Peter Orszag fleshes out strategies for Medicare cost cutting

July 1, 2011


ATLANTA — Peter R. Orszag, one of the chief strategists behind the Obama administration's health reform initiative, told a group of Catholic health care leaders meeting here that the U.S. will remain mired in legislative gridlock for a long time. Therefore, he said, leaders must learn to use inertia and gridlock to their advantage.

Orszag, a vice chairman of Citigroup, was the first head of the Office of Management and Budget in the Obama administration. He said the health reform legislation passed into law last year is aimed at reshaping the health delivery system into one "more focused on value and quality than volume and intensity."

The rate at which health care costs are growing is at the heart of the country's long-term fiscal problem, according to Orszag. These rising costs are spread out across the entire health care system in the U.S., but much of the focus is on slowing growth in Medicare costs in part because that is necessary to achieve meaningful reform.

During a keynote speech at the Catholic Health Assembly, the economist said that the Patient Protection and Affordable Care Act has two built-in mechanisms to circumvent political gridlock and achieve health system improvements: funding for pilot projects from the Centers for Medicare and Medicaid Services and a to-be-created Independent Payment Advisory Board.

That board has been charged with putting forth proposals aimed at keeping Medicare spending growth within a certain target range as it moves the system toward "value-based" payments aimed at reining in costs while raising care quality. Beginning in 2015, a 15-member IPAB board must make recommendations to reduce Medicare spending when that spending is expected to exceed a target level.

Orszag said that polarized politics in Washington may make it difficult to get nominees confirmed to the IPAB board. "If we succeed in getting people confirmed, I think it does hold promise to overcome the gridlock."

Orszag said that he does not expect the board to impose either "hard rationing" of medical services or "blunt provider payer reductions" to meet its cost saving goals. Rather, he expects it to experiment with different payment incentives. But it's not entirely clear how the board will keep Medicare cost growth under control. Orszag said an uncertain path, and one that will likely be marked by false starts, is far preferable to staying on the present course.

"There are going to be mistakes," Orszag said. "I think it is better to try" to bend the Medicare cost curve, "even acknowledging imperfection."

Orszag said the drivers behind hyperinflation in health care include technology — not all of which improves patient care or outcomes — and the "enormous variability" in the way medicine is practiced. Such diverse approaches to similar pathologies and symptoms show up not only across regions, but across hospitals within regions and even under one roof in one hospital, he said.

He cited research released earlier this year by the Medicare Payment Advisory Commission, a congressional agency known as MedPAC. The research shows that higher spending areas are not generating better patient outcomes than lower spending regions. The highest cost region spent 2.5 times more per Medicare beneficiary than the lowest cost region.

Orszag said the clinical variation is most pronounced in treating diseases and illnesses in which there is the least medical science establishing care protocols. Such protocols are clinically proven to produce the best patient outcomes.

Significantly, the MedPAC research shows variation in spending is owing to differences in the "intensity of services" provided rather than service costs — a variation that the study design ensured could not be attributed to differences in patient acuity level. Orszag said that to control Medicare cost growth, ultimately the system must address the structural drivers of that intensity.

There are a few ways to do this, including reducing the amount payers reimburse for select services that add costs but don't improve patient outcomes. Other ways include care rationing and shifting more first-dollar costs to consumers. In Orszag's opinion, none of these approaches would be effective.

Blunt reductions in payments to providers would cut costs in the short term, but ultimately the unreimbursed provider costs would show up elsewhere in the health care system. What is more, the approach would make it harder for Medicare beneficiaries to access care, he said.

Orszag called rationing "a horrifying off switch for specific services" and an approach that won't be used in Medicare in the foreseeable future.

He is critical of injecting principles of consumer-driven health care into the Medicare model — an approach he said is at the heart of a Medicare voucher proposal backed by House Budget Committee Chairman Rep. Paul Ryan, R-Wis. Orszag said consumer-driven care won't bend the Medicare cost curve because medical spending is so highly concentrated among the sickest, most medically complex patients whose catastrophic care coverage is not impacted by higher deductibles and out-of-pocket costs in consumer-driven models. Only 5 percent of Medicare beneficiaries account for 43.1 percent of Medicare claims.

In contrast, Orszag said the Affordable Care Act tries to wring costs out of the system by focusing resources on high-cost patients, by making care delivery more efficient using an accountable care organization model and by promoting disease prevention and wellness.

Orszag said accountable care organizations have the potential to be "highly efficient, cost-cutting machines."


Copyright © 2011 by the Catholic Health Association of the United States
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