Deficit Reduction Plan to Implement Feared Cost-Control Tool

April 13, 2011

April 13, 2011 — The deficit-reduction plan unveiled by President Barack Obama today strengthens a cost-control tool in healthcare reform that organized medicine fears.

The savings mechanism is the Independent Payment Advisory Board (IPAB). Under the Affordable Care Act (ACA), the IPAB will advise Congress on ways to curb the per capita growth of Medicare spending if it exceeds growth-rate targets set by the law.

If it does not implement IPAB recommendations, Congress must enact policies that save just as much, or else let the Department of Health and Human Services make the cuts.

President Barack Obama outlines his fiscal policy during an address at George Washington University in Washington, DC, today AP Photo/Charles Dharapak

The Medicare growth-rate target initially will be the average of the consumer price index (CPI) for urban residents and the CPI for medical costs. In 2018, the target changes to growth in the gross domestic product (GDP) plus 1%.

To wring more savings from Medicare, Obama proposes to lower the second spending target, triggering IPAB action to GDP growth plus 0.5% beginning in 2018. In addition, the IPAB would gain additional tools and enforcement mechanisms to control Medicare spending.

The greater role of the IPAB is part of a plan to reduce the federal deficit by $4 trillion over 13 years or less that Obama outlined in a speech at George Washington University.

End of Medicare "As We Know It"

Obama would hit those numbers with $3 in spending cuts and interest savings for every $1 in higher tax revenue, partly derived from ending Bush tax cuts for the wealthiest Americans. Obama said his prescription borrows from the recommendations of a bipartisan fiscal commission that he appointed last year, and incorporates $1 trillion already contained in his budget proposal for fiscal 2012, which begins October 1.

Obama laid out a different path toward a balanced budget than Rep. Paul Ryan (R-WI), the chair of the House Budget Committee, did last week. Under the Ryan proposal, federal outlays would decrease by $5.8 trillion over 10 years based on current spending policies.

The GOP plan achieves these savings partly by giving seniors who turn age 65 in 2022 and beyond a subsidy for buying healthcare coverage from private insurers, and turning federal contributions to state Medicaid programs into block grants.

Obama opposes the GOP "voucher" system, saying it would "end Medicare as we know it" and shift more costs from the federal government to seniors. He also argues that converting Medicaid into a block-grant program would leave it underfunded.

Hitting a Raw Nerve

Although Obama intends to preserve Medicare as an entitlement as opposed to a subsidy program, he nevertheless seeks to trim $340 billion from it over 10 years, which is on top of more than $400 billion in savings through 2019 that the ACA calls for. Some of the extra economizing involves improving patient safety, cutting unnecessary prescription drug outlays, and reducing waste and abuse that drives up costs.

None of those measures, however, is likely to hit a raw nerve in medical circles like the increased reliance on the 15-member IPAB to control Medicare spending.

Ever since the ACA was passed in 2009, organized medicine has sought to eliminate or drastically reshape this new entity, designed to function in a framework resembling the sustainable growth rate (SGR) formula for determining physician reimbursement in Medicare.

That formula sets an annual target for Medicare spending on physician services based on GDP growth, which also forms the basis for IPAB targets starting in 2018. If actual spending on physician services exceeds the target in a given year, reimbursement rates under the SGR formula must decrease the following year to make up the difference.

Organized medicine argues that the SGR formula is flawed because physician practice costs typically rise faster than the GDP. Every year since 2003, the SGR formula has triggered cuts to Medicare rates that Congress has subsequently postponed, causing them to pile up. As a result, physicians face a 29.5% reduction in 2012.

Obama's deficit-reduction plan allocates a "sufficient" amount of money to reform the SGR formula and avert this catastrophe but does not provide details on what this reform looks like.

In the meantime, the IPAB looms as a similar threat to physician compensation. Leaders of the American Medical Association and other medical societies contend that the IPAB could expose physicians to a double whammy by requiring pay cuts in addition to those mandated by the SGR formula.

"Strong Concerns"

In a written statement issued after Obama's speech today, American Medical Association Chairwoman Ardis Hoven, MD, said that her group has "strong concerns about the potential for automatic, across-the-board Medicare spending cuts because they are not consistent with meeting the medical needs of patients, which is our primary focus."

Medical societies also object to a group of unelected officials having so much power over physician reimbursement. And they consider it unfair that hospitals are spared IPAB cuts until 2019.

There are other restrictions that cause physicians to feel the brunt of IPAB spending decisions. The ACA prohibits the board from recommending any solutions that would reduce Medicare eligibility and benefits or increase costs borne by beneficiaries, including Part A and Part B premiums. In short, seniors avoid the IPAB axe just as hospitals do.

However, a senior White House official hinted during a not-for-attribution press briefing today that the IPAB might spread out the pain. When asked whether the various restrictions on IPAB cuts might disappear under the president's deficit-reduction plan, the official replied, "No, not all of them. I think the idea is there would be some expansion."

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