For Medicare, a Game of Choose Your Bureaucrat

June 9, 2011

The battle over how to fix Medicare comes down to which unelected bureaucrats you trust more to impose painful reforms

Physicians, here’s a question for you:

Who’s worse to deal with: Medicare or private insurers?

The answer to that question, I think, will determine which Medicare cost-reduction plan is worse for physicians - the Republican plan as embodied in the Rep. Paul Ryan budget, or President Obama's plan. Make no mistake: Both sides have plans to reduce the unsustainable growth of Medicare costs. (In fact, Obama’s plan is already taking effect; it’s part of the health reform law that Republicans have derided as rationing.) It’s not at all clear whether Obama’s plan would reduce costs enough to close Medicare's gaping budget gap. The Ryan plan would certainly put Medicare on more certain financial footing but only by fundamentally changing its mission.

Both sides’ plans amount to bad news for physicians. Which plan you prefer comes down to whether you trust the government or the private sector to administer the brutal corrective action necessary to make Medicare solvent.

First, the Obama plan.

The health reform law includes an Independent Payment Advisory Board for Medicare whose job is to recommend ways to reduce costs. In the past, an agency within Medicare called MedPAC - the Medicare Payment Advisory Commission - was tasked with this responsibility. But MedPAC's recommendations are meaningless unless Congress enacts them, whereas IPAB's determinations become policy unless Congress overrules them. Since inertia is Congress' default position, IPAB figures to be a pretty powerful board indeed.

And IPAB will have to administer strong medicine if it’s to come close to solving Medicare’s problem. Health costs now account for 26.5 percent of the federal budget, and growing, growing, growing. (When Medicare started, health costs amounted to 2.6 percent of federal spending.) The overseers of Medicare’s trust fund recently acknowledged that it will be busted by 2024, five years earlier than previously believed. No wonder, then, that critics of “Obamacare” are lambasting the board as a group of unelected bureaucrats charged with rationing seniors' healthcare. But whether IPAB could cut payments to providers enough to stabilize Medicare without driving doctors away for good is an open question.

The reform law also includes Accountable Care Organizations, Medicare’s experimental new payment model that will begin next year. The ACOs - groups of providers that will work together to provide comprehensive care to specific populations - will get to share a portion of any money it saves Medicare, provided the ACOs also meet some 65 clinical quality benchmarks. No one knows if it will work but skeptics are legion (and I'm among them). The Government Accountability office estimates that ACOs will save Medicare about $800 million over its first three years, even after paying out about $500 million in shared-savings bonuses to ACOs. Yet the GAO is expecting only about 150 ACOs to form during the initial period, covering no more than 4 million of the 45 million patients eligible to join them. And given the industry’s response to CMS’ proposed ACO regulations, even that estimate is probably ambitious.

In any event, all estimates about the expected efficacy of ACOs to drive quality up and costs down are pure speculation. Medicare’s historic function is to pay for care, period, not to drive quality, nor has it ever had meaningful controls on how much it would spend. We’re in uncharted waters. No one knows how much these measures will save Medicare.

The Republicans' plan, meanwhile, is simple and drastic. It converts Medicare’s basic function of a direct purchaser of healthcare services into an administrator of vouchers that beneficiaries would use to buy insurance on the private market. Because the value of the vouchers would be capped, regardless of the actual costs of care, the plan has the virtue of cost certainty. And since Medicare’s historic profligacy may very well be the biggest single factor driving medical inflation, such a change could do more than anything else to bend the cost curve down.

Yet it is no exaggeration to say that the Ryan plan ends Medicare “as we know it.”

And how would private insurers find profit margins where the Medicare trustees see only red ink? By charging beneficiaries more in premiums and copays year after year; by paying providers less; and by declining to pay for certain services that beneficiaries want and their providers deem necessary.

By doing exactly the things that Republicans have repeatedly called rationing.

The difference between the Republicans’ and the Democrats’ plans? The former would let unelected private sector bureaucrats carry out this unpleasant business while the latter would let unelected government bureaucrats do it. Medicare might still go broke under the Democrats’ plan. Beneficiaries might go broke under the Republicans’.

But under any plan, you, doctors, will be paid less.

The real debate is not over whether to ration - that's already been decided in the affirmative by virtue of the dire state of Medicare finances and the fact that no other solution exists, except massive tax hikes - but over who should do the rationing.

Choose your bureaucrat.