Eye on Washington

Chad Mulvany

When it comes to achieving savings in the Medicare and Medicaid programs, Republicans and Democrats in Washington aren't as far apart as you might think.

It's true that Republicans are furiously trying to upend the Affordable Care Act by every means at their disposal, while Democrats are just as frantically trying to defend and implement the law. However, the disagreement centers on how coverage expansion occurs, not on whether provider payments should be cut in the process. As evidence of this, early discussions among House Republicans related to a replacement bill (in the event the Supreme Court overturns the Affordable Care Act) would use provider payment savings included in the existing bill as the basis for a fix of the sustainable growth rate (SGR) and deficit reduction.

Further evaluation of recent Republican and Democratic proposals related to Medicare and Medicaid spending also bear out this unexpected harmony. Both sides have identified similar areas of opportunity for short-term savings as part of various deficit-reduction plans. For the longer term, although opinions differ considerably regarding the mechanisms for cost control, there is consensus on how fast federal healthcare outlays for Medicare should be allowed to grow.

Given that this is an election year, significant action on either short- or long-term measures is unlikely. However, what's likely to happen after the election is a different story, so providers should understand their exposure and prepare for significant cuts starting as early as 2014.

Short-Term Targets

The past 24 months have seen a number of proposals suggesting Medicare and Medicaid reductions to further deficit reduction. The exhibit on page 33 compares a menu of options House Majority Leader Eric Cantor was willing to consider during this summer's debt ceiling debate with a deficit-reduction plan President Obama released in September.a The only real area of divergence between the plans is in the scale of the savings considered from the federal Medicaid match.

None of the proposed reduction target areas are surprising. The Medicare Payment Advisory Commission has discussed most of them at one point or another as areas of opportunity. Safety-net hospitals will experience the brunt of the cuts due to reductions in both Medicaid payments and payment for Medicare bad debt and indirect medical education. Rural hospitals and systems with post-acute care assets will also experience significant payment reductions. Given the degree of alignment between the two political parties, it's only a matter of time before something breaks the logjam in Washington and some version of these proposals becomes law.

Exhibit 1


Long-Term Outlook

There is far less unanimity between the parties regarding a long-term cost-control mechanism. Democrats prefer the Independent Payment Advisory Board (IPAB), which was included in the Affordable Care Act. The IPAB is envisioned as a MedPAC with rate-setting authority. The IPAB takes effect in 2015, but it does not apply until 2018 for hospitals and other providers whose market basket updates have been adjusted for productivity under the Affordable Care Act. Starting in 2018, under current law, if expected per capita Medicare cost growth were to exceed GDP plus one percentage point, the IPAB would be tasked with reducing cost growth by the lesser of excess cost or 1.5 percentage points.b The president's debt ceiling plan alters this requirement slightly by tightening the cost growth target to GDP plus 0.5 percentage points, which is more likely to trigger payment reductions.

By contrast, Republicans tend to favor the plan proposed by Sen. Ron Wyden (D-Ore.) and Congressman Paul Ryan (R-Wis.) as the framework for their long-term cost-control efforts.

Starting in 2022, under this plan, a Medicare exchange would offer beneficiaries choices of either commercial Medicare plans or traditional Medicare. Premium support to purchase either a private plan or traditional plan would be available. It would be based on the second-least-expensive option available in a geographic region. Medicare spending would be indexed to economic growth (GDP plus 1 percent). Excess costs would be passed on as payment cuts to the industry sectors (e.g., providers, pharmaceutical companies) responsible for the growth.

The status of both mechanisms is politically tenuous. Should President Obama lose his bid for reelection, the IPAB could be repealed. The Wyden/Ryan plan faces an even steeper challenge. It would require Republicans to maintain the House, gain control of the Senate and White House, and then pass Wyden/Ryan using reconciliation.

Dwelling on these political challenges misses a more significant point. Despite disagreeing on the means to curb Medicare cost growth (i.e.,targeted cuts overseen by a panel of technocrats versus managed competition in a highly regulated market), both sides have common ground in the ends. Both proposals attempt to limit Medicare cost growth to GDP plus "X." President Obama's proposal provides enough detail for a rough analysis. A hospital with about $40 million in 2012 Medicare revenue could see inpatient and outpatient payment reduced by $465,000 in 2018. The Wyden/Ryan plan could have a far more severe impact. Although there is insufficient detail to model the proposal at the provider level, it appears to set no cap for Medicare payment reductions to providers.

Exhibit 2


Given the political uncertainty around a long-term cost-control mechanism, it is understandable that providers have not considered the potential impact. However, both Republicans and Democrats agree on the need to peg Medicare expenditure growth to GDP to ensure the nation's long-term fiscal stability. It is only a matter of time, crisis, or political circumstance before it happens.

Next Steps for Providers

The political environment will be ripe for deal making in the period after the 2012 election. In a short period, Congress will likely need to negotiate an extension of the Bush era tax cuts, some form of SGR patch, and an increase in the federal debt ceiling.

As part of a deal, reductions in payment will squeeze already narrow margins, forcing providers to move from managing operating costs to redesigning their organizations' overall cost structures. These efforts should include reassessing service offerings, reengineering how remaining services are delivered, and reducing overall administrative costs.

Reassessing service offerings. Noncore service lines and activities will need to be eliminated as organizations can no longer afford to be "everything to everyone." Services targeted for elimination should include those identified as providing low value to the organization and purchasers of health care that have little chance for improvement. Nonstrategic assets should be monetized.

Reengineering care delivery. Organizations need to focus on making sure the care they deliver is cost-efficient for the organization and cost-effective for purchasers. Care teams will need to reengineer internal processes to minimize waste and patient hazards, and the organization will need to collaborate with providers across the care continuum to ensure that avoidable admissions and readmissions are minimized and that duplicative testing and procedures are eliminated. Achieving these outcomes will require a cadre of engaged physician leaders at all levels of the organization to orchestrate process reengineering.

Reducing administrative costs. Administrative services that do not add value to care delivery should be pooled or outsourced where opportunities exist. Organizations also should explore population-health-management pilots with their own heavy users of health care to gain experience with this strategy and better manage benefit costs.  

Chad Mulvany is a technical director in HFMA's Washington, D.C., office, and a member of HFMA's Virginia Chapter.



a. For the menu of options Cantor contemplated in July 2011, see Norman, J., and Reichard, J., "Cantor Document Spells Out $353 Billion in Potential Health Program Cuts," CQ HealthBeat, July 12, 2011; Obama's deficit reduction plan is available here

b. For 2015, 2016, and 2017, the IPAB's jurisdiction excludes hospitals and other providers subject to productivity update reductions under the Affordable Care Act. During that period, the growth rate target is the average of the consumer price index for all urban consumers (CPI-U) and the Medical CPI-U. 

Publication Date: Monday, April 02, 2012

Login Required

If you are an existing member, please log in below. Username and password are required.



Forgot User Name?
Forgot Password?

If you are not an HFMA member and would like to access portions of our content for 30 days, please fill out the following.

First Name:

Last Name:


   Become an HFMA member instead