Another Budget Blow to Health 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 is 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.