The boards of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds late last month released their annual report to Congress touting the extension of the hospital trust fund’s solvency by four years to 2030.The report noted that Medicare outlays for hospitals (Part A) had slowed as a result of lower-than-expected spending while Part B (outpatient) remained in line with earlier forecasts by the CMS Office of the Actuary. The boards concluded that the ACA contributed to the improved outlook by lowering spending and generating savings.

But there’s more to the story.

Indeed, Medicare spending for hospital inpatient care has continued to trend lower. No surprise. Services once delivered in inpatient settings are now routinely delivered in outpatient settings. From 1991 to 2009, average annual spending per Medicare beneficiary increased 8 percent per year. During the same period, the percentage of total expenditures for hospital services decreased from 34 to 31 percent, and Medicare’s share of total inpatient spending dropped to 28 percent. Consistent with the entire delivery system, Medicare is decreasingly about inpatient encounters and more about care coordination for its 50.7 million U.S. enrollees.

And yes, the ACA can be credited with slowing down inpatient spending in three major areas:

  • The acute sector is on the hook for $155 billion in reduced payments over 10 years as a trade-off for increased coverage and lower bad debt.
  • Payments to Medicare Advantage Plans, used by 13.1 million seniors, were cut over 10 years, which will result in reduced reimbursement to doctors and hospitals.
  • Demonstrations and pilots in the ACA — accountable care organizations, bundled payments, medical homes, avoidable readmissions, value-based purchasing — are based on lower Medicare spending via shared savings.  

For most of these, the jury’s still out on savings achieved to date, but hospitals are already seeing reduced payments nonetheless. Example: the Hospital Value-Based Purchasing started Oct. 1, 2013. Medicare reduced payment rates to all hospitals by 1.25 percent and only 1,231 hospitals saw a bonus at the end of Year 1.

And lest we forget, Medicare’s budget undergoes scrutiny in the federal budgeting process every year. Hospital payments are adjusted based on anticipated increased costs for direct purchases (supplies, drugs, overhead) and decreased on the presumption of improved efficiency. CMS does its calculations, announces what it will pay, and then bullies hospitals and doctors into its payment schemes. As a payer, Medicare has leverage unmatched by any public or private plan, and it uses this clout.

So, the conclusion that the inpatient hospital trust fund’s solvency improved as a result of the ACA and lower than expected inpatient spending should not be a surprise, nor should it be assuring to hospital leaders and trustees. It’s akin to a TV network raving about improved prime-time viewership without acknowledging the elephants in the room — Netflix, Hulu and other alternative entertainment providers who are gaining market share at their expense.

Coming out of the trustees’ report, the real questions hospital leaders and policymakers need to ask are these:

Given the clinical and social needs of the senior population, what’s the optimal allocation of spending to achieve better outcomes at lower cost?

Why is Medicare operated, in Parts A, B, C and D, barely understandable to policymakers and beyond comprehension to most enrollees?

Is inpatient care for seniors necessary in every community if volumes are inadequate to achieve minimal safety and quality thresholds? And how might Medicare more directly and significantly reward providers who coordinate care for seniors resulting in lower costs, improved population outcomes and higher satisfaction?

If a community received a capitated payment to manage the health care needs of its seniors, could it do so successfully? And where would those monies be invested? In 2012, that would have meant more than $11,270 per enrollee. Given a white board with dual responsibility for improving health and managing costs at less than the GDP, who might have stepped up?

The trustees’ report does not tell the full story. The goal of the health system is not to fill beds nor can every hospital be justified by the jobs it provides a community. Otherwise, the three states that operate more than four beds per 1,000 would be overwhelmed by people harmed in the eight states that operate fewer than two beds per 1,000.

The goal of a health system is to manage health across populations ranging from the healthy to the very sick appropriately and efficiently. That Medicare is seeing lower use of hospitals and its hospital trust fund is healthier as a result is good. That Medicare is seeing improved health status across the wider variety of its clinical populations while containing per capita total spending is much more important.

Medicare spent $572.5 billion last year, up 4.9 percent versus the prior year. Meanwhile, total health spending was up 3.7 percent to $2.8 trillion. The question is not how much of this is spent by Medicare in hospitals for inpatient services, but how much is spent appropriately?

Paul H. Keckley, Ph.D., a health economist and expert on U.S. health reform, is managing director at the Navigant Center for Healthcare Research and Policy Analysis. His H&HN Daily column appears the first Monday of every month. He is a member of Health Forum's Speakers Express. For speaking opportunities, contact David Parlin.