Beware the unintended consequences of across-the-board cuts

Some deal. Last week's bipartisan budget compromise gave most domestic discretionary spending programs a small reprieve from the 2% sequestration cuts—except Medicare providers. Maybe it's the media's relentless focus on high hospital charges (which are rarely collected), but providers clearly have few friends in Washington.

The relaxation of sequestration does have some ancillary benefits for the healthcare sector. Medical research supported by the National Institutes of Health will see some of its funding restored. Public health agencies such as the Centers for Disease Control and Prevention may be able to resume a few of the functions left languishing by sequestration.

But the $62 billion increase in the overall domestic discretionary budget, which brings the total for this year including defense spending to $1.021 trillion, is funded in large part by extending Medicare's 2% cuts for an additional two years to 2023. That most healthcare reform advocates went along with the plan shows there is bipartisan support in Washington for keeping a tight lid on spending by healthcare institutions that deliver services to the elderly.

Physicians, on the other hand, face a better situation. They were given another brief reprieve from the pay cuts that 1997 legislation nominally imposed whenever overall growth in Medicare's physician pay exceeded the growth rate of the economy. For those keeping score, the physicians' lobby has a near-perfect track record in getting Congress to enact temporary postponement of the pay cuts mandated by the so-called sustainable growth-rate formula.

Congress may even come up with a comprehensive fix for the SGR next year. There is a growing bipartisan consensus that overall physician pay can be held flat while building in various incentive payments for higher quality.

That will still cost money. Congress must raise $116.5 billion over 10 years to permanently replace the SGR. So far, House and Senate leaders have given no clues as to how they would fund repeal, which is required by the nation's balanced budget law.

Given their recent track record, there is every reason to believe they will finance at least part of that fix by slashing funding from some other parts of Medicare.

The saddest part of this approach is that Medicare spending by hospitals and other institutions is coming down, and fairly rapidly. Yet no one on Capitol Hill has conducted oversight hearings or investigated why. Are the pilot projects on accountable care and shared savings having an impact? They don't know and apparently don't care.

During the week when they were asked to vote on extending the 2% sequestration cuts for Medicare, not a single one of the many oversight hearings held on Capitol Hill—including one where a Republican congressman accused HHS Secretary Kathleen Sebelius of acting like the leader of North Korea—dealt with changes in the delivery system that are underway.

Nor did our solons show any interest in exploring the consequences of the provider cuts they are about to extend. When Medicare imposes a 2% cut, it cuts rates by 2%. But what if providers respond by increasing volume? Isn't it possible that the across-the-board meat ax approach favored by Congress will have the opposite effect and actually increase spending?

A growing body of economic literature suggests not. According to a study that appeared in October in Health Affairs, when Medicare cuts hospital prices, seniors wind up using less inpatient care. Lead author Chapin White of the Center for Studying Health System Change estimated a 1% reduction in prices leads to 0.5% reduction in patient volume. A similar study by Chapin and his colleagues on post-acute care found a 0.13% drop in use for every 1% reduction in reimbursement.

In other words, the common wisdom that providers “make it up in volume” is wrong. In fact, the supply curve appears to move in the opposite direction in healthcare as it does in all other areas of economic life. If true, a 2% cut in rates will lead to a greater than 2% cut in spending.

Hospitals and other providers may adjust to the cuts by carrying out the delivery system reforms piloted in the Affordable Care Act, which were designed to reduce use in a manner that improves outcomes. Down that path is higher-quality care for patients and a more affordable price for taxpayers.

Or, they might simply respond to the economic incentives created by a Congress that doesn't have the time or inclination to understand which of the new delivery system and reimbursement models work. They will reduce use based on money-driven factors.

It is anybody's guess what impact that will have on the quality of care offered the nation's seniors.

Follow Merrill Goozner on Twitter: @MHgoozner