You Heard It Here First: Medicare Spending Slows

Sunday, a New York Times editorial confirmed that “Since January 2010 the growth in Medicare spending has actually slowed to an annual rate of about 4 percent, less than half the annual rate for the previous decade. No one is quite sure why, but one theory holds that hospitals are scrambling to squeeze a lot of fat out of the system even before the health care reforms pressure them to do it.”

HealthBeat first reported the slowing of Medicare spending to 4 percent on August 12, noting that: “While our elected representatives wrangle over slicing entitlements, virtually no one seems to be paying attention to an eye-popping fact: Medicare reimbursements are no longer accelerating at a break neck-pace. The new numbers should be factored into any discussion about healthcare spending:  From 2000 through 2009, Medicare’s outlays climbed by an average of 9.7 percent a year. By contrast, since the beginning of 2010, Medicare spending has been rising by less than 4 percent a year. On this, both Standard Poor’s Index Committee and the Congressional Budget Office (CBO) agree. (S&P tracks healthcare spending with the help of Milliman Inc., an independent actuarial and consulting firm.)

In that post, I quoted Zeke Emanuel, an oncologist and former special adviser for health policy to the White House Office:  “This is not mere chance: this is directly related to the initiation of health care reform.”  It is not the result of reform, Emmanuel emphasized.  The reform measures that will rein in Medicare inflation have not yet been implemented.  But, he explained, providers are “anticipating the Affordable Care Act kicking in.”  They can’t wait until the end of 2013: “They have to act today.  Everywhere I go,” Emanuel, added, “medical schools and hospitals are asking me, ‘How can we cut our costs by 10 to 15 percent?’

“This is doable, since there is so much fat in the system” added Emanuel, a doctor who is well aware of just how often pricey, but unnecessary tests and procedures hike medical bills, while exposing patients to needless risks.

At the time, the mainstream media was ignoring the deceleration in Medicare inflation. Much of the press was caught up in reporting that Medicare spending was “out of control.”  Acknowledging the slow-down would undermine the fear-mongering.

When I published the post in August, former OMB director Peter Orszag e-mailed me to say that he was glad I written about it. Orszag he was well aware of the slow-down, and was planning to write about it himself. Within a few days, he published an Op-ed on Bloomberg.

There, Orszag explained:  “We don’t yet have enough data to tell for sure what’s causing the recent deceleration in Medicare spending — or whether it will last. But some evidence suggests it may be a shift toward value in the health-care sector. Various hospital executives have told me they have already begun to prepare for less generous reimbursement from Medicare as the new federal health-care-reform law takes effect and there is a greater focus on value. They are therefore trying to become more efficient now. That’s the discussion taking place in the strategic planning process at Mount Sinai Medical Center in New York, where I recently joined the board of directors.

“The Mount Sinai experience may be instructive,” he continued. “From September 2010 to May 2011, the hospital’s Medicare revenue rose only 2 percent over the previous year — in part because the number of inpatient cases fell. Why was that? One important reason was that the number of patients readmitted to the hospital within 30 days of discharge was 5 percent less than what it had been the previous year.

“Reducing readmissions is one of the objectives of the federal health-care-reform law enacted last year. Historically, nearly 20 percent of Medicare patients have been readmitted to a hospital within 30 days of being discharged, in part because their doctors and other health-care providers have not managed patient handoffs very effectively. The Affordable Care Act included, among other remedies, a modest penalty for hospitals with high readmission rates.

“At Mount Sinai, patients at risk of rehospitalization are now identified when they first come in and assigned to a special team of doctors and nurses that works to minimize that risk. Apparently, the effort is working. And as more hospital systems begin to use information-technology systems to measure and manage value, we could see progress in other areas of patient care as well.”

The Mt. Sinai example is extraordinarily important because it shows that hospitals can rein in costs. This suggests that we don’t need to slash Medicare benefits. Over the next year or two, if more hospitals respond to the financial carrots and sticks embedded in the Affordable Care Act, and begin squeezing some of the waste out of the system, many could follow Mt. Sinai lead, and reduce annual growth of Medicare spending on hospital care to 2% — or less. At that point Medicare’s outlays for hospital care would be growing no faster than GDP, in other words, they would be sustainable.

Of course,  spending on hospital services represents only about one-third of the nation’s Medicare bill.  More importantly, as Orszag points out, “even if the slowing does represent the early stage of a shift toward value and reducing the fat in the health-care system, the improvement will not be sustainable unless certain further changes are made in the existing payment system.”  Today, if a health care provider becomes more efficient in treating Medicare patients, it is punished: as Mt. Sinai reduced readmissions, its Medicare revenues fell.  Medicare needs to revise its payment system so that hospitals and doctors are rewarded for value–better care at a lower price.

The good news is that the Affordable Care Act contains many provisions that would do just that: for example, physicians who create medical homes that keep patients out of the hospital will receive bonuses; doctors and hospitals that form Accountable Care Organizations will share in the savings.  This, in turn, means that surgeons will have an incentive to avoid using over-priced “cutting edge” that are, in fact, no more effective than the older products they are trying to replace, and hospitals will have a reason to pay close attention to which patients are actually helped by more expensive drugs and which patients do just as well on tried and true medications.

Finally, reform legislation puts an emphasis on patient safety.  Today, measurable medical errors that harm patients cost roughly $17 billion a year according to a study published in the April issue of Health Affairs. Going forward, as the Affordable Care kicks in, hospitals will be penalized for avoidable errors. Starting in 2014, Medicare will cut payments to hospitals with the highest rates of preventable patient injuries by 1 percent. At the same time, hospitals with lower infections rates will be acknowledged with higher payments.

Moreover in April, HHS Secretary Kathleen Sebelius announced a new $1 billion funding initiative called Partnership for Patients that is designed to achieve two goals: reduce preventable injuries in hospitals by 40 percent; and cut preventable hospital readmissions by 20 percent. “Reaching those targets would save up to $35 billion over the next 10 years,” Sebelius said, adding that $10 billion of that would come from Medicare savings. “That’s a return of up to $10 for each dollar we’re investing.

Keep in mind, today, it is estimated that one-third of Medicare dollars are squandered. Given the amount of waste clogging the system, it should be possible to trim growth in Medicare spending per patient by more than 2 or 3 percent.  Over time, as baby-boomers age, the savings could easily pay for the increase in the number of Medicare patients. And private insurers are sure to follow Medicare’s lead. Other nations provide high quality care for less. We can too.

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