Medicare Waste is Rightly Back on the Table

The Senate is reportedly exploring options to reduce Medicare waste, fraud, and abuse as they consider changes to the House-passed One Big Beautiful Bill Act (OBBBA). This would be a welcome improvement and in fact something we suggested recently. There are a number of bipartisan reforms – such as adopting site-neutral payments or reducing excessive risk scores in Medicare Advantage – that could lower Medicare costs without cutting benefits and help offset the $3 trillion net cost of the current reconciliation bill.

Medicare is the largest government program that can be addressed in reconciliation, with a projected $13 trillion cost over the next decade. There is a broad expert consensus that a significant share of that spending is wasteful or unnecessary and could be reduced without meaningfully reducing access to or quality of care. Indeed, Presidents Trump, Obama, Biden, and Bush each proposed hundreds of billions of dollars in Medicare savings from reducing wasteful spending and overpayments – including many of the same policies. 

As policymakers work to improve the OBBBA, they should incorporate these and other reforms.

Options to Reduce Waste in Medicare

Source: Committee for a Responsible Federal Budget estimates based on CBO projections.
T = Version of this policy appeared in Trump budget; O = Version of this policy appeared in Obama budget; B = Version of this policy appeared in Biden budget; W = Version of this policy appeared in Bush budget.
1. Medicare previously reimbursed 340B hospitals for drugs at 22.5 percent below average sales prices to reflect their lower costs, but the courts ruled CMS did not have the legal authority to do this under existing law.
2. We estimate roughly $80 billion of this savings is from excluding the health risk assessment and $45 billion from using two years of data.
*Based on score from 5 years ago or more.
 

Perhaps the most broadly-supported reform is the adoption of site-neutral payments in Medicare. Medicare currently pays higher rates for procedures performed in hospital outpatient departments than for the same procedures performed in a physician’s office. The payment differentials are sometimes quite large – such as an average of 125 percent more for basic evaluations – and can drive hospital consolidation.  

Members of both parties have endorsed site neutrality for some or all Medicare services, including as part of President Obama’s final budget, most of President Trump’s budgets, the bipartisan House-passed Lower Costs, More Transparency Act, Senator John Kennedy's (R-LA) Same Care, Lower Cost Act, and a bipartisan site-neutral framework from Senators Bill Cassidy (R-LA) and Maggie Hassan (D-NH). The policy – which is also supported by experts on the left, right, and center – could save over $150 billion through 2034. We’ve estimated it could also reduce premiums and cost sharing by tens of billions more.

Numerous other policies with broad support could lower Medicare costs and reduce waste without cutting benefits. For example, Presidents Trump, Obama, and Bush have all supported reducing payments to post-acute care facilities, reforming Medicare payments for Graduate Medical Education (payments to hospitals and new doctors for their residency programs), restricting or ending reimbursements for “bad debts” (uncollected cost sharing), and modifying hospice payments. Presidents Trump, Obama, and Biden have all supported extending the Medicare ”sequester,” which reduces provider payments by 2 percent, and changing Medicare Part D cost-sharing rules to encourage the use of generic drugs. Together, these policies could save up to $300 billion through 2034.

Lawmakers could also consider reducing reimbursements for physician-administered drugs to hospitals benefiting from the 340B drug discount program – as currently those hospitals are able to pocket most of the drug savings. This change could save up to $75 billion over a decade.

And most significantly from a savings perspective, lawmakers could consider reducing Medicare Advantage (MA) overpayments, which we recently estimated could total $1.2 trillion over the next ten years – about 14 percent of total MA spending. These overpayments are driven mainly by the fact that insurers make their enrollees appear sicker (while simultaneously selecting a healthier population) to take advantage of “risk adjustment” payments, a phenomenon that has been recognized by experts on the left and right.

In the Senate, the bipartisan bill from Senators Cassidy and Jeff Merkley (D-OR), the NO UPCODE Act, would limit the ability of MA plans to inflate their enrollees’ risk scores. And although President Trump’s prior budgets had not proposed any MA reforms, Office of Management and Budget Director Russ Vought proposed well over $100 billion of MA savings in late 2022. More recently, the Trump Administration announced an effort to beef up MA plan audits to recover more overpayments, building on efforts under the Biden Administration. CMS Director Mehmet Oz has also discussed the importance of addressing upcoding. 

With a projected cost of $13 trillion over the next decade, lawmakers should be keen to adopt policies with broad support among experts that will reduce waste and excessive payments in Medicare. While these savings would ideally be used to reduce the deficit, they could also lessen the impact of OBBBA on the debt.