Obama Proposes More Healthcare Savings

(MoneyWatch)  President Obama has suggested $313 billion in additional savings that the government could use to fund health-care reform. Added to his earlier proposed "reserve fund" of $634 billion, the new cuts would theoretically produce nearly $950 billion in savings over 10 years. That's close to the $1 trillion that the Administration expects reform to cost--although some observers say it might cost up to twice that much.

To his credit, Obama is talking about hard savings that don't depend on hazy projections of how much information technology or preventive care or some other pie-in-the-sky solution might save. More than $200 billion would come from lower Medicare payments to hospitals. That would include $110 billion to account for expected improvements in hospital efficiency, and $106 billion in reduced "disproportionate share" (DSH) payments to hospitals that take care of an unusual number of poor and uninsured patients.

Another $75 billion would be saved by lowering drug prices. If that means negotiating with pharma companies for prices in the Medicare drug program, Congress would have to amend the law. But OMB Director Peter Orszag was quoted as saying that there are multiple ways to find these savings.

Naturally, hospitals are already reacting strongly to the suggestion that they take a hit of this size. Richard J. Umbdenstock, president of the American Hospital Association, sent a message to AHA members urging them to "push back" against the proposed cuts even before the President announced them in his weekly radio address. And, while Orszag justified the reduction in DSH payments on the basis that an expansion of coverage would reduce the number of charity cases, hospital executives say these cuts could really hurt inner-city hospitals and academic medical centers.

Basing part of the hospital cutbacks on expected increases in efficiency presupposes that hospitals control the care that is provided. That's true to some extent, because nurses and some physicians are hospital employees. But most care is ordered by physicians--and even if they work for hospitals, there's a limit to how much the hospital can guide what they do. Even if the hospital has a strong anti-infection policy or uses checklists to reduce medical errors, the extent to which physicians adhere to the policy varies. And physicians may or may not refer patients or order tests with an eye to conserving resources, but no hospital administrator can tell them what to do.

In the short run, if Obama's cuts are adopted, hospitals might try to compensate by negotiating higher rates from private payers. But to restrain spending growth, other strategies may be required to align physician and hospital incentives. One idea that reformers in Congress are looking at is bundling Medicare payments for procedures. Hospitals would receive a fixed amount for a procedure and have to distribute some of it among the physicians involved in the case. (Whether or not hospitals are capable of doing that in a fair and disinterested manner is a topic for another discussion.) This approach would inevitably lead to cuts in reimbursement for physicians, not just hospitals. Medical suppliers and device makers might also feel the pinch. That would save money, but it's unclear how it might affect patient care.