How To Finance Reform: Hold Hospitals ‘To Cost And Quality Promises’

On Saturday, the White House identified “proposals that will contribute another $313 billion over 10 years to paying for health care reform.” Obama’s budget had previously identified $635 billion in new revenues and savings that could be used to finance reform, and his latest proposal of cutting “more than $200 billion in expected reimbursements to hospitals over 10 years” would seed nearly $950 billion and almost cover the full cost of health care reform.

The White House is proposing the following changes:

Incorporate productivity adjustments into Medicare payment updates: Productivity in the U.S. economy has been improving over time. However, most Medicare payments have not been systematically adjusted to reflect these system-wide improvements.

Reduce subsidies to hospitals for treating the uninsured as coverage increases: Instead of paying hospitals to treat patients without health insurance, we should give people coverage so that they have insurance to begin with. As health reform phases in, the number of uninsured will go down, and we would be able to reduce payments to hospitals for treating those previously uncovered.

Pay better prices for Medicare Part D drugs: For example, drug reimbursement could be reduced for beneficiaries dually eligible for Medicare and Medicaid. The Administration is working with the Congress to develop the most appropriate policy to achieve these savings.

Speaking out on CBS’s Face The Nation, Sen. Mitch McConnell (R-KY) called the proposal “extremely controversial” and predicted that “you’re going to hear from every hospital in American and virtually every doctor pushing back, because they’re having a hard time dealing with the cuts that have been imposed already.” But in a letter to the President, the American Hospital Association — along with other members of the health care industry — freely admitted that hospitals must adopt efficiencies to slow the growth of health care spending.


As CAPAF Senior Fellow Judy Feder and Marilyn Moon, of the American Institutes for Research, argue in a column for Kaiser Health News, “The industry needs a push, in the form of a little financial pressure.” Policy makers should use Medicare to prod the industry, which accounts for over 40 percent of all spending, to slow cost growth and enhance health quality:

Hospitals respond rapidly to Medicare changes. They have done so in the past and could do so again….Hospitals will challenge reductions in payment updates with claims that they lose money from Medicare. Medicare payment rates are indeed below those of private payers. But for about two-thirds of all hospitals, Medicare’s payments exceed the cost of care. Moreover, the Medicare Payment Advisory Commission has found that the hospitals that lost money on Medicare are in areas where private insurers aren’t pressuring them to reduce costs. Medicare payments exceed costs where hospitals are pressured to be more efficient. Geographic differences remind us that lower costs are possible and that “good” hospitals can be role models for the rest.

In an interview with the Wonk Room, Feder explained that increasing system efficiency will not lead to a corresponding reduction in the quality of care. To the contrary, “adjustments will create incentives for providers to deliver care more effectively.” Watch it:

As President Obama explained during today’s address to the AMA, “I am committed to making these cuts in a way that protects our senior citizens. In fact, these proposals will actually extend the life of the Medicare Trust Fund by 7 years and reduce premiums for Medicare beneficiaries by roughly $43 billion over 10 years.”