How to Reduce Medicare Spending Without Cutting Benefits

During the 2016 presidential campaign, President Trump argued against making cuts to Social Security and Medicare. At the time, we showed that promises not to touch these programs were foolhardy, considering that they make up over 40 percent of the budget (excluding interest) and more than 60 percent of its growth over the next decade – not to mention both programs are headed toward insolvency.

Fortunately, when it comes to Medicare, it is possible to save hundreds of billions of dollars without cutting benefits. In testimony to the House Energy & Commerce Committee, CRFB's senior policy director argued that Medicare reform should begin by pursuing "cost benders" that reform the health care system and thus reduce costs (and often improve quality) for individuals and the Medicare program alike. In general, these changes improve the health care system – they do not cut benefits. The Medicare Payment Advisory Commission (MedPAC) and others have identified many other areas where eliminating or reducing unnecessary payments and subsidies could reduce costs without significantly harming access or quality. Similar savings can come from prescription drugs – as recently suggested by Office of Management and Budget Director Mick Mulvaney.

Bringing Medicare costs under control will by no means be easy. However, there are a number of ways to begin to do so without truly cutting benefits. Below, we discuss many such options.

Expand Bundled Payments and Promote New Payment Models – $5 billion to $50 billion. Medicare's "fee-for-service" payment model generally encourages each provider to increase utilization and provides no incentive to coordinate services. Reforms that move away from this model toward one that rewards quality, efficiency, and care coordination would result in higher quality care for beneficiaries and savings for Medicare. For example, CRFB has previously proposed eventually mandating bundled payments for inpatient stays and 90 days of post-acute care for a number of conditions while also using these bundles to reduce identified overpayments in post-acute care.

Reduce Preventable Readmissions and Unnecessary Complications – Up to $10 billion. The Hospital Readmissions Reduction Program (HRRP) penalizes hospitals with high readmission rates for certain medical conditions, reducing unnecessary costs for Medicare and creating an incentive to provide better quality care. Many analysts credit HRRP for contributing to the reduction in readmission rates. The program could be expanded by increasing penalties and extending them to more medical conditions and types of providers.

Reduce Payments to Post-Acute Providers – $25 billion to $75 billion. A number of bipartisan plans have recommended reforming and reducing payments to post-acute care providers (home health agencies, skilled nursing facilities, etc.). According to MedPAC, the current payment system for post-acute providers incentivizes treating certain types of patients over others, leads to wide variation in program spending across different regions, and does not align payments with treatment costs. Potential reforms might include restructuring payments using a bundled payment approach, reducing annual payment updates to post-acute providers, or moving to a more equitable and uniform payment system that bases payments on patient characteristics.

Reform and Reduce Payments for Graduate Medical Education – $15 billion to $40 billion. Medicare provides special payments to teaching hospitals that hire medical residents that cover their compensation and teaching costs. MedPAC has consistently found that these payments are higher than hospitals' actual teaching costs, suggesting a smaller subsidy would not significantly undermine hospitals' teaching activities.  

Reduce Medicare's Coverage of Bad Debts – $15 billion to $50 billion. Medicare currently partially reimburses hospitals and certain other providers for unpaid beneficiary cost sharing known as "bad debts." Reducing or eliminating payments for bad debts could generate Medicare savings while also encouraging providers to better manage care and explore less costly alternatives ahead of time.

Expand Medicare and Medicaid Drug Rebates – $50 billion to $150 billion. Currently, the federal government pays a reduced rate for prescription drugs purchased through the Medicaid program by requiring manufacturers to provide rebates to the government. In order to reduce federal spending on drugs, policymakers could expand these rebates and/or apply them to some or all beneficiaries within Medicare Part D.

Reduce the Price and Use of High-Cost Drugs – Up to $30 billion. Additional options to reduce Medicare spending on pharmaceuticals include banning so-called “pay-for-delay” agreements designed to prevent manufacturers from bringing generic drugs to market and reducing the patent period for certain types of brand-name drugs. Other options could also include reforming reimbursements of physician-administered drugs in the Part B program to encourage physicians to choose cheaper and more effective drugs or encouraging Part D low-income subsidy beneficiaries to use generic drugs by lowering copays for generic drugs and raising them for branded ones.

Adopt Competitive Bidding for Medicare Advantage – $25 billion to $50 billion. Under the current Medicare Advantage (MA) program, Medicare pays private health plans a monthly amount based on a benchmark equal to a fixed percentage of fee-for-service costs in the local area. Adopting a competitive bidding structure for the benchmark, determined by the average bid, could bring down MA costs and improve quality, particularly in urban areas with greater competition among health plans.

Reform Medicare Cost-Sharing Rules – Up to $20 billion. A number of proposals have been put forward to replace current Medicare cost-sharing requirements with a more straightforward and uniform approach for Parts A and B along with limits on catastrophic costs. Importantly, a comprehensive cost-sharing reform can be designed to reduce federal costs without increasing net out-of-pocket costs for seniors simply by reducing excess utilization. More savings could be generating through modest increases in net out-of-pocket costs.

Restrict Supplemental Coverage – $50 billion to $125 billion. Medigap plans tend to be a bad deal for both beneficiaries and the federal government, resulting in higher Medicare spending and greater out-of-pocket costs for most seniors. Policymakers could reduce excess utilization by further limiting the ability of Medigap plans to provide first-dollar coverage. Doing so would reduce net out-of-pocket costs for Medicare beneficiaries because it would lower the high premiums they currently pay for Medigap plans. Policymakers could also apply this principle to employer-sponsored retiree health benefits by allowing employees to “cash out” of their employer-provided plan in exchange for a premium subsidy and restricting TRICARE-for-Life supplemental coverage from covering first-dollar costs as well.

Limit Medical Malpractice Claims – $50 billion to $70 billion. An option that would lower health care spending for all payers, including Medicare, would be to impose a variety of federal limits on medical malpractice claims, such as capping damages, shortening the statute of limitations, and limiting attorney fees. These reforms would lower costs by reducing malpractice insurance premiums and decreasing “defensive medicine,” where providers over-prescribe services to help avoid the risk of future legal action.  

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While each of these options could face objections, this list clearly illustrates that there is plenty of room for policymakers to reduce projected Medicare spending growth without harming beneficiaries. The worst thing we could do for Medicare, though, is nothing. The Medicare Trustees project the Medicare Hospital Insurance (HI) trust fund will be depleted in 2028, and overall Medicare spending is growing at an unsustainable rate. The depletion of the HI trust fund or a fiscal crisis caused by unsustainable spending growth would require abrupt changes in the program that would likely impose major burdens on beneficiaries. It would be far better to act now to reduce unnecessary spending.