The Medicare Cuts

Last week, President Bush released his proposed budget for 2007, which included $36 billion cuts in Medicare spending over 5 years. The response has been anxiety on the part of older people who worry their benefits will be slashed, as well as by hospitals and physicians who depend heavily on the Medicare population for their business. But are the cuts—if they go through, and in an election year, many will not—such a bad idea?

Medicare spending is growing at a phenomenal rate. If we don’t put the brakes on it, according to some projections, Medicare will consume 24% of all federal income tax revenue by 2019 and 51% by 2042 (quoted in “Medicare: A Ticking Time Bomb for Tax Increases” by Daniel Mitchell of the Heritage Foundation). We won’t have much left for education, housing, and other social programs (leaving aside the issue of national security). The Medicare prescription drug benefit alone, crucial as it is for the millions of elderly people who rely on medicines to treat chronic illnesses and who previously had no drug coverage, is expected to cost at least $700 billion over the next 10 years. It won’t do to protest every attempt to control Medicare spending. The question is not whether Medicare should be trimmed back, but how.

The suggested approaches in the President’s budget largely reflect the recommendations of the Medicare Payment Advisory Commissions (MedPac), an independent, bipartisan panel that has a reputation for thoughtful, careful proposals. And it’s important to realize that the budget proposal isn’t calling for lower reimbursement rates than currently prevail; it’s calling for a smaller increase than previously planned (eg payments to hospitals would increase by 2.9% rather than 3.3%). Moreover, to complement moderately increased reimbursement rates, Medicare would introduce a quality incentive payment policy for hospitals. While this has to be done carefully to make sure hospitals are not penalized for taking care of the sickest patients (if quality is defined in part by mortality rates, for example, adjustments must be made to take into consideration just how complex and elderly a hospital’s patients are), it is potentially a means of stimulating improved quality of care.

One piece of the budget that is worrisome is the freeze on prospective payment rates to home care agencies and skilled nursing facilities. Home health care has been one of the fastest growing components of the Medicare budget and is thus a logical target for cost-cutting. But a large fraction of the cost of home health care and of nursing home care is labor. And most of this labor is provided by aides, who are among the lowest paid, least appreciated workers in the US economy. The average hourly wage for a nursing home aide, as reported in 2002, was $8.29, less than what she would earn working in a fast food chain. Only 68% of home health aides receive health insurance from their employers. To make matters worse, home health aides and certified nursing assistants experience higher injury rates than workers in any other industry, including the construction industry. Lifting and turning sometimes resistant older people is literally backbreaking work. (Statistics are from Nora Super, “Who Will Be There to Care? The Growing Gap between Caregiver Supply and Demand,” a National Health Policy Forum Background Paper, issued January, 2002). To freeze payments to home health agencies and nursing homes will prevent wages from rising for their workers. As it is, we are facing an imminent shortage of long term care workers. The number of people who will need personal care (whether in a nursing home, assistant living facility, or at home) is going to soar from 8 million today to 19 million in 2050, at the same time that the working population is growing slowly. If we want to have aides to care for older people, we need to make the work more attractive—and freezing salaries at their current low rate is exactly the wrong way to proceed.

What’s striking about the proposed Medicare spending cuts is what measures aren’t included that should be. Right now, Medicare will reimburse for any medical treatment that it accepts as “reasonable and necessary.” Costs don’t figure into reimbursement decisions at all: the Centers for Medicaid and Medicare Services (CMS), which runs the Medicare program, pays for technology and now medications even if their added benefit is miniscule and their cost is enormous. As an example, Medicare will pay for the left ventricular assist device, a kind of partial artificial heart. This device is implanted in people with extremely severe heart failure who are too sick or too old to qualify for a heart transplant, at a cost of roughly $250,000. Even with the device, about half such patients are dead within a year and only a quarter are alive at the end of 2 years. People who have the device are at high risk of developing severe infections, bleeding, or device failure (which necessitates a second open heart operation). One way to rein in Medicare spending is for CMS to consider costs in its decisions about which treatments to reimburse. A well-established way of doing this is with cost-effectiveness analysis, a means of comparing the costs of alternative strategies for treating the same condition relative to their efficacy. For the left ventricular assist device, a cost-effectiveness analysis by Blue Cross/Blue Shield shows that the cost/quality-adjusted-life-year, the standard unit of measurement, is about $500,000, compared to the benchmark of $100,000/quality-adjusted-life-year for widely accepted procedures such as kidney dialysis (see the report by the Technology Evaluation Center of BC/BS, “Special Report. Cost-Effectiveness of Left-Ventricular Assist Devices as Destination Therapy for End-Stage Heart Failure,” released in April, 2004).

The Bush budget proposal starts the critically important process of controlling Medicare spending. It includes a number of reasonable strategies, and several short-sighted ones. But it misses a major opportunity, the chance to systematically build considerations of cost into the process of deciding what Medicare will cover and what it won’t.