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Breaking Down Obama's Health Care Cuts

By Ken Terry

Updated on: February 27, 2009 / 5:45 PM EST / MoneyWatch

Under President Obama's budget proposal, about half of the money required to fund his $634 billion "reserve fund" for health reform would come from changes in Medicare and Medicaid spending. Jacob Goldstein of the WSJ Health Blog has dug up a detailed list of these projected savings from 2010-2019 in the budget plan. The biggest savings ($176.6 billion) would come from changing the current method of paying Medicare Advantage plans, which has resulted in CMS paying these insurers 14 percent more per beneficiary than it does for traditional fee-for-service Medicare.

Other major categories include "change Medicare home health payments" ($37.1 billion), "reallocate Medicare and Medicaid improvement funds" ($23.9 billion), "increase and extend rebates on drugs purchased by Medicaid patients" ($19.5 billion), "bundle Medicare payments for hospital and post-hospital care" ($17.8 billion), "create 'quality incentive payments' for hospitals" ($12.1 billion), "allow FDA approval of generic biotech drugs" ($9.24 billion), and "drive down hospital readmission rates for Medicare patients" ($8.43 billion).

Attempts to limit home health care payments have been ongoing since the 1990s but have had little success in the long run. The Medicare Payment Advisory Commission (MedPAC) advised Congress not to give home health agencies a payment increase in 2009. In its report, MedPAC noted that after being cut radically in the 1997-2000 period, Medicare payments for home health care had risen 55 percent from $8.5 billion in 2000 to $13.2 billion in 2006. The number of home health agencies, which had a 15.4 percent average profit margin in 2006, rose from 6,881 to 9,227 during the same period.

A few other comments are also in order:

Experts like Robert Berenson of the Urban Institute have advocated bundling Medicare payments for hospital and post-acute care for years. Yet it remains an untried approach, with uncertain savings.
The same goes for driving down hospital readmission rates for Medicare patients. While readmissions result, in some cases, from poor inpatient care or inadequate discharge planning, it's not clear how CMS will factor case-mix severity into financial penalties for readmissions.
FDA approval of generic biotech drugs is a great idea, considering that the brand-name equivalents can cost up to $200,000 annually per patient. But will it save the government nearly $1 billion a year?

As fascinating as this breakdown were some of the comments on the WSJ blog. Besides the expected predictions that insurers would dump Medicare HMOs and that investors would abandon biotech drug companies, there was a spirited debate about whether specialist physicians are paid too much. One Boston doctor weighed in with the sage observation that specialists deserve their high pay because of their extra training. "Comparing pediatrician to interventional radiologist is like comparing control tower operator to airline pilot," he wrote.

In light of this denigration of primary care, it was interesting to read the excellent article in this week's New England Journal of Medicine by Elliott Fisher, Julie Bynum, and Jonathan Skinner. Entitled "Slowing The Growth of Health Costs--Lessons From Regional Variation," the commentary argues that if physicians across the country practiced more like their colleagues in San Francisco and Minnesota, and less like those in New York and Florida, we could easily get health costs under control. To do that, they point out, health care fragmentation must be reduced, and physicians must be paid differently. Of course, their prescription for reform would reduce specialist incomes, because volume would no longer be the basis of reimbursement, and primary-care physicians would have incentives not to refer patients unnecessarily. But in the long run, patients would be healthier because of better access to primary care and better coordination of care.