President Obama used to claim Medicare would save money by implementing the principle that if the “red pill” works just as well as the “blue pill,” but costs half as much, patients should get the red pill. That dangerously simplistic notion now boasts an enforcer created by last year’s Obamacare legislation.
The Independent Payment Advisory Board (IPAB) is a panel of 15 unaccountable presidential appointees. IPAB’s authority is triggered when Medicare’s future spending is forecast to increase faster than a target rate. The target growth rate through 2018 is the average of the change in the Consumer Price Index (CPI) and the medical care component of the CPI.
Medical prices have outpaced other prices for a quarter-century. History suggests that we should expect Medicare spending to increase by 6.7 percent, well above the estimated target of 4 percent. Obamacare actually expects 15 presidential appointees to cut the rate of Medicare spending by two-thirds - and without rationing. Where, exactly, will the cuts occur?
Obamacare assumes dramatic cuts to physicians’ fees, but this is unlikely. Beginning in 2003, Congress has delayed scheduled cuts to physicians’ fees 13 times. In December, Mr. Obama approved the latest delay, which runs through the end of this year. If the cuts are not delayed, Medicare fees paid to physicians will drop 28 percent in January. It is highly implausible Congress will allow this to happen.
Obamacare also imposed various questionable measurements of “value” and “productivity” on providers such as hospitals, which are supposed to drive cuts of more than $200 billion this decade. It is also highly unlikely all these cuts will take effect. Hospitals operate in every congressional district and can therefore mount a credible “all hands on deck” lobbying effort when their revenues are threatened. Because they also spend a lot on supplies and services locally, they enjoy an even stronger natural coalition of allies in congressional districts than physicians do.
Although IPAB can theoretically cut Medicare Advantage, the private program used by one-quarter of Medicare beneficiaries, Obamacare has already subjected Medicare Advantage to $145 billion in cuts this decade. This analysis suggests that IPAB will have to carry a lot more weight than expected. In 2019 alone, Medicare spending will likely be about $75 billion higher than officially estimated - or 7.5 times greater than what IPAB is called upon to save in the official estimate. For the entire decade, Medicare spending will be more than $400 billion greater than Obamacare estimates.
Per the presidential directive, IPAB will certainly raid the medicine cabinet. But prescription drugs only account for 12 percent of Medicare spending. And prescription use is increasingly dominated by generic drugs, often available at chain pharmacies for less than $10 for a month’s supply. Generics now account for about 8 in 10 retail prescriptions filled. It’s not possible that IPAB can find much more savings there.
Branded drugs made available within the last two years only accounted for $4 billion of all U.S. prescription spending last year. Medicare might account for one-third of this. IPAB could deny coverage of every innovative drug - red, blue or polka dot - every year and not come close to the savings expected in any reasonable scenario.
Taking control of Medicare spending away from 535 politicians in Congress is a great idea but giving it to 15 presidential appointees is not. Congress should abolish the IPAB and put Medicare dollars under control of patients by giving each Medicare beneficiary a fixed payment. Let physicians and patients - not political appointees - decide who gets which pill.
John R. Graham is the director of Health Care Studies at the Pacific Research Institute.