Rumor has it that the annual report of the Boards of Trustees for the Federal Hospital Insurance and Federal Supplementary Hospital Insurance Funds (a.k.a the Medicare Trustees) will be released on Wednesday this week. The release - earlier than the July 2014 and 2015 publication dates - has had tongues wagging for months about the possibility that the Independent Payment Advisory Board (IPAB) will be deployed as a result of the Trustees estimates of growth of per capita Medicare spending. If IPAB is implemented, the express targets of their efforts must be Medicare Advantage and the Part D perscription drug plans.
We believe that triggering IPAB is politically impossible for a number of reasons discussed below. Even if we are wrong, the result will be pretty muted and we think you can almost count on a complete nullification of the IPAB provisions in the ACA early next year. For 2017 and beyond, the action for bending the Medicare spending curve won't be at IPAB but at the Center for Medicare and Medicaid Innovation and to that we direct our attention.
Independent Payment Advisory Board. IPAB was created by the Affordable Care Act as a way to reduce Medicare spending. The Board would consist of 15 members - all appointed by the President and confirmed by the Senate - and charged with developing proposals to reduce the growth in per capital Medicare spending. IPAB's proposals are, at least theoretically, designed to take the form of legislation and follow the usual course of House and Senate approval. However, the Secretary of Health and Human Services has the authority to implement if Congress fails to act. IPAB, through a joint resolution of Congress introduced no earlier than February 2017, can be discontinued effective January 2018.
Deployment of IPAB. Each year with the release of the Medicare Trustees report, the Office of the Actuary at Health and Human Services sends a letter to the head of the Centers for Medicare and Medicaid with a determination - based on the Trustees' report - as to whether or not anticipated five-year per capita Medicare spending growth exceeded the estimated target growth rate. The per capita spending growth rate is specified as the sum of the average per capita spending for each of Medicare Parts A, B and D in the prior two years, the current year and the following two years. This per capita growth rate shall take into account "any delivery system reforms or other payment changes that have been enacted or published in final rules but not yet implemented as of the making of such calculation." When the Office of the Actuary sends its letter to Andy Slavitt at CMS this week, they will be using data for years 2014 to 2018. The target growth rate is equal to the average of the projected 5-year average growth, ending in 2018, in the Consumer Price Index for All Urban Consumers (all items; United States city average) and the medical care expenditure category of the Consumer Price Index for All Urban Consumers (United States city average).
If the Medicare per capita spending growth rate does not exceed the target growth rate, as was the case in 2013, 2014, 2015 and likely 2016, the Office of the Actuary will advise CMS of that determination and IPAB is not deployed. If, however, the Actuary determines that the Medicare per capita spending growth did exceed the target, they must also provide CMS with a savings target - a reduction in Medicare spending - for the final year of the five years included in the analysis, which for this year's analysis would be 2018. The savings target in 2018 must be the lesser of 1.5 percent or the excess of the average Medicare per capita spending growth rate over the target growth rate.
Once this savings rate is established, the President will appoint the 15 member IPAB board subject to confirmation by the Senate. Members must then develop a proposal or proposals by January 15, 2017. If IPAB fails to submit a proposal, the Secretary of Health and Human Services can submit one that satisfies all the requirements of the law. Neither the Secretary or IPAB can submit a proposal that would reduce Medicare reimbursement to providers of services (acute care hospitals, home health agencies, dialysis providers, etc.) or supplies (durable medical equipment, prosthetics and other supplies) prior to December 31, 2019. Any proposal shall include reduction in Medicare payments under Part C - Medicare Advantage - and Part D - Medicare Prescription Drugs benefit. Suggestions offered in the ACA regarding reductions in spending under Parts C and D include:
- Reducing direct subsidy payments to Medicare Advantage and prescription drug plans related to administrative expenses for basic coverage
- Denying or removing high bids for prescription drug coverage from the calculation of the national average monthly bid amount
- Reducing payments to Medicare Advantage plans related to administrative expenses and bonus payments
IPAB, assuming they convene, will submit a draft proposal for review to the Secretary by September 1, 2016. The Secretary has until March 1, 2018 to report to Congress the results of that review. If the Secretary is responsible for submitting the proposal, then this review and report is not required. IPAB is also not required to submit a proposal of the Office of the Actuary detemines that in 2018 CPI-U for medical care will be less than CPI-U for all items.
For better or worse, IPAB is highly politicized. For better or worse 2016 is a highly - and very unusual - political year. For that reason, any analysis of whether or not IPAB (or the Secretary) will submit and implement a proposal to reduce Medicare spending growth must start with the politics.
Medicare spending in general and IPAB in particular have become a political hot spot for Democrats. Republicans successful connected ACA-mandated reductions in Medicare spending to their Democratic rivals and took control of the House of Representatives in 2010. In 2012, more spectactularly but less effectively, Vice Presidential candidate Sarah Palin dubbed IPAB the "death panel" and raised the specter of rationed care. Since then, IPAB has become one of the few things in the ACA that both parties agree should disappear. A few weeks ago, the Senate Appropriations Committee approved, on a bipartisan vote, the FFY 2017 Health and Human Services' budget which included a defunding of IPAB with the following explanation:
Funding for IPAB is eliminated. IPAB is a 15 member board of unelected bureaucrats created by the ACA to achieve a reduction in Medicare spending through the only means they have – rationing care.
Given the manner in which IPAB was successfully leveraged - at least in part - by Republicans in 2010 to 2012, a trigger of this section of the ACA presents a lot of downside risk for Democrats. With the the possibility they will retain the presidency and potentially regain majority of the Senate, a replay of 2010's broadcast, cable and social media ads accusing Democrats of rationing care and cutting Medicare benefits is clearly something to be avoided. Donald Trump, whose base consists largely of older voters who may well remember Hillary Clinton's own health care proposal of 1993, will find the implementation of the IPAB provisions to be good ammunition against an opponent that openly supports the ACA.
The implications of IPAB implementation on presidential and congressional races would be magnified by the inevitably contentious nomination and confirmation process of IPAB board members. We wonder who that is qualified to serve on the IPAB board would also be willing political canon fire. More likely, President Obama would not want to nominate anyone thus avoiding risking the confirmation process that would thrust IPAB and its mission into the spotlight right when the 2016 elections were hitting full stride this summer. The Senate would likely not hold hearings but instead would repeat the strategy deployed around President Obama's Supreme Court nominee and use the opportunity to explain why America should vote Republican in November.
Complicating things tremendously is the fact that the ACA explicitly places in IPAB's crosshairs two extremely popular programs - Medicare Advantage and Medicare Part D. When the ACA was drafted and passed, Medicare Advantage was still a go-to source of spending reductions for Democrats who had a long held distaste for the Republican-originated program. Between then and now, Medicare Advantage reached an inflection point whereby its popularity is now firmly bipartisan and significant reductions unpopular. The specifics IPAB's authority to make spending reductions in these areas and the protections the law attempts to provide beneficiaries will no doubt get lost in the shuffle. All a good video ad or direct mail piece needs to say is that these programs are being threatened - something to be avoided in an election year.
The inability to seat an IPAB board presents the Obama Administration with a particularly thorny problem. The ACA directs that if the board cannot submit a proposal for any reason then President Obama's Secretary of Health and Human Services will do so. That contingency plan, incorporated into the ACA, drops the IPAB spending reduction mandate firmly into the lap of the President and his party.
In short, if the Office of the Actuary determines that the IPAB provisions of the ACA are to be implemented, the result is one big political headache for Democrats on the cusp of a major election.
With politics driving the agenda but a law that clearly defines the process, what happens next turns on how much discretion the Office of the Actuary has in determining if estimated five year average Medicare per capita spending growth exceeds the target growth rate. The good news is that the ACA included a provision that permits the Actuary to consider "any delivery system reforms or other payment changes that have been enacted or published in final rules but not yet implemented as of the making of such calculation." Given the startling pace of payment delivery reform in the form of CMS driven pilots like the Comprehensive Care for Joint Replacement and Congressional mandates of physician payment reform and changes to the clinical lab fee schedule, the Actuary has a lot to work with this year in estimating Medicare per capita spending growth on the low side.
A determination by the Actuary that IPAB is not triggered in 2016 would also be consistent with their 2015 forecast which estimated that Medicare per capita spending growth would modestly overtake the target spending in 2017 and then fall below it until 2022. Table 1 provides the Office of the Actuary's 2015 IPAB related forecasts as presented in the Medicare Trustees' Report.
Table 1. Key Rates of Percentage Growth for IPAB Determination
Source: 2015 Report of the Medicare Trustees
If, for the sake of argument, the political environment shifts dramatically in the next few weeks and IPAB is implemented, the consequences are very likely not dire. Had the IPAB provisions been triggered last year, the savings target rate for the year of implementation, 2017, would have been 0.12 percent or about $735 million. In the context of the $170 billion Medicare Advantage program and the $ 67 billion Medicare Part D program, that is not a lot of money. The reason for the modest impact is that IPAB's implementation is triggered by a difference between Medicare per capita spending growth and target spending growth. The target spending growth rate is established by CPI-U and CPI-U for Medical Care over which Medicare spending has a good deal of influence. In other words, the IPAB provision in the ACA is really designed to limit Medicare spending growth that was anomalous relative to general and medical care price increases.
What Happens in 2017. This time next year, the political conditions will be very different. A new president will be elected and control of the Senate will be determined. None of those things will make IPAB any more popular than it is today, however. Thankfully, the IPAB provisions of the ACA will be eligible for what is essentially nullification via a joint resolution of both houses next year. We expect that there will be a large bipartisan crowd wanting to slay this beast. Republicans can claim a blow to a law they tried to repeal 50 times. Democrats can rid themselves of an albatross that appears every election cycle. For health care investors, an element of uncertainty will be removed.
The irony of this drama is that CMS can and is accomplishing more effectively and more prudently the goals of IPAB through another provision of the ACA which created the Center for Medicare and Medicaid Innovation. The ACA conveyed to CMMI broad powers to test payment and delivery reforms and expand them nationally without the benefit of Congressional action. With the launch of the Comprehensive Care for Joint Replacement model in April, CMS began in earnest its efforts to significantly alter how Medicare pays for services. It is to CMMI not IPAB to which investors attention should be turned in 2017 and beyond.