Are Medicare Cuts a Big Fat Lie?

Some critics say we're foolish to think health care reform will make serious Medicare reductions. Are they right?

One of the unbridgable gaps of the health care debate is the issue of Medicare cost controls. Democrats say they can cut hundreds of billions of Medicare bucks, with the faith and blessing of the Congressional Budget Office. Republicans say those spending cuts are totally mythical, and the CBO is a sucker for believing they'll happen.

Into the fray leap Robert Samuelson and Fred Hiatt, those twin titans of polemical centrism at the Washington Post. They have twin sentences in their twin columns today about health care cost control. It's kind of cute, like seeing identical twins wearing matching shirts -- except instead of identical shirts, they're porting identical scare quotes. So actually: not as cute.

Samuelson: The [health care reform] proposal is "responsible" because it's "paid for" through new taxes and spending cuts.

Hiatt: In helping to shape and reshape the bill, Obama has stayed true to the goal of improving access. But his new entitlement is "paid for" by wishing away costs and wishing into the future taxes and unpopular reforms that he can't bring himself to embrace now.

Mind-meld, achieved! But substance is more important than style, so onto the meaty question: are Samuelson and Hiatt "right"? Are Medicare cost cuts fictitious?

This is a tough question. Neither Samuelson nor Hiatt explain exactly why they've put "paid for" in quotes, but I'll try. It's generally accepted in some corners that Medicare cuts are inherently fantastical. Congress passes them from time to time without implementing them. Exhibit A is the Sustainable Growth Rate, passed in the late 1990s* to slow the growth of physician spending. But physicians spent faster than the SGR policy authors anticipated, and Congress has side-stepped the policy ever since.

But the Center for Budget and Policy Priorities released a study last year that turns that wisdom on its head. Congress has a good record of implementing Medicare savings, the authors found, and the SGR, which wasn't supposed to save much money anyway, represents an exception that conservative critics have turned into the rule. I called one of the authors, Paul Van de Water, this afternoon to press him on his findings:

Could you sum up your report and findings for us briefly?

We looked Medicare savings that were contained in previous budget bills back to 1990. With the exception of the so-called Sustainable Growth Rate formula, the vast majority of other Medicare cuts did stay in effect as they were enacted.

One can never guarantee what's going to happen in the future. But these people who assert that history shows Medicare cuts don't stick have argued on the basis of the one exception rather than the vast majority of cases that have stayed in place.

One persuasive critique of your report pointed out that medical inflation slowed in the 1990s --  the time period you studied -- due to a brief, bizarre heyday of managed care, which Americans have since rejected. Are your numbers potentially skewed by this historical blip in the 90s?

I mean it's always possible that there were some unique circumstances. But I think the evidence is such that people who think that future Medicare cuts might not stick have to posit special circumstances. The evidence goes in the opposite in the way people like [Robert] Samuelson are asserting.

Tell me a bit about the SGR and why you think we should consider it an outlier.

The first fact that people have to keep in mind is that when it was enacted in 1997*, it was wasn't designed to save very much money. The original estimate at the time was that the proposal would save 5 billion over 5 years and 12 billion over 10 years. In fact, what happened was that physician spending started to grow much more rapidly when the formula was enacted, so Congress started taking steps to make sure the full step didn't go into effect.

I'm going to push back a little. We're instituting Medicare cuts just as millions of baby boomers are about to retire in the next 5, 10, 20 years. That's going to put a lot of upward pressure on Medicare spending. Is it possible that what happened in the 1990s* -- when physician-spending increases swamped the original SGR policy -- could happen in the next decades, with Medicare spending swamping the planned cuts?

There is reason think the Senate bill cuts don't share the same features as the SGR formula. CBO assumes that Medicare spending is going to grow more rapidly because there will be more older people. That demographic pattern is well known and is built into the projections already. So that's not unexpected or ignored.

The cuts are mostly reductions that have been suggested by the Medicare Payment Advisory Commission (MedPAC), and they're supposed to look at what they think is reasonable and fair at holding down costs while making sure providers are paid enough to make a reasonable profit.

The biggest one is the reduction in payments to Medicare Advantage plans -- private plans that participate in Medicare. According to MedPAC those private plans are overpaid by 13 percent compared to what it would cost if those people had just stayed in Medicare. So that's the bulk of where the savings come from.