Medicare’s chief actuary rejects rosy projections from CMS
posted at 9:30 am on August 9, 2010 by Ed Morrissey
Last week, the Obama administration used the Medicare Trustees Report to argue that its ObamaCare bill had created new life for the troubled entitlement. The economics site E21 took a closer look at the report and discovered that it contained an unprecedented dissent — from Medicare’s own chief actuary. The memo claimed that the estimates used by the White House and its allies underestimated costs by a whopping 68% and could not possibly be seen as a good-faith projection of the program’s future:
“(T)he financial projections shown in this report for Medicare do not represent a reasonable expectation for actual program operations in either the short range. . . or the long range. . . . I encourage readers to review the ‘illustrative alternative’ projections that are based on more sustainable assumptions for physician and other Medicare price updates.”
These remarkable words are found, in all places, in the “Statement of Actuarial Opinion” in the back of the 2010 annual Medicare Trustees’ Report.
It is difficult to overstate how unusual this development is. The normal process with the annual Trustees’ Reports is for the Trustees to develop and publish the best available projections for the future finances of Social Security and Medicare. The respective Social Security and Medicare actuaries then sign a pro forma blessing of those projections, which is tacked to the back of the report when released to the public.
This year, the Medicare Chief Actuary clearly did not feel he could in good conscience sign such a declaration.
What happened? Our old friend the “doctor fix” raised his head again. It turns out that the Medicare trustees’ projection of costs relies on the postponed 23% cuts in reimbursements to take effect — even though the White House and the Democrats have repeatedly promised the AMA they would be repealed. Democrats passed a temporary suspension of the cuts in June, but are widely expected to pass another, more lengthy suspension before those expire in November.
The actuary also rejected the idea that “economy-wide productivity” gains would drive costs downward:
The other major source of projection error is the assumption, enshrined in the recent health care law, that future program cost growth will be contained by downward adjustments in annual price updates, reflecting in turn the assumption that health service productivity growth will parallel “economy-wide productivity.” The actuary states, however, that “(t)he best available evidence is that most health care providers cannot improve their productivity to this degree – or even approach this level – as a result of the labor-intensive nature of these services.”
The actuary’s memo provides greater detail on the point. The memo notes the long-acknowledged phenomenon that productivity growth in services industries is generally not as rapid as in industries affected more by technology improvements. It is possible, for example, for productivity in personal computer manufacturing to improve several-fold in a short time. It is not similarly possible for productivity in nursing services to mushroom in the same way. The actuary’s memo rightly notes the generally slower pace of productivity growth in the health care field, which has been slowest of all in such labor-intensive venues as skilled nursing facilities and home health services.
As a result, the memo finds, it “very unlikely” that Medicare productivity growth can mirror productivity growth in the larger economy. The chief consequence of the legislated productivity adjustments, therefore, would be to render 15 percent of hospitals, skilled nursing facilities, and home health agencies unprofitable by 2019 — up to 25 percent in 2030 and 40 percent by 2050.
The actuary concludes that “neither of these update reductions is sustainable in the long range, and Congress is very likely to legislatively override or otherwise modify the reductions in the future to ensure that Medicare beneficiaries continue to have access to health care services.”
The health-care industry won’t see “economy-wide productivity” gains anyway, because of the top-down nature of ObamaCare and government regulation. It’s almost too obvious to point this out, but efficiency does not have a direct relationship with regulation, but usually an inverse relationship. As regulations grow, productivity and efficiency decline. One cannot impose top-down government control over an entire industry and then expect it to develop productivity and efficiency at the same pace as the free market. That assumption is absurd on its face.
Also, it appears that CMS got caught double-counting, just like the Democrats in Congress did:
Bad though all of this is, none of it is actually the worst gimmick in the official report’s advertised improvement in Medicare solvency. That involves the double-counting of Medicare savings. Earlier this year, Congress passed a health care bill containing various new Medicare taxes and constraints on program expenditures. Such savings are assumed in the official report to extend the solvency of Medicare. But Congress chose instead to spend the savings on a new health care entitlement.
The Medicare actuary wrote a memorandum on April 22 of this year calling attention to this “double-counting.” “In practice,” he stated, “the improved Part A financing cannot simultaneously be used to finance other Federal outlays (such as the coverage expansions under the PPACA) and to extend the trust fund, despite the appearance of this result from the respective accounting conventions.”
In other words, money can only be used once. Since the Medicare savings is being spent elsewhere on expanded health care coverage, it is not really being employed to extend Medicare solvency. To claim an improvement in Medicare financing is to mislead about the effects of recent legislation.
The entire program is a gimmick; this is just the worst part of the rationalization behind it.
Last week, the media rushed to report the CMS analysis as a support for Barack Obama’s claims of success with ObamaCare. Will they rush to report the dissent from the Medicare actuary and its clear indictment of the false assumptions and evasions of the Obama administration and Democratic leadership on Capitol Hill? I’d bet … no.