Medicare Actuary's Reform Report, Part II

(MoneyWatch)  Besides estimating that the Senate reform bill would slightly increase U.S. health expenditures over the next decade, a report from CMS' chief actuary, Richard Foster, also said that the proposed Medicare cuts may not be achievable and that they pose a threat to the adequacy of care available to seniors. The Republicans, predictably, have pounced on this report as evidence that the reform legislation is as bad as they've said it was all along.

The issue of the reform bill raising costs was addressed in a previous post. But Foster's contention that the reductions in Medicare spending might endanger the program require additional discussion. According to the chief actuary, the $493 billion cut over 10 years would mean that about a fifth of hospitals, nursing homes, and home care agencies would lose money and that some institutions might stop participating in Medicare. Democrats responded by saying that hospitals rarely drop out of Medicare and that the reform measure would provide them with millions of newly insured patients. The actuary himself estimated that the reform measure would lead to coverage of about 33 million people who would otherwise be uninsured.

Considering that bad debt and charity care are among hospitals' chief worries, it would seem that this increase in the number of insured patients would improve their financial picture. As for dropping out of Medicare, hospitals have jumped through many hoops to avoid being excluded from the program. Just look at the history of the Anti-Kickback and Stark anti-self-referral laws. And how could a nursing home or home care agency exist without Medicare?

As for the possibility that hospitals could go bankrupt as a result of the Medicare cutbacks, let's look at a little recent history: At the end of last year, about half of all hospitals were reportedly in the red. By the end of the second quarter, in the depths of the worst recession since the Big One, 80 percent of them were profitable. Overall, the median profit margin of hospitals in the second quarter was 8.4 percent. Can they afford to give up a small percentage of the money they expect to receive from Medicare over the next 10 years? Aside from safety-net hospitals, it would appear that most can.

It's also important to view the CMS actuary's report in a long-range context. The Senate bill's provisions to restrain Medicare costs and tax generous insurance plans "would have a significant downward impact on future health care cost growth rates," the report said, but those gains would be outweighed in the initial years as newly insured people sought to get more health care. In other words, Foster was describing the well-known phenomenon of "pent-up demand": When people who have been uninsured get coverage, they immediately try to obtain the care they couldn't afford earlier. But as they and their physicians get their health conditions under control, there is every reason to think that their demand for services will decline.

What neither the CMS actuary nor the CBO can measure right now are the effects of delivery-system reforms that would be tested if health reform passes. Moreover, the proposed Medicare advisory commission could have an impact on costs-but only if several provisions limiting its reach are dropped from the bill.