Published 6/1/2010
Alok D. Sharan, MD; Ryan M. Nunley, MD

Where are the savings in healthcare reform?

Can potential savings offset the immense cost of reform?

The Patient Protection and Affordable Care Act signed by President Obama represents the first attempt at comprehensive healthcare reform since the administration of President Lyndon Johnson. Through this legislation, an estimated 32 million additional Americans will be covered by some type of health insurance, leaving only 5 percent of the population without any coverage.

To achieve this historic effort, the Congressional Budget Office (CBO) estimates that the legislation will cost $940 billion over the next 10 years. But the legislation also includes provisions that are anticipated to reduce healthcare costs, and it is anticipated that these savings will offset much of the cost (Fig. 1). This article will attempt to detail where the savings will be achieved, based on the CBO analysis.

Medicare Advantage
The Medicare Advantage program was created under the administration of President George W. Bush as a method to allow private insurers to provide health care for Medicare beneficiaries. Generally, the government pays these insurers anywhere from 95 percent to 115 percent of Medicare fee-for-service payments to provide coverage for the individual Medicare beneficiary.

During the debate over healthcare reform, many heated discussions focused on the increased amounts these insurers were receiving and the impact of these payments on Medicare’s future fiscal stability. The final bill reduces the variance in payments to Medicare Advantage programs over the next 3 years, resulting in an estimated $136 billion in savings over the next 10 years.

Provider productivity
The Medicare sustainable growth rate (SGR) formula—as all physicians know—takes physician productivity into consideration as a means to regulate reimbursement. Reimbursements to many other providers of Medicare services, however, are based on growth of the costs of goods or on the Consumer Price Index (CPI). As a result, these providers have seen positive updates to their reimbursement levels.

Under the Patient Protection and Affordable Care Act, a productivity adjustment will be applied beginning in 2012 to the updates for many other healthcare providers, as well as to the CPI updates for specific Part B items and services. The following providers would be affected by this provision:

  • acute and long-term care hospitals
  • inpatient rehabilitation facilities
  • hospice care
  • skilled nursing facilities
  • ambulatory surgical services
  • orthotics and prosthetics
  • laboratory services

The CBO estimates that this change would allow for a savings of $157 billion over 10 years.

Additional savings within Medicare
One area that generated significant discussion and controversy during the healthcare debate concerned the creation of an Independent Payment Advisory Board (IPAB) to advise the Congress on ways to achieve savings in the Medicare program. The idea for an IPAB was based on the government’s successful efforts to close down military bases using a similar commission structure.

The IPAB provisions don’t go into effect until 2014 and would apply only if the projected per capita Medicare spending growth rate exceeds a target growth rate. Under the legislation, however, many of the recommendations of the IPAB will undergo a fast-track approval process so that they can be implemented in an expedited manner.

The IPAB is prohibited from submitting proposals that would ration care; increase revenues or change benefits, eligibility, or Medicare beneficiary cost-sharing (including Parts A and B premiums); or result in a change in the beneficiary premium percentage or low-income subsidies under Part D prior to 2019. Many hospitals and hospices are exempt from any savings proposals until 2020. Nonetheless, the CBO estimates that the IPAB will save $16 billion over the next 10 years.

Limits on specialty hospitals
Specialty hospitals run by physicians experienced significant growth during the last two decades. During the healthcare debates, opponents of these hospitals were able to successfully argue that these hospitals contribute to increased expenses for the Medicare program. As a result, the legislation attempted to limit the growth of these facilities.

Beginning in 2010, new physician-owned hospitals will be banned from participating in Medicare; savings from this measure are anticipated to be $500 million over the next 10 years.

DSH payment reductions
Until now, under Medicare, hospitals received payments under the disproportionate share program (DSH) for taking care of uninsured individuals. As a result of the new legislation, however, the CBO estimates that 95 percent of Americans will have some type of health insurance, thus enabling changes to the DSH payment program.

Although hospitals will still receive payments for uncompensated care, a new formula will be used beginning in 2014 that takes into account the decreasing number of uninsured individuals and decreased amount of uncompensated care. The CBO estimates that the government will save $22 billion over the next 10 years as a result of decreases in DSH payments.

Realigning reimbursements
Medicare has traditionally been administered as a fee-for-service program. Many legislators have commented that this structure fosters overutilization of services, resulting in increased expenses for the Medicare program.

The new legislation allows the Secretary of Health and Human Services to develop or continue demonstration programs and pilot programs to examine new methods to realign physician reimbursement. Some ideas that were discussed include the creation of accountable care organizations (ACOs) or the creation of medical homes. In addition, a new Center for Medicare and Medicaid Innovations will be created to closely examine these programs. The CBO believes that the government will save $13 billion over the next 10 years as a result of these new programs.

The Patient Protection and Affordable Care Act is more than 2,400 pages long and proposes a multitude of methods to save money for the Medicare program. The President and other supporters of the legislation point to some of the cost savings programs listed above as necessary steps toward maintaining the solvency of the U.S. healthcare system while increasing access for Americans.

Although the new legislation does not address all the concerns or the problems facing the nation’s healthcare system, the opportunity exists for future legislation to improve upon some of these initial actions.

The Washington Health Policy Fellows include Alok D. Sharan, MD; Ryan M. Nunley, MD; Manish Sethi, MD; Adrian Thomas, MD; Taruna Madhav, MD; A. Alex Jahangir, MD; Aaron Covey, MD; James Genuario, MD, MS; John H. Flint, MD; Sharat K. Kusuma, MD; Samir Mehta, MD; and Anil Ranawat, MD.

Editor’s note: This is the second in a series of articles on redefining health care in America prepared by the AAOS Washington Health Policy Fellows. The series takes a close look at various aspects of the healthcare reform legislation signed by President Obama earlier this year.