedic surgeon might earn. This may help explain why research published in BMJ shows that patient satisfaction is often higher among patients who see NPs.

In addition, under the Affordable Care Act, federally qualified health clinics will expand their capacity by 50 percent and many will be staffed by nurse-practitioners, as they are today. Clinics that are open “after hours” will care for many of the patients who, today, receive most of their care the most expensive way possible—in an ER. Community clinics will provide far better continuity of care for seniors and others trying to manage chronic diseases.

Meanwhile NPs are also specializing in areas such as acute care, gerontology, family health, neonatology, pediatrics, anesthesiology, mental health and nurse midwifery where they can help care for the newly insured.

• Strengthening the Independent Payment Advisory Board (IPAB) In April I wrote about IPAB, debunking some of the myths about the board and explaining why we need it. President Obama would require the board to recommend Medicare changes to Congress if the program’s growth rate exceeds that of GDP by 0.5 percentage points, rather than one percentage point as called for by the Affordable Care Act. IPAB would not be able to recommend reforms that cut benefits, shift costs to seniors or ration care. Nonetheless,  this recommendation, like the cuts listed above, will be exceedingly controversial. Anytime Medicare trims spending——someone’s income stream is cut.

In part 2 of this post, I will talk about ill-advised Medicare reforms in the President’s new plan to reduce the deficit. Sadly, many of these are more likely to find support in Congress.