Is The 716 Billionth Cut The Deepest?

One of the primary items of contention in Wednesday night's Presidential debate was the $716 billion in cuts to Medicare through the Accountable Care Act (ACA). Mitt Romney claimed that this would harm Medicare beneficiaries, while Barack Obama claimed just the opposite, that this would help them. Let's consider these claims.

First Romney's claim. First, let's be clear that there are no payment cuts to doctors included, so there should be no impact of the cuts on physician supply of services. It is possible that if Medicare spending exceeds the target growth rate that the Independent Payment Advisory Board (see nice explanation of the IPAB) could recommend payment cuts to physicians as part of its recommendations to reduce cost growth, but that is not mandated.

The main cuts are payment cuts to Medicare Advantage (MA) plans and cuts in the rate of increase to hospitals and a few other providers. It is possible that cuts in payment rates to MA plans will lead to some of those plans leaving the market. A recent paper by Austin Frakt, Steve Pizer and Roger Feldman finds large impacts of payment cuts on plan participation in MA (blog post by Austin Frakt on the findings, with link to the paper). Medicare beneficiaries who lose their MA plans could simply enroll in traditional Medicare or in another MA plan (if available), so they won't lose coverage entirely or access to services. Studies have shown, however, that beneficiaries in MA plans prefer them to traditional Medicare, so they would suffer a loss from having to switch. In a separate paper, Frakt, Pizer, and Feldman estimate that what beneficiaries lose due to the exit of their MA plan is more than outweighed by the savings from reduced MA payments (blog post on this with link to paper).

There are two main questions regarding the impacts of reductions in the growth of hospital payments. Will hospitals reduce their supply of services to Medicare beneficiaries, and will they reduce the quality of care they provide? The first question is basically about the elasticity of supply -- how responsive are hospitals to changes in Medicare reimbursements? There is surprisingly little direct evidence (so far as I'm aware) on how hospitals' supply of services to Medicare beneficiaries responds to Medicare payment levels. There is a lot of research evidence on hospitals' response to the introduction of the Prospective Payment System (PPS) in 1983, which did have impacts on payment levels. The evidence there seems to be that the PPS payment changes did affect intensity of care, but not volume. More recent work on changes in Medicare reimbursements for different DRGs also finds no volume response (but upcoding: "How Do Hospitals Respond to Price Changes?"Leemore S. Dafny, The American Economic Review , Vol. 95, No. 5, Dec., 2005, pp. 1525-1547). Deductively, we know that Medicare beneficiaries make up a large part of hospital patients. Therefore it's unlikely that hospitals could replace them with more remunerative patients or activities, even if they want to. As a consequence, it does not appear likely that hospitals respond to Medicare payment cuts by seeing fewer Medicare patients.

There is evidence, however, that hospitals do respond to Medicare payment reductions by reducing the intensity of care they provide to Medicare patients. David Cutler ("Empirical Evidence on Hospital Delivery under Prospective Payment," unpublished Paper, 1990) finds reductions in the intensity of treatment by hospitals in response to reimbursement reductions due to PPS. Vivian Wu and Yu-Chu Shen (2011) find evidence that hospitals that experienced large cuts in Medicare payment rates had increased mortality rates for heart attack patients relative to hospitals that had smaller cuts.

So it's possible that hospitals could respond to the reduced growth in their Medicare payment rates mandated by the ACA by cutting back on things that end up harming the quality of care. It is important to realize, however, that the ACA also introduces quality incentives into Medicare payments for hospitals. These are based on clinical quality measures and patient surveys, and penalties for readmissions. As a consequence, it's not clear that slower increases in payments will end up leading to lower quality.

So, it's far from clear that Mitt Romney's claim that the ACA's reductions in Medicare payments will harm Medicare beneficiaries is correct. There is some evidence that points in this direction, but my personal opinion is that it's unlikely.

What about Barack Obama's claim that the Medicare payment cuts will help beneficiaries by keeping Medicare solvent? It extends the solvency of Medicare from 2016 to 2024.  There has been some controversy about the impacts on Medicare spending and the Federal budget. Charles Blahous has claimed that extending the solvency of Medicare actually ends up increasing the government's spending and increases deficits. He assumes that benefits would be cut when the Medicare trust fund is exhausted (the law is that it can't spend more than comes in) and there would be no Medicare deficits. Therefore the Medicare savings from the ACA aren't really savings -- they wouldn't have been spent anyway.

Peter Orszag says this isn't correct -- roughly speaking, the government would have continued to pay for Medicare absent the ACA, so that's not the right basis for comparison and there are true savings. Jeff Brown does yeoman's work trying to sort out the controversy. These views lead to very different conclusions about the impacts of the ACA on Medicare and the federal deficit. My own view is that Peter Orszag is right. I seriously doubt if the government would carry out the benefit cuts that would be required.

Obama's claim about the solvency of Medicare is correct. The implications for spending and deficits are subject to some (very wonky!) debate, but I think the most likely scenario is one in which these are true savings.