NEJM: Proper Medicare spending & saving is moving pendulum

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The shift in the driver of baseline spending growth away from increases in spending per beneficiary toward demographic changes has important policy implications for Medicare, according to a perspective paper published Oct. 6 in The New England Journal of Medicine.

Michael E. Chernew, PhD, from the department of healthcare policy at Harvard Medical School in Boston, and colleagues wrote about the complexities of assessing the potential savings to be gained from further Medicare reform.

“Medicare savings are calculated as the difference between projected spending with new legislation and the current law baseline that's intended to capture what spending would be with no legislative changes,” the authors wrote. “Because the existing baseline delineated by the Congressional Budget Office (CBO) shows an increase in spending (about 5.5 percent per year between 2011 and 2021), savings can be realized without reducing Medicare spending below current levels: spending need only grow more slowly under the new legislation.”

The projections of the baseline and computation of savings under new legislation are known as scoring, which is conducted independently by the Centers for Medicare & Medicaid Services and the CBO.

“It's also important to note that scoring reflects federal spending, not total spending, which includes what beneficiaries pay,” Chernew and colleagues wrote. “So initiatives that shift costs from the Medicare program to beneficiaries will be scored as generating savings, even if total healthcare spending, including out-of-pocket payments by Medicare beneficiaries, is unchanged.”

They mentioned this because Congress has repeatedly delayed fee cuts; the gap between the target and spending has grown, resulting in a baseline including a 30 percent reduction in physician fees in 2012. “CBO scoring suggests that the cost of simply freezing physician fees instead of cutting them would be about $300 billion over 10 years. Thus, if physician fees don't fall, proposed Medicare reforms must cut at least $300 billion over the next decade before they'll be scored as saving a dime.”

However, including further fee cuts to providers beyond those specified in the Patient Protection and Affordable Care Act (PPACA), the magnitude of such savings—when officially scored—is likely to fall short of the $300 billion associated with replacing sustainable growth rate cuts with a freeze on physician fees, the authors wrote.

For the policy implications, the authors stated two important implications:
“First, our efforts to contain total spending should focus on meeting the ambitious projections for baseline per-beneficiary spending growth, rather than aiming to derive significant savings from even lower per-beneficiary spending growth,” the authors wrote. “The PPACA baseline, if we can achieve it, will represent an unprecedented slowdown in Medicare spending per beneficiary. And even if we succeed, total Medicare spending (program spending plus beneficiary share) as a proportion of our national economy will still rise with the influx of baby boomers.”

Second, assuming that savings from other parts of the budget will be used to reduce the deficit, the policy question becomes how much to raise taxes to finance the demographic trend, how much to cut provider fees, and how much to shift costs (or the responsibility for controlling costs) to beneficiaries. “These are not comfortable realities, but they must be addressed,” the authors concluded.