Sensible reductions to healthcare costs could be made and spare major impacts to coverage.
Readers and listeners have written in asking the following: Any cuts to healthcare programs would likely impact coverage, but are there smarter cuts that could be enacted? It is a great question, and the answer is yes. There are sensible reductions to healthcare costs that could be made, and it could mean much less impact on coverage. More importantly, it could set the stage for comprehensive healthcare reform.
The problem with budget reconciliation cuts
The problem with the Republican proposals wending their way through Congress is that these are clear and deliberate reductions to Medicaid and Exchange coverage. Whether the reduction is centered on work requirements or limitations of provider taxes, it is clear that the changes would stop many from accessing healthcare coverage and lead to states contracting benefits and coverage as well. The GOP is being quite stealthy, but nonetheless Republican lawmakers get to the same place as more explicit coverage termination initiatives would.
Some want cuts to Medicare
Recently, some Republicans argued that making reductions to Medicare, principally Medicare Advantage (MA) overpayments, might be needed. They eventually concluded that such a move would violate election promises not to touch Medicare. Taking dollars out of MA would shrink benefits, increase beneficiary costs, and lead to more contraction throughout the country. We don’t know what cuts the Republicans might have proposed. Here it is harder to argue that people would lose absolute coverage. But it is reasonable to assume that an overarching proposal to remove revenue to plans would have impacts.
The budget cuts in context
Back to the budget reconciliation cuts: the Congressional Budget Office (CBO) says as many as 16 million would lose coverage from congressional budget proposals hitting Medicaid and the Exchanges, the expiration of Exchange enhanced subsidies, and a rule constraining Exchange enrollment in the future. But opponents point to the impact on provider revenue as well.
The Urban Institute and Robert Wood Johnson Foundation (RWJF) breaks down how providers (hospitals, physicians, and drugs) are impacted in each state by the reductions to Medicaid and the Exchanges. Over the next decade, the bill would decrease spending by $321 billion to hospitals, $81 billion to physicians and $191 billion for drugs. Spending on other healthcare services would decline by $205 billion.
If the Exchange premium tax credits expire, spending would decline by an additional $262 billion — hospitals an additional $103 billion cut, physicians an additional $39 billion cut, and drugs an additional $50 billion cut. Spending on other healthcare services would drop an additional $70 billion.
But are there smarter cuts?
Now, I have little doubt as to the accuracy and premise of Urban’s and RWJF’s math. If you cut a trillion out of healthcare over ten years, it is technically true that it flows through the system down to providers rendering care. The reconciliation bill hurts both people who are currently insured and providers caring for people.
But a case can be made that provider cuts are needed to attack high costs and the inflation problem we have in healthcare. High costs are driving premiums and creating a situation where we (employers, the government, and the insured) are “priced out” of healthcare, as my idol and inspiration Uwe Reinhardt’s famous book outlined. Done right, price reform brings inflation down and bends the cost curve. Over time, it could mean a real reduction in prices and costs.
Now, yes, this would mean reductions in revenue to providers. But done over a reasonable period of time, it would force provider reform, especially at hospitals. Note that not all providers are over-reimbursed. For example, the real rates paid to physicians in Medicare have dropped dramatically over the past few decades. This has eroded independent practices (they have been bought up by hospitals) and threatened primary care in the U.S. A case can be made that primary docs need a raise. Hospitals, which drive almost one-third of all healthcare spending, are the biggest culprits.
As opposed to the budget reconciliation cuts that do little more than add to the uninsurance rolls and pull revenue from providers, reductions that focus on true price reform are needed. Those cuts could be focused on real cost controls and reforms, without touching coverage per se. Hospitals and other providers don’t want that because the current system supports inefficiency and continual rate hikes. They like that. It also supports empire building by top hospital executives. They like that too.
Hospitals have been using the proposed budget cuts to say rural and critical access hospitals, already in precarious financial health, will close. The truth is the current system overwhelming supports the relatively well-heeled urban and big hospitals, not rural and other critical ones. In fact, the system likely creates at least part of their financial woes. With price reform, more funding would be available and could be focused on these hospitals. Right now, almost every drop goes to the big and powerful hospitals.
What are the price reforms?
The following price reforms could be phased in over time and have a meaningful impact on overall healthcare reform. Further, the reforms would also save in the employer world as commercial prices are very much set based on Medicare rates — admittedly many times Medicare in most cases. Budget savings are easily in the hundreds of billions when fully implemented, with more savings accrued throughout the whole healthcare system (e.g., lowering commercial rates and employer costs).
Site neutral payments —It is high time for site neutral payments to be adopted. This blog from July 8, 2024 ( https://www.healthcarelabyrinth.com/it-is-time-for-site-neutral-payments-in-our-healthcare-system/ ) gives you all the details on site neutral payments, what they are, and why adoption is important. There is no reason that hospital-owned settings (outside of inpatient) should be paid more for the same services provided at independent free-standing facilities or a physician’s office. What’s more, about half of all doctors are now owned by a hospital or health system and physician practice patterns are changing. Hospital employers are now telling their physician employees to practice at more expensive owned settings. This is a huge drain on our healthcare system, serves as a disincentive for hospitals to be more efficient, drives up Medicare and commercial coverage costs, and increases member out-of-pocket costs.
I believe that full site neutrality should be adopted, but various forms save between $5 billion to $145 billion in the Medicare program over 10 years. What’s more important to underscore is the savings in the commercial world. As I note, prices there are substantially “piggy-backed” off of Medicare. The Blue Cross and Blue Shield Association (BCBSA) says healthcare savings between Medicare and Medicaid as well as consumer out-of-pocket costs would be $495 billion over ten years.
Related reforms here would:
- Favor use of the right site of care in all cases
- Rein in aberrant physician and other provider patterns
- Eliminate the Medicare inpatient only list
- Institute ambulatory service center procedure expansion
- Bar telehealth and facility fees
340B reform – Reforming this drug discount program may not save major government spending, but reforms would reduce costs to employers and beneficiaries. There is growing evidence that hospitals and other entities have abused the program, obtaining deep discounts but not passing them on to the needy and those who can benefit. Studies show that prices are as high or higher at 340B entities than at those providers that do not receive such discounts. These prices then roll out across Medicare and commercial coverage and increase out-of-pocket costs. The program is a boondoggle that needs reform. It should return to its original purpose.
Other proposals — Other ways of reducing provider pricing include:
- Barring all-or-nothing-contracting demanded by providers when negotiating with health plans. This drives rates and costs.
- Requiring hospital administrative cost reporting. These costs are out of control and rising. These costs should be limited. Health plans have implicit caps in place.
- Reforming the pro-provider No Surprises Act (NSA). Arbitration decisions are favoring the huge prices providers set and are driving up overall costs.
- Expanding price transparency and enforcement.
- Implementing a national or regional price scheme could reduce administrative costs, bring down fraud, increase transparency, and further move the needle to force providers, especially hospitals to be efficient. It might mean a little more money in Medicaid and Medicare (or not) and could provide huge relief to commercial coverage.
- Setting reasonably uniform benefit structures across lines of business (e.g., some state Medicaid benefits are clearly overly generous and exceedingly expensive). Savings would occur both on medical expense and administrative costs.
Drug price reform
Proposals on drug price reform could save considerably as well. President Trump has proposed most-favored-nation (MFN) pricing across the entire healthcare system. Currently Americans pay manyfolds more than those in other developed countries. His proposals to overhaul the transparency of and how the drug channel operates are key. Both the president and Congress, too, want to reform pharmacy benefits managers (PBMs) and ensure vertically integrated PBMs are not using sister companies to inflate margins at the expense of consumers, employers, and the government. The PBMs enter into above-market, sweetheart deals with their various sister pharmacies and entities. These same PBMs who have sister health plans get lucrative deals too.
It is safe to say that all these reforms could save several hundred billion on our $800 billion drug bill annually across retail, specialty, and medical drugs. This is in addition to the hundreds of billions outlined earlier.
Medicare Advantage overpayments
While I back MA’s importance to the future of Medicare, there also are changes that can be made here to rein in unreasonable costs. Again, phasing in changes would be key so as not to impact coverage.
The area that makes the most sense to tackle is risk adjustment reform. Related just to risk adjustment (not all overpayments), there are varying estimates of savings. Congressional policy arm MedPAC says $43 billion annually could be saved. University of San Diego researchers say there are $34 billion in savings annually. The Centers for Medicare and Medicaid Services (CMS) says $17 billion could be saved. Based on several studies and audits I have seen, I peg that number between $10 billion and $17 billion annually.
CMS has already gone down this road by implementing a new risk model (v28), which appears to take over 7% out of rates and plan revenue and is focused on removing the propensity for overpayments. The agency also has announced a 100% risk adjustment data validation audit process. I have concerns with certain proposals. Budgeteers could book savings here as well.
I have backed some other reforms, properly phased in:
- Barring coding tied only to manual chart reviews.
- Barring coding tied only to health risk assessments.
- Applying the coding intensity factor on a plan-by-plan basis to take into account each plan’s relative coding intensity (with a credible adjustment for real differences in risk based on population demographics).
Why could carefully crafted changes here be made over time and not demonstrably impact benefits, consumer costs, or MA’s footprint? Because the vast majority of the overpayments tend to accrue to a small number of large plans that practice aggressive or perhaps unscrupulous risk adjustment. Most plans in the industry do not benefit from the revenue or at least not that much of it. The practices give the whole industry a bad name. Other plans largely could fill in the voids left by the plans that would need to change course and reduce benefits. In the alternative, some savings could be invested to ensure adequate coverage in rural and suburban areas if needed.
Conclusion
Now, I am not so pollyannaish to assume there is no coverage fallout or impact on providers’ financial health if any of this is implemented. But again, done in a sober and phased way, the healthcare system could be transformed to the benefit of plans, providers, employers, and consumers. It is far superior to how each party thinks about it.
The GOP’s “pull yourself up by your own bootstraps” philosophy treats healthcare as a commodity you earn as you go up the income scale. They tend to think chopping coverage will mean savings. They forget that we all end up paying for emergency room, inpatient care, and other uncompensated care when the uninsured and underinsured (together some 85M Americans and growing) get sick.
The Democrats’ fixation is driving more and more coverage and benefits without a thought to efficiency. This creates a system where costs and ongoing inflationary spirals eventually mean the collapse of the entire system or at least parts of it. We see that today with employer coverage cost spikes and erosion. Some would say that is the goal of the socialized medicine or single payer Democrats, but a collapse would have huge fallout for all of America.
As I noted in another recent blog, the problem with gaining a consensus on a middle ground is that Washington is entirely dysfunctional. Neither party is committed to doing right by people or the country’s or healthcare system’s finances.
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— Marc S. Ryan
