August 28, 2012 / 7:47 PM / 5 years ago

COLUMN-Here's where Medicare could really save some money

By Mark Miller

CHICAGO, Aug 28 (Reuters) - Question: What do you call Obamacare’s $716 billion cut in Medicare spending during the next decade?

Answer: A good start - and not because seniors don’t deserve their Medicare benefits.

The Affordable Care Act (ACA) achieves those spending cuts over 10 years by decreasing payments to Medicare providers. The Republican Party, which is expected to vote today on its platform at its Tampa convention, is likely to adopt the Romney-Ryan health care plank calling for fundamental changes in Medicare and restoration of the $716 billion by repealing the ACA. Democrats, and some health care experts, charge that their plans would boost seniors’ out-of-pocket costs for prescription drugs and premiums, and end Medicare as we know it.

But the smoke from the presidential campaign battle obscures an important fact. Obama’s Medicare reimbursement cuts are no more than a down payment on a vital project: Getting our nation’s health care spending in line with the rest of the industrialized world.

In 2010, the U.S. spent 18 percent of its gross domestic product on health care, about seven percentage points higher than the average for all other industrialized countries, according to the Organization for Economic Cooperation and Development (OECD). Our rate of spending growth for health care is double that of other OECD nations. We’re spending $2.5 trillion a year on health care, and researchers who study the health care system estimate that about one-third of every dollar we spend doesn’t do anything to improve health.

Here are some of the top targets for greater efficiency and better care - along with estimated annual savings from an authoritative 2009 research project convened by the Institute of Medicine (IOM), the health arm of the not-for-profit National Academy of Sciences. IOM invited leading health care experts to present and discuss research papers on the nature of excess health costs, and evidence on the effectiveness of strategies for controlling them.


The current U.S. health care system’s reliance on fee-for-service reimbursement encourages health care providers to provide more - not better - care. That could be fixed by paying providers for performance. “The idea is to get providers away from an incentive to just turn the crank faster and faster,” says John Rother, chief executive officer of the National Coalition on Health Care (NCHC), a non-profit reform coalition of medical professionals, businesses, organized labor and other groups.

A better approach is to pay providers for performance - outcomes, quality and efficiency. The ACA funds pilot programs for several promising models for this, including incentives for providers to form so-called “Accountable Care Organizations” and patient-centered medical homes. But the transition won’t be easy, notes Paul Ginsburg, who served on the IOM panel and is president of the Center for Studying Health System Change.

“The biggest obstacle is the need for coordination between all the different payers, because you don’t want to put providers in a situation where half of their patients are fee-for-service, and the other half are in a pay-for-performance model.”

The practical application of this model is far in the future. “It’s really a dream that is being pursued,” says Ginsburg.

IOM’s estimated potential annual savings: $210 billion.


A disproportionate share of Medicare dollars are spent taking care of the sickest patients. The non-profit Kaiser Family Foundation reports that 10 percent of fee-for-service Medicare beneficiaries accounted for 58 percent of total Medicare spending. Average per capita Medicare spending for these beneficiaries was $48,210, compared with average per capita spending of $3,910 among the bottom 90 percent. The IOM research found that major savings could be achieved by doing a better job of coordinating their care. “Today, very ill patients with multiple chronic conditions often receive care in a very fragmented way from different physicians who aren’t talking to one another,” Rother says. “The result is not only over-treatment but often unnecessary hospitalization.”

IOM’s estimated potential annual savings: $80 billion.


Many chronic conditions stem from individual behavior, including obesity, drinking, and drug abuse. That means we spend health care dollars on medical conditions that could be prevented through adoption of healthier lifestyles. But Ginsburg emphasizes that the opportunity here is to change lifestyles, rather than provide medical services.

“We’ve had a lot of success over a long period of time with smoking reduction,” Ginsburg says. “Obesity is much more challenging to figure out.”

IOM’s estimated potential annual savings: $55 billion.


Half of every health care dollar in the U.S. goes to hospitals, Rother says, and many simply charge too much. The cost of inpatient services in the U.S. is 164 percent of the group average for 12 OECD countries, and 45 percent higher than what Canada pays, OECD data shows.

Medicare already uses a system of set prices for procedures, called diagnosis-related groups. But in the commercial insurance arena, more competitive market forces could bring down prices. Ginsburg argues that insurers and employers need to focus on restructuring their provider networks. “We need insurers to evolve their benefit designs to increase incentives to enrollees for using more efficient, lower-priced providers,” he says. “That could include narrower networks of providers, or tiered plan designs, where all the hospitals are in the network but enrollees have incentives to go to hospitals that provide higher value.”

That’s a tall order, Ginsburg notes, especially in markets where a single hospital has dominant market share or pricing power, based on reputation.

IOM’s estimated potential annual savings: $85 billion.


No one is quite sure how much money is wasted through fraud and abuse in the health care system, but in Medicare alone, estimates run as high as $98 billion a year. The ACA gave the federal government several new tools for fighting fraud, including reforms in payment processes, and consolidation of fraud-fighting initiatives. Last year, the government recovered $4.1 billion, the most ever recovered in a single year - but only a fraction of the estimated total loss.

An FBI investigation in 2007 estimated that fraud and abuse accounted for anywhere from 3 percent to 10 percent of total health care spending. “We know there is a lot of it out there,” Rother says. “For every dollar we put into anti-fraud efforts, we get $10 back in savings.”

IOM’s estimated potential annual savings: $75 billion.

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