Medicare Spending Slows as Hospitals Improve Care: Peter Orszag

Aug. 24 (Bloomberg) -- And now for some good news: Medicare spending growth has been slowing noticeably. So far this fiscal year, expenditures have actually declined slightly, according to the Congressional Budget Office.

Part of the decline this year reflects timing shifts in certain Medicare payments, which will soon be reversed. Even adjusting for these shifts, though, Medicare spending is still up less than 4 percent so far this year.

The 2011 numbers come on the heels of relatively slow growth in 2010 as well. Last year, Medicare spending rose just a little more than 4 percent.

Compare this with an almost 12 percent average annual growth rate in Medicare spending since the early 1970s. During those four decades, there were only four years in which costs rose by less than 5 percent -- and three of those four years were in the late 1990s, when payments were cut back as part of the 1997 budget deal.

We don’t yet have enough data to tell for sure what’s causing the recent deceleration in Medicare spending -- or whether it will last. But some evidence suggests it may be a shift toward value in the health-care sector. Various hospital executives have told me they have already begun to prepare for less generous reimbursement from Medicare as the new federal health-care-reform law takes effect and there is a greater focus on value. They are therefore trying to become more efficient now. That’s the discussion taking place in the strategic planning process at Mount Sinai Medical Center in New York, where I recently joined the board of directors.

Trimming Medical Expenses

To some degree, the Medicare slowdown also reflects the weak economy. Spending increases for people with private insurance have also slowed, as consumers have cut back on everything in the past couple of years, including health care. Even though copayments and deductibles in Medicare are usually small, Medicare beneficiaries, too, seem to be having fewer elective procedures and unnecessary doctor visits. This year, for example, Medicare has seen a reduction in the number of costly hip, knee and other major joint replacements, which are sometimes more a choice than a necessity.

Medicare’s growth slowdown has been much greater than that of private health insurance, however, as Maggie Mahar has noted on the Century Foundation’s Health Beat blog. In the 12-month period that ended in June 2011, Standard & Poor’s index for commercial health insurance rose 7.5 percent, while its Medicare index rose only 2.5 percent. The S&P data show that Medicare spending growth has been falling fairly steadily over the past 18 months.

So why are we seeing an especially rapid decline in Medicare growth?

The Mount Sinai experience may be instructive. From September 2010 to May 2011, the hospital’s Medicare revenue rose only 2 percent over the previous year -- in part because the number of inpatient cases fell. Why was that? One important reason was that the number of patients readmitted to the hospital within 30 days of discharge was 5 percent less than what it had been the previous year.

Reducing readmissions is one of the objectives of the federal health-care-reform law enacted last year. Historically, nearly 20 percent of Medicare patients have been readmitted to a hospital within 30 days of being discharged, in part because their doctors and other health-care providers have not managed patient handoffs very effectively. The Affordable Care Act included, among other remedies, a modest penalty for hospitals with high readmission rates.

At Mount Sinai, patients at risk of rehospitalization are now identified when they first come in and assigned to a special team of doctors and nurses that works to minimize that risk. Apparently, the effort is working. And as more hospital systems begin to use information-technology systems to measure and manage value, we could see progress in other areas of patient care as well.

It is much too soon to know whether the Medicare slowdown we’re seeing this year is a temporary blip or the beginning of a new era. But even if the slowing does represent the early stage of a shift toward value and reducing the fat in the health-care system, the improvement will not be sustainable unless certain further changes are made in the existing payment system.

Penalty for Quality

Reimbursement from Medicare is still primarily based on how many services hospitals perform rather than on how well they care for patients, so hospitals are often financially penalized for improving value and quality. The Mount Sinai program to reduce readmissions, for example, is costly for the hospital both because of the extra expense of running it and because fewer readmissions means less revenue. Ken Davis, the president and chief executive officer of Mount Sinai, says the hospital won’t be able to afford continuing the successful program if the financial incentives remain so skewed against it.

The health-care law includes a variety of provisions meant to shift Medicare’s payment system toward a focus on quality. Yet many of these aspects of the law are under attack in Congress. It is therefore important for the new supercommittee - - created by the recent debt-limit deal to find $1.5 trillion in further savings in the federal budget -- to protect and even strengthen the effort to base the Medicare payment system on value.

Another innovation of the Affordable Care Act is the Independent Payment Advisory Board, a panel of health-care experts charged with devising proposals to reduce Medicare spending growth and boost the quality of care. Many health-care providers are vehemently opposed to this board, because they fear it will be an ax that cuts too bluntly, making their financial condition even more precarious. But blunt spending reductions wouldn’t require a new board. Congress has been adept at ratcheting down payments, but it has struggled with the challenge of shifting toward value-oriented payments. The payment advisory board is intended to take some of the politics out of the effort.

Those doctors and hospital administrators who are already shifting their efforts toward greater health-care value may therefore want to reconsider their stance toward the advisory board. With Congress in gridlock, it is one of the few mechanisms we can use to reward their efforts.

In any case, the best way for health-care providers to keep the board from making any changes to Medicare is to ensure that the growth in spending stays low.

(Peter Orszag is vice chairman of global banking at Citigroup and a former director of the Office of Management and Budget in the Obama administration. The opinions expressed are his own.)

To contact the writer of this article: Peter Orszag at

To contact the editor responsible for this article: Mary Duenwald at

    Before it's here, it's on the Bloomberg Terminal.