US Politics Analysis: Setting Out the Medicare Crisis

Later this week the Senate will vote on the 2012 Budget Resolution, passed by the Republican-controlled House of Representatives. The resolution will be defeated, its only real purpose to get on record the Republican senators who support the ideas put forward by Representative Paul Ryan for Medicare reform. Democrats believe that demands for changes in Medicare will be a certain vote-loser for Republicans in 2012, a strategy they believe is vindicated by yesterday's apparent victory for Democratic candidate Kathy Hochul in a special election for a Congressional seat in one of the few solidly-Republican areas of New York State.

Meanwhile, the deficit reduction talks, led by Vice President Joe Biden, continue. The two sides appear to have agreed upon a figure for initial cuts in discretionary spending of around $150 billion, but they must now come to some understanding on the tone, if not the actual content, of discussions over entitlement programs.

In a salutary lesson that reforms in the programmes must occur --- barring inconceivable concessions by Republicans on raising revenue through tax increases --- America's debt, according to usdebtclock.org, has risen to $14.4 trillion. In the nine days since reaching the current limit of $14.3 trillion, the government has added roughly $100 billion to a debt that is now only being serviced through extraordinary measures by the Treasury.

It is a gloomy point to note, for last week the partisan division over budgetary policies hardened considerably. Republican Senator Tom Coburn took a "sabbatical" from the bipartisan "Gang of Six", and Democratic Senator Kent Conrad could not get a budget through the Democrat-controlled Senate Budget Committee, let alone a filibuster-happy Senate.

These were significant developments, but even they took their place behind the leading cause for concern: Medicare Trustees Report for 2011 and comments made by Nancy Pelosi, the former Speaker of the House and still Minority Leader.

On Thursday, Pelosi called Washington Post blogger Greg Sargent to clarify that, counter to media reports, she was not prepared to put Medicare on the table in the ongoing deficit-reduction discussions. Sargent wrote:

Pelosi insisted that any claims she could support cuts in the program are wrong. "No benefit cuts," she said flatly. Pelosi added that Dems have already put on the table the type of reform they should continue advocating for: The Affordable Care Act.

The interview continued with Pelosi's, and by extension a broad segment of the Democrat constituency's, views on the future of Medicare:

We gave the blueprint for how we strengthen Medicare in the Affordable Care Act," Pelosi said, a plan which is still "ripening" and "which does not reduce benefits. It lowers costs to taxpayers, the deficit, and beneficiaries." She said the only type of Medicare cuts she's open to are extracting savings via bureaucratic and pharmaceutical reforms that don't touch benefits.

Pelosi's political history suggests that she will not be open to compromise on that stance, even as she repeated her line-in-the-sand arguments this week. The problem is that the Medicare Trustees Report, in guarded bureaucratic language, rubbished the idea that the Affordable Care Act can deliver the savings ---and hence no need for cuts --- touted by Pelosi.

The Medicare Trustees Report, issued annually by law, reviews the future financial prospects of the programme covering 47 million retired and disabled Americans. It is a guess on the solvency of Medicare that fluctuates from year to year depending on the economic outlook, and the law, when the report is written.

This year the Report estimates that Medicare, as a result of increasing annual deficits in the program, will go bankrupt in 2024, five years earlier than predicted in 2010. Changes in the economy and the law could change that outlook, but the report has a broader, disturbing message. It accepts that the Affordable Care Act has improved the outlook of Medicare in general, but it always add the qualifying reminder that it is, as currently scheduled to be implemented, the ACA is not viable.

The essence of the Report is in the Introduction:

It is important to note that the actual future costs for Medicare are likely to exceed those shown by the current-law projections in this report. We recommend that the projections be interpreted as an illustration of the very favorable financial outcomes that would be experienced if the physician fee reductions are implemented and if the productivity adjustments and other cost-reducing measures in the ACA can be sustained in the long-range --- and we caution readers to recognize the great uncertainty associated with achieving this outcome.

The Report refers to two of the two major policies in ACA designed to cut costs. The first is the implementation of the law's scheduled reduction in physician fees of an estimated 29.4% on 1 January 2012. This is the cumulative total of all the cuts required in physician payments under the Sustainable Growth Rate, deferred since 2003 by annual "doc fixes". The Report regards the 2012 projection, and future annual adjustments downward, as an "implausible expectation".

Actuaries, in a 20-page addendum to the Report, are just as dismissive of the claim that cuts will occur in payments from the HI (Medicare Part A) trust fund to the fee-for-service health providers (mostly hospitals) from "productivity adjustments".

This is the bureaucratic reform that Nancy Pelosi believes will contribute to saving Medicare as we know it, but which the Report regards as an unachievable goal. It notes that under the ACA:

The annual price updates for most categories of non-physician health services will be adjusted downward each year by the growth in economy-wide productivity. The best available evidence indicates that most health care providers cannot improve their productivity to this degree --- or even approach such a level --- as a result of the labor-intensive nature of these services.

So the fundamental evaluation of the ACA in the Report and its addendum is that "pigs might fly" before a 30% reduction in physician payments occurs. And it is "pie in the sky" to believe that long-term cuts linked to productivity improvements --- estimated at 1.1% a year --- will happen. Yet these two cost-cutting measures provide a large part of the hopes of Pelosi and many Democratic adherents that the ACA by itself will help sustain Medicare in the future.

There is a further complication. The Report, while putting forth the gloomy change to the ACA as the salvation of Medicare, in no way portrays the approach as "socialist". Yet many Republicans hold that view --- conservative think tanks, and the talking points memos they produce, are currently putting forward the guide of the 1944 book Road by Serfdom by Friedrich Hayek. His argument is that well-intentioned bureaucrats and politicians pass laws to improve society. When the law does not produce the desired results the same bureaucrats and politicians pass further laws, always requiring extra government-knows-best involvement, to fix the problems with the initial law. That fix inevitably fails, leading to another attempt with more government input, until the people are mere serfs ruled by a feudalistic, even if beneficent in intent, government.

For conservatives who believe this; their opposition to the ACA "fix" for Medicare is based on its path to serfdom, not because it harms the profits of insurer providers.

The progressive politics of Nancy Pelosi putting forth the ACA meets the conservative ideology, exemplified by Paul Ryan, which abhors the same law.

That clash looms over the reality that healthcare costs are on an unsustainable upward curve. Both parties have different and deeply divergent opinions on how those costs should be controlled, but the Trustees Report unequivocally sets outs that the ACA is not by itself enough. The final sentence by the actuaries argues:

The sizable differences in projected Medicare cost levels between current law and the illustrative alternative scenario highlight the critical importance of finding ways to bring Medicare costs --- and health care costs in the U.S. generally --- more in line with society's ability to afford them.

Quite how that "critically important'"solution can be found in the existing political climate remains a mystery.