CMS: Medicare Faces Unsustainable Rise in Spending

Published June 21, 2012

Two reports released by the Centers for Medicare and Medicaid Services show Medicare is fiscally unsustainable as currently structured.

One report, released in April by Medicare’s Trustees, used the assumptions built into current law. Another, released by CMS actuary Richard Foster in May, used alternative fiscal assumptions based on past Congressional activity. The two reports agree on the unsustainable nature of Medicare’s current approach, according to Grace-Marie Turner, president of the Galen Institute.

“People are sticking their heads in the sand if they refuse to deal with Medicare. We cannot avoid this problem. Every new report emphasizes that in the long term, reforming Medicare is not optional, but must be done,” Turner said.

Demographic Challenge

Jane Orient, executive director of the American Association of Physicians and Surgeons, says Medicare’s future is very much at risk.

“It’s partly a matter of demographics,” Orient said. “It’s partly a matter of the huge increase in medical spending that comes about when people are not paying their own bills and have no reason even to care what the bills are, and when their providers have every incentive to get as much as the program will pay them.”

Doctor Payment Cuts Assumed

Kathryn Nix, a policy analyst for the Heritage Foundation, said the fiscal scenario has worsened because of the unwillingness of Congress to accept scheduled cuts to physician payments.

“The Trustees Report comes out every year, and in it the Trustees are required to assume that current law that is on the books will go into effect as it is written. The most recent example for which we have historical evidence of that not happening is with the Sustainable Growth Rate (SGR) update to physician payments under Medicare,” Nix said. “Since 2003 the SGR would have required a reduction in physician payments, and Congress has overridden that payment every single year. If that was allowed to go into effect in 2013 like it’s scheduled to do, physicians would see about a 30 percent decrease in their payment.”

“Now, obviously,” Nix continued, “Congress is not going to allow that to happen because we all know if you cut physician payments by 30 percent a lot of doctors aren’t going to be able to take Medicare patients any more. So we can say with a pretty large amount of certainty that that update isn’t going to happen. But since it’s on the books, the Trustees still build that into their report.”

Price Control Failures

This fictitious treatment of Medicare reflects Congress’s and the White House’s refusal to accept responsibility for tough decisions, Nix says.

“Congress has a tendency to pass legislation such that the bonuses, the perks, and the pretty parts for Americans happen right away, but then the hard part, the painful part, is going to happen much later,” Nix said. And that’s what we see happen with cost containment measures in Medicare, is that is stuff that happens down the road. That’s assuming that future Congresses are going to have the political will to let this happen.”

Nix says the responses under President Obama’s health care law amount to price controls and delegating the rationing decision process to unelected bureaucrats.

“We’re perpetuating a failed strategy of saving money in Medicare. Administrative price-setting doesn’t work. We’ve seen it before, and no matter how many different ways you try it, it’s just not going to work,” Nix said.

Orient agrees.

“It points to the failure of the price fixing model,” said Orient. “The government really is in a box. The Congress can’t let the cuts go through, or else Medicare recipients will lose access to medical care, but they can’t really repeal it because it will cause an immediate increase in the budget deficit. So what they do always is kick the can down the road and pretend that there will be some change in payment methodology.”

Individualizing Medicare

Orient says reforms should bring Medicare down to an individual level, where recipients are most conscious of price differences.

“I think that we have got to get the government out of medicine,” Orient stated flatly. “Just the compliance requirements of Medicare mean that probably 40 percent of the money that’s spent on Medicare goes to something other than care to patients. We would be much better off just taking all of the money that is going through Medicare and just giving it to the beneficiaries, saying ‘This is your allotment; figure out what to do with it.’

“If you really wanted to cut administrative expense, you would go back to catastrophic or casualty insurance, where only a very small fraction of medical bills went to the third-party payer,” she added.

What would work is to give patients control at the point of purchase, Nix says.

“There are lots of proposals for moving to [an insurance] premium support system, which would allow competition to bring costs down,” Nix said. “But if you look at these reports and conclude they represent the best-case scenario, it’s still unsustainable. Without change, it’s just not going to work.”

Internet Resources

Medicare Trustees: 2012 Annual Report:

CMS Actuary: Projected Medicare Expenditures under Illustrative Scenarios with Alternative Payment Updates to Medicare Providers: