Like the Western military allies after the collapse of the Berlin Wall, the healthcare interest groups that successfully fended off nearly half of the spending cuts mandated under the Balanced Budget Act of 1997 are now looking for a new enemy.
After spending the past two years fighting to restore more than $50 billion in Medicare and Medicaid spending growth taken away by the balanced-budget law, they have spent the early part of 2001 trying to find a bogeyman to justify increased Medicare spending. Their efforts have focused on such looming emergencies as the healthcare workforce shortage, as well as the potential costs of regulations to enforce medical-records privacy and simplify transactions with payers.
But none of these is as fearsome an opponent as hospitals' new enemy. The end of the five-year balanced-budget law is fast approaching, and that expiration will redraw the battle lines across a new federal healthcare policy landscape.
The new foe is a projected jump in healthcare spending once the budget law's caps expire in 2002 and 2003, and it's likely to spur another round of healthcare budget-cutting by the federal government.
The budget law was a landmark measure that aimed to trim about $112 billion, or about 8.3%, from projected Medicare expenditures from 1998 to 2002 by imposing caps on spending growth and eliminating cost-based reimbursement for nearly every type of provider treating Medicare beneficiaries.
Without new legislation to extend the budget law's tight caps, Medicare and Medicaid spending is likely to accelerate if many of the law's provisions terminate on schedule in 2002 and 2003. In fact, the Congressional Budget Office projects 7.2% average annual growth for Medicare and 8.6% average annual growth for Medicaid from 2001 through 2011, compared with 3.2% and 6.3% for both programs, respectively, from 1996 through 2000.
That's going to make it hard for Congress to resist extending the reductions to such items as Medicare hospital inpatient updates, which have been a key element in Medicare cost containment since the introduction of the prospective payment system in 1983. That is particularly true given that the Medicare Payment Advisory Commission's (MedPAC) calculations showed that total Medicare hospital margins stayed relatively steady at 5.9% in 1999, the second year of the Balanced Budget Act, compared with 6% in 1998.
"Rarely in the last 10 years have they allowed hospitals to go with a full update too many years. They've always done some slicing and dicing," says Herb Kuhn, vice president of advocacy for the Premier hospital alliance, San Diego.
The new threat comes at a time when some provider groups are happy to be backing away, if only for a few months, from their pursuit of new Medicare dollars. They are now able to focus on such issues as the workforce shortage and technology advances.
"When we fought for the money, we fought for our salvation," says Michael Rodgers, government relations director at the Catholic Health Association. "Now we've got to get back to other things we've let wallow. We don't have to fight the money fight right now."
But budget pressures are on the horizon. New priorities under a Bush presidency, ranging from education to military pay raises to a $1.6 trillion tax cut package, could erode the federal budget surplus-now projected at a cumulative $5.6 trillion between 2002 and 2011-so much that the healthier growth in federal healthcare spending may make it an inviting target.
"If anything like the Bush tax cut goes through, these guys (the White House and Congress) are going to get cold feet and they're going to start cutting again," says Uwe Reinhardt, a Princeton University healthcare policy scholar.
"We seem to have more things we want to spend money on than we have surplus money," adds MedPAC Chairwoman Gail Wilensky, a senior fellow at Project Hope in Bethesda, Md.
Medicare will spend $238.1 billion this year. The Hospital Insurance Trust Fund represents $28.7 billion in unspent revenue this year alone and will hold $200 billion in reserve by the end of the fiscal year, making Medicare an attractive source of funds for tax cuts or new programs.
Economic uncertainty also could play a role. If a recession or economic slowdown sets in, as some experts forecast, payroll-tax receipts could take a tumble, and with them rosy projections of surpluses, both in the federal general fund and the Medicare Part A trust fund.
"If we lose our surpluses, there's no doubt that Medicare, because of its size, is vulnerable to further reductions in the rate of spending increase," says Lawrence Goldberg, director of national healthcare affairs in the Washington office of Deloitte & Touche.
It's not certain that Congress necessarily will look to cut, however. The continuing presence of a budget surplus could make a new round of constraints on spending growth hard to justify. That is particularly so given the healthcare industry's advertising and lobbying campaign of the past two years, which has been effective at convincing lawmakers that the balanced-budget law has led to providers' cutbacks on care, service and staffing.
"As long as there's money on the table, I think the environment (encourages lawmakers) to spend money, not cut," says Premier's Kuhn.
But even without those cost- and economy-driven pressures, Congress will want to look at some of Medicare's spending trends and try to control growth. Medicare Part B, the program for noninstitutional providers such as physicians, outpatient departments and home health agencies, is spending more than it takes in.
That has occurred, in part, because of the shift of an estimated $40 billion over five years in home health spending from Part A to Part B, but also because the site of care for many procedures has shifted from hospital beds to outpatient departments.
Because only about one-quarter of Part B is funded by beneficiary premiums, the rest is financed through general federal revenue, making it a special focus of budget hawks. In fact, according to the CBO, the general fund's contribution to Medicare Part B will more than double between now and fiscal 2010, to $162.1 billion from $70.5 billion.
Overall Part B spending also will more than double over the same period, to $212.9 billion in fiscal 2010 from $99.9 billion in the current fiscal year. During that time, Medicare Part A spending will increase 76% and the U.S. gross domestic product will grow 56%.
"Spending in any sector that starts growing faster than the economy or any other part of the budget is a concern," Wilensky says.
That is a description that also could fit Medicare in general. The balanced-budget law brought Medicare spending growth to a near-halt in 1998 and 1999-including a reduction in spending in 1999-but "giveback" bills in consecutive years have boosted Medicare growth rates. In fact, the CBO estimates a growth rate for Medicare of 10.5% per year for 2000 and 2001, just four-tenths of a percentage point below the spending growth rate for the six years that preceded the budget law.
That will be followed by the 7.2% annual growth rate through 2011 without any changes in the law, according to the CBO. In part, the increase will be driven by higher prices paid to hospitals, but it also will be driven by growing enrollment beginning in 2006, with the retirement of larger numbers of people born after the Depression.
Those factors driving faster spending growth will be held in check by less fraudulent and abusive billing by providers, according to the CBO. The government's tougher enforcement and expansive investigations into provider fraud have forced most providers to bill more cautiously. That, in turn, has resulted in one-time reductions in projected cost growth and will put the brakes on spending growth in the future.
To be sure, the imposition of prospective payment on skilled-nursing, home-care and outpatient departments-where hospitals previously shifted care to make up for payment caps in their inpatient wards-also will have a permanent braking effect.
Return to trouble
But some believe the CBO's estimates are too optimistic.
Stuart Altman, a Brandeis University healthcare policy scholar who for 13 years chaired a predecessor commission to MedPAC, says the CBO is underestimating inflation in Medicare because it hasn't fully accounted for rising costs from the ever-dwindling labor supply, prescription drugs and new medical and information technologies.
"I'm predicting we're going back to the '80s (growth rates) so fast it'll make your head spin, on the private side as well as the public side," Altman says. "I think there's much greater cost pressure in the provider community."
That could put wind in the sails of the advocates for a Medicare overhaul. Accelerating Medicare spending, particularly if coupled with lagging payroll tax collections in the Part A trust fund, could bring that fund's exhaustion date much closer than 2025, the year predicted by the fund's trustees.
The threatened insolvency of the trust fund has driven most efforts to rein in Medicare spending in the past. In 1997, before the Balanced Budget Act passed, for example, the trust fund was predicted to go broke in 2002.
Without a looming crisis, Congress is less likely to move on Medicare reforms. Thus, a shortened life span for the trust fund from higher spending growth could be a godsend for Medicare reform advocates.
The leading model for Medicare reforms is based on a proposal developed, but never approved, by a bipartisan commission that disbanded two years ago. Under this model, the federal government would pay 88% of the average costs of private-sector plans that cover the current Medicare benefit package, which doesn't include prescription drugs.
The latest version of that proposal was introduced as two separate bills last month by Sen. John Breaux (D-La.), who chaired that commission, and Sen. William Frist (R-Tenn.).
Many congressional leaders, including Sen. Charles Grassley (R-Iowa), chairman of the Senate Finance Committee, and Rep. William Thomas (R-Calif.), chairman of the House Ways and Means Committee, are planning to make a push for Medicare reforms this year.
But the reform push probably will come regardless of Medicare spending growth, Kuhn says.
"I think it presents an opportunity for a segue," he says. "(Spending) will be part of the backdrop, but I think (advocates) have a vision of a better, more efficient system."
But Altman says the boom-bust cycle in spending patterns could haunt a reformed Medicare system. The balanced-budget law's expenditure-growth caps followed years of tighter fees from private managed-care plans. In the wake of the budget law, providers have gotten more aggressive in their negotiations with the private plans, causing higher spending growth on the private side.
HMOs with big Medicare business have faced a "double-whammy," including less-generous government payments and higher fees to providers both in their Medicare HMO networks and commercial networks. That is why many managed-care plans are struggling, reducing their benefits and pulling out of some markets.
That is a pattern that is likely to repeat itself if private health plans take on a larger role in a reformed Medicare system, he says.
John Rother, legislative director with the American Association of Retired Persons, agrees. "The larger questions with regard to Medicare reform are HMO withdrawals and the collapse in the belief that HMOs offer an answer," he says.
That should draw Medicare reformers to a different conclusion about the path to a more-efficient system, Rother says. He says they should instead allow HCFA to become a more prudent purchaser, calling for more competitive bidding and formation of preferred provider networks.
That, however, "also leads you to more controversy because provider groups would see that as a threat," Rother adds.