Opinion Column

The Independent Payment Advisory Board and Health Care Price Controls

White House Budget Director Peter Orszag has speculated that creation of the new Independent Payment Advisory Board just might be viewed decades from now as the most important and far-reaching change enacted in the entire health reform legislation–despite the lack of significant public attention to it before passage.  He might be right.

After all, the IPAB–a 15 member independent panel, to be appointed by the president and confirmed by the Senate–is now charged with enforcing an upper limit on annual Medicare spending growth.  That’s right: Medicare spending is now officially capped.  Even most people who follow health policy closely don’t seem to know this.  Perhaps it’s just too hard to believe that a Democratic Congress, prodded by a Democratic president, actually voted to cap spending for a cherished entitlement.

But make no mistake: Beginning in 2015, Medicare spending is now supposed to be limited, on a per capita basis, to a fixed growth rate, initially set at a mix of general inflation in the economy and inflation in the health sector.  Starting in 2018, the upper limit is set permanently at per capita gross domestic product growth plus one percentage point.

One might be tempted to think this is an area of the legislation which should have gotten some bipartisan support.  After all, in the past, it’s the Republicans who have pushed for these kinds of caps on entitlement costs, with Democrats fighting them every step of the way.  Conservatives know that if they are to have any hope of fighting off a major tax increase to close the nation’s budget gap, Medicare spending growth has to be slowed, and soon.

But the IPAB provision is actually an indicator of why there is a great divide in American health policy.  To hit its budgetary targets, the IPAB is strictly limited in what it can recommend and implement.  It can’t change cost-sharing for covered Medicare services.  Indeed, it can’t change the nature of the Medicare entitlement at all, or any aspect of the beneficiary’s relationship to the program.  The only thing it can do is cut Medicare payment rates for those providing services to the beneficiaries. 

This wasn’t an accident.  It reflects the cost-control vision of those who wrote the bill. They believe the way to cut health care costs is with stronger federal payment controls.  They envision the IPAB coming up with new payment models which will push hospitals and physicians to emulate today’s most efficient delivery models.   Call it “government-driven managed care.”

But the efficient, private sector delivery models in operation today have been built on a principle of exclusivity.  They don’t take just any licensed provider into the fold.  They operate highly selective, if not totally closed, networks.  That’s the way they get control over the delivery system.  Low quality performers are dropped or avoided altogether, and tight processes are established to streamline care and eliminate unnecessary steps.

The federal government has never shown any capacity to exclude otherwise qualified suppliers of services from Medicare.  Indeed, the whole point of the fee-for-service model which Congress has so jealously protected over the years is that beneficiaries get to see any licensed provider of their choosing, to whom Medicare pays a fixed reimbursement rate, no questions asked.   

In the past, to hit budget targets, Congress has always preferred to impose across-the-board payment rate reductions to provisions which would punish or reward providers based on some measure of quality or efficient performance.  Tellingly, that was also true in the bill Congress just passed.  The big savings comes from arbitrary cuts in payment updates for institutional providers of care.  The much-touted “delivery system reforms” will produce almost no savings according to both the Congressional Budget Office and the chief actuary of the Medicare program.  When push comes to shove, the IPAB will almost certainly fall into the same trap.  To cut spending fast and with certainty, the preferred solution will always be deeper payment rate reductions rather than reforms which may or may not lead to more efficient organizational arrangements.

Even as he has been praising the IPAB’s potential, Orszag has also gone out of his way to attack Wisconsin Congressman Paul Ryan’s proposal to convert the Medicare entitlement into a fixed, defined contribution toward the purchase of insurance.  It’s an entirely different way of limiting Medicare’s cost growth.  Beneficiaries would have strong incentives to get the most value possible from their fixed entitlement.  Rep. Ryan’s critics say the plan would leave seniors holding the bag, contending that the entitlement would gradually cover a smaller and smaller share of costs.  But that’s only true if the reform didn’t also lead to a more efficient health sector.

Most sectors of the American economy are experiencing profound transformations as the workforce becomes ever more productive.  What’s driving the change is a competitive global marketplace. 

The question for health policy is this:  What will bring about a similar transformation in American medicine. 

Certainly, more of the same payment rate reductions will not do it.  Medicare’s chief actuary has already said that the payment cuts in the health reform law are unsustainable because they don’t change the cost structure for those providing care.  In a very real sense, seniors will be the ones holding the bag from these cuts when they can’t access care due to a lack of willing suppliers.

Rep. Ryan’s plan would bring the power of a consumer-driven marketplace to the health sector, with the government providing oversight and consumer protection.  There’s plenty of evidence indicating that such a decentralized approach would work far better than central-planning at weeding out unnecessary costs while still improving the quality of patient care.

James C. Capretta is a Fellow at the Ethics and Public Policy Center. He served as an associate director at the White House Office of Management and Budget from 2001 to 2004.