Sunday, March 29, 2009

Medicare, Costs - CMS Savings: A Snare and Delusion of Obama Health Reform?

Congress this week took a big step toward clearing the way for passage of President Barack Obama's ambitious plan to overhaul the health-care system. But questions remain over how to pay for it.

The five-year budget plan passed by a Senate committee this week contains a little-noticed provision that would give the government 10 years to cover the cost of the health-system overhaul. That, in effect, would allow the government to spread out the costs and help meet rules that new initiatives don't add to the deficit.
The provision would also give the government more time to generate savings from changes to the health-care system, and allow it to rely less on new taxes or other revenue increases. In essence, lawmakers are hoping they can find a way to make the health-care overhaul pay for itself, even though any substantial savings are likely to take years

John D. McKinnon and Naftak PenDavid, “Congress is Buying Time for Health Care Savings, “ Wall Street Journal, March 27, 2009.

The United States Congress’ Congressional Business Office (CBO) released a two-volume health reform study in December 2008. It lays out the underlying logic, data, and arguments the Obama administration and Congressional leaders are using to move their health reforms forward.

We use these CBO Reports to address the argument that government health care administrative costs is far less than that of private insurers. If this were the case, of course, it would argue for a government-run health payment system. CBO data clearly disputes that argument, and instead, show that insurance companies spend at least 51% less than the government does in its health care programs.

If the government chose to administer Medicare internally, it would increase administrative costs by $1 trillion during the next ten years. A key reason is that private companies externally administer Medicare , while other government programs are internally administered.

Grey Datillo and David Racer, “Comparing Administrative Costs, Private Sector and Government,” Alethos Press, LLC,, March 28, 2009

The snares and the delusions of the Obama administration may be twofold:

One, that a government-run system would save money;
Two, that if government were to administer health care, costs would be far lower than a system administered by private plans.

Indeed, critics often lambast greedy private plans as the cause of health costs, saying costs of these plans add anywhere from 15% to 30% of total costs. If only we had government administering costs, that percent would plunge to 5% or so, as it is purportedly the case in Canada and European nations.

As someone who has seen U.S. government health costs for Medicare-Medicaid, estimated in 1965-1966 never to grow beyond $9 billion, to somewhere around $900 billion, 25% of the federal budget, I am dubious about the cost efficiency of government controlling administrative costs of CMS.

I am also dubious of claims that Medicare could administer all care for about 5% . Private administration costs are somewhere between 10% to 15%.
Nevertheless, a central tenet of the White House is that it would save money and be more efficient in administering care.

Here is how it plans to save money over the next ten years.

Anticipated Medicare Savings - Savings envisions by President Obama which may make his spending proposals affordable.

Proposal 2010-2019 Savings

Use competitive biddings for private Medicare plans $176.6 billion

Have government negotiate drug rebates for Medicare and Medicaid. $19.6 billion

Link hospital Medicare pay to quality measures $12.1 billion

Set approval pathway for generic biopharmaceuticals $9.2 billion

Reduce Medicare readmissions through pay bundling $8.4 billion

Increase Part D premiums for higher income seniors $8.1 billion

Reduce inappropriate Medicare payments $2.0 billion

Use radiology benefit managers $0.3 billion

Total $236.3 billion

Source: White House Office of Management and Budget

If you look closely this chart, you will see that $205.7 billion out of the total of $236.6 billion in savings, or 87%, are aimed at making private Medicare plans and drug company prices “competitive.” presumably by trimming profits and administrative costs of private plans and drug companies.

Finally, it’s worth looking at the details of President Obama’s Health Spending American Recovery and Reinvestment Act of 2009, signed by President Obama on February 17, 2009. Over $22 billion is devoted to comparative effectiveness research, health information technologies, i.e. EMRS in every doctor’s office and hospital, and prevention and wellness - all of which would presumably save money over the long run but have yet to be proven to do so.

Program Amount of Funding

Comparative effectiveness research $1.1 billion

Continuation of health insurance coverage for unemployed workers $24.7 billion

Departments of Defense and Veterans Affairs $1.4 billion

Health information technology $19.2 billion

Health Resources and Services Administration $2.5 billion

Medicare $338 million

Additional federal matching payments for state Medicaid programs $87 billion

National Institutes of Health $10 billion

In other words, if government were in total control, it could bring down costs of the private sector, and overall costs would decrease significantly.


Saving CMS money may be a snare and delusion.

It rests on the unquestioned but slippery illusion,

that if government could administer and negotiate,

everything with government health care we associate,

reduced costs would be foregone conclusion.

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