Right Problem, Wrong Solution

Right Problem, Wrong Solution

By Paul Howard and Douglas Holtz-Eakin - February 28, 2012

Last week, 24 medical organizations representing 350,000 doctors urged Congress to repeal Medicare’s new Independent Payment Advisory Board (IPAB). That’s the right prescription for improving American health care and protecting access to innovative treatments for seniors. Unless repealed, IPAB will quash medical innovation and make it even harder to adopt Medicare reforms that can improve quality and lower costs.

An important part of President Obama’s Affordable Care Act, IPAB was designed to address a real problem: the unsustainable growth in Medicare spending. At present, there is a $280 billion gap between the premiums and payroll taxes flowing into federal coffers and the Medicare checks being sent out. As 10,000 more seniors join the roles each day, the red ink will threaten the program’s future.

Medicare’s dysfunction owes much to its antiquated design. Created in 1965, the program mirrored the then-prevalent insurance package: hospital insurance providing fee-for-service reimbursement, with 20 percent co-pay for catastrophic costs. Over time, additional benefits have been layered on top, but the result is a jury-rigged health-insurance program divided into silos for hospital care (Part A), physician services (Part B), HMO-style insurance (Part C or Medicare Advantage), and prescription drug coverage (Part D).

By dividing hospital and physician services – and allowing seniors to choose their own providers regardless of cost or quality – Medicare’s design makes it extraordinarily difficult to make health care more efficient or affordable. No health insurer in America could operate in this fashion and expect to survive. The fractured payment structure also encourages Medicare fraud. Last year, the Government Accounting Office projected that Medicare loses nearly 10 percent of its annual budget ($48 billion) to fraud.

Over time, policymakers have responded to Medicare’s rising costs by imposing price controls on providers, a strategy that hasn’t solved the program’s underlying problems. Indeed, doctors and hospitals responded to price controls by increasing their volume of services, or providing more heavily reimbursed services.

IPAB is the ultimate in government price controls. It consists of a 15- member board selected by the president and empowered to reduce Medicare outlays automatically if spending rises above a target rate (set by legislation). Beginning in 2018, the target rate is set at GDP plus 1 percent.

Ironically, Medicare payment cuts already required by the Affordable Care Act will make many providers “unprofitable”, according to Medicare’s own actuary. Although IPAB is prohibited by statute from “rationing” access to care, slashing reimbursements will drive more providers to limit services for Medicare recipients – creating de facto rationing.

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Paul Howard is a senior fellow and director of the Manhattan Institute’s Center for Medical Progress. Douglas Holtz-Eakin served as director of the Congressional Budget Office. He is now president of the American Action Forum.

Paul Howard and Douglas Holtz-Eakin

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