Editor’s Note: Shorter versions of this post have appeared on The Health Care Policy and Marketplace Review and The Health Care Blog. You can also read a related follow-on post by Robert Laszewski here.

Senate Democrats and Republicans are engaged in one heck of a “game of chicken” over the automatic July 1 10.6% Medicare physician fee cuts and cutting the private Medicare program to pay for avoiding those cuts.

When Congress returns on July 7, we will see incredible political theater, and the likelihood that at least one major health care stakeholder is going to lose and one is going to win — big.

The odds are that either the Medicare physicians will take a 10.6% pay cut this month — as well as another 5% cut on 1 January 2009 — or the health plan industry is going to lose its most profitable and fastest-growing private Medicare product — private fee-for-service — on 1 January 2011.

While a compromise that would take care of both sides is still possible and was worked out late last month, this “game of chicken” is now so far down the line that it’s hard to see how either side can back off with a “never mind.”

Since the Democrats took control of Congress in 2006, I have been saying that they are intent on going after Medicare Advantage (MA) and the extra payments Republicans gave that program in 2003 in order to “prime the pump” to get both insurers and seniors interested in the program.

The differences between Democrats and Republicans on the issue of private Medicare can’t be more basic:

* Republicans believe more in the private sector; Democrats believe more in government.
* Republicans see a Medicare entitlement that needs a private-sector solution as the only hope of bringing it under control; Democrats see Medicare as already the most efficient health plan in America.
* Republicans see competition and choice at the core of a Medicare solution; Democrats see universality and avoiding a two-tier system of care as critical.
* Republicans see an opportunity to take away a key element of the Democratic legacy by being successful in fundamentally overhauling the entitlement with market-based principles; Democrats see a cornerstone of their legacy and connection to the American people at stake.

To successfully launch their Medicare reform strategy, Republicans gave health plans and seniors incentives to offer and join the new private plans. Medicare Advantage generally is paid 13% more than Medicare pays out for similar seniors, and private fee-for-service (PFFS) plans get 17% more.

PFFS is a special program because health plans are not required to create managed care networks of doctors, hospitals, and other providers. Instead, the health plan can force providers to treat its members and also force them to accept the Medicare fee schedule in payment. PFFS plans get 17% more than Medicare does for like seniors and don’t have to establish networks of providers, and they can simply pay at the already established Medicare payment schedule.

Health plans commonly pass some of these extra payments on to members in the form of extra benefits, which makes these plans very attractive — almost 10 million seniors are now in them.

Why did Republicans grant these great payment and network provisions to private Medicare? To prime the pump — to get enough plans and seniors into these plans to make the market work in favor of them. But these special advantages were granted in 2003, and the plans have had five full years to get them up and running.

When It Comes To Advantages For Private Medicare Plans,
Democrats Say Enough Is Enough

Democrats are saying that this is long enough, and they point to some health plans that critics complain have been playing games with the system by never intending to build permanent networks. Republicans and health plans are giving no indication they are ready to give the extra payments up. The health plan industry lobbied hard to keep them, and President Bush has said he will veto any attempt to change things.

Democrats just see the private plans getting bigger and worry that if they aren’t stopped now, the Democrats’ Medicare legacy may not be retrievable.

This fight has been brewing since the Democrats took Congress back in the fall of 2006. I fully expected that all of this would come to a head in late 2007 — the first opportunity for the Democrats to use the budget process to undermine private Medicare. Some days during these past two years I have felt like “Chicken Little,” warning that the Democrats would stop at nothing to get at the private program they have seen as a threat to universal Medicare and a big part of their party’s legacy. Looks like the only thing I was wrong about was the timing: instead of late 2007 and the budget process, it turns out that D-Day was mid-2008.

The turnabout in the debate over MA payments in the course of just a few days has been amazing. As much of a pessimist as I have been over whether these payments would continue forever, I really expected that the Democrats would just bide their time until 2009, when they would have even bigger majorities in Congress and a president — either Obama or McCain — much more willing to cooperate than the intransigent Bush on the issue of equalizing MA payments with traditional Medicare. The only thing that has been holding the Democrats off has been President Bush’s threat to veto any cuts to the private Medicare program.

What A Difference A Day Makes

But over the course of just twenty-four hours, everything changed in a dramatic way and in ways not even Democratic leaders would have predicted the day before. The third week in June, led by Senate Finance chair Max Baucus (D-MT), Democrats drafted a perfunctory bill to override the 10.6% physician fee cut and pay for it with cuts to the PFFS program. No one expected it to go anywhere, and it didn’t — failing to advance in the Senate getting only 54 of the 60 votes it needed. Neither Obama, Clinton, nor McCain even bothered to show up for the meaningless vote.

The bill would have ended the PFFS program by 2011, not by direct payment cuts to the most controversial part of the private Medicare program, but by requiring that any PFFS player establish networks by that time — converting PFFS members to mainstream Medicare Advantage. With PFFS gone in 2011, the Congressional Budget Office (CBO) estimated that $14 billion in savings could be transferred to physician payments.

Immediately after the failed Senate vote, Baucus and ranking Republican Chuck Grassley (R-IA) did what everyone expected they would do: they worked out a smaller compromise that would avoid the doc cuts and freeze their payments in 2009, and dropped the elimination of PFFS by 2011 that would have paid for the bigger defeated Senate bill. None of these proposals would cut the extra payments from the mainstream MA program.

Problem solved, real fight deferred until 2009, let’s go home.

But then something quite unexpected and really amazing happened. On Tuesday, June 24, the day that will mark the turning of the tide for Medicare Advantage in Washington, the House took up the failed Senate bill in what everyone saw as just a meaningless political exercise.

Son of a gun, the House didn’t just pass the failed Senate bill on a meaningless party-line vote, they passed it by a vote of 355-59. Two-thirds of the Republicans joined the Democrats voting for a fix to the Medicare physician fees in a way that would go beyond just freezing the doc payments in 2009 by giving them a 1.1% raise––and getting the money out of PFFS by killing the program in 2011!

Turns out the House Republicans had been feeling enormous heat from the physician lobby, about all other providers looking to establish the precedent that it needs to be the health maintenance organizations (HMOs) that pay to keep the provider payments whole, AARP who long ago decided that the HMO payments need to suffer on behalf of Medicare providers (and gave political cover among seniors for members voting for Medicare Advantage cuts), and a general sense that defending all of these extra payments to private Medicare just isn’t worth it anymore.

The House vote reflects a turning of the tide where even Republicans have made their choice: providers over private Medicare plans that are seen as overpaid for what they do at a time when money is getting more and more scarce in Medicare.

In Battle Of The Health Care Lobbies, It’s Docs Over Health Plans

Who has the strongest health care lobby in Washington, providers or health plans? The 355-59 vote makes that clear: the docs. Docs versus HMOs — not even close.

Once Senate Democrats saw the House vote, the Baucus/Grassley compromise suddenly was shelved. If Republicans would so easily abandon their president in the House, why not in the Senate?

Late on Thursday night, the Democrats brought the House-passed bill back to the Senate for another vote. The House bill differs from the original Senate bill because it also suspends the upcoming competitive bidding program for durable medical equipment — something that has strong bipartisan support. By just one vote, the Senate effort failed on Thursday night to get the needed 60 votes. Senator Ted Kennedy, undergoing cancer treatment in Massachusetts, did not come back to Washington this time, and his vote would have made the difference.

Now what? For the Democrats, the choice was to take the Baucus/Grassley compromise, spare PFFS, and have the fight on better ground in 2009 or play one big “game of chicken” and send the Republicans home to the physicians, who were now facing a 10.6% fee cut in a matter of a few days. The Democrats, emboldened by the House vote and having seen what the provider lobby did to House Republicans, picked option two.

The Democrats are calculating not only that they can get one more vote to get to 60 and put the House bill on Bush’s desk but that they can get to 67 votes in the Senate — a veto-proof majority.

Also impacting the Senate Democrats’ decision to push the issue was the criticism they took from House Democrats during the budget fight last fall. Senate Democrats acceded to the threat of a Bush veto over a bipartisan State Children’s Health Insurance Program (SCHIP) bill, and House Democrats angrily charged their Senate colleagues with giving in too easily on an issue they apparently had the high ground on.

Senate Democratic leader Harry Reid (NV), still smarting from that, had himself another lopsided House vote in favor of a health care bill and didn’t back down this time.

It looks like the Democrats see the big physician fee cut issue as a win-win situation. The way the Dems see it, they can “win” by passing their bill, or they can “win” by letting Republicans incur the wrath of every doctor in America for “putting HMO payments in front of patient care” and the potential for a lot of angry seniors if their physician does what so many have threatened to do: stop taking Medicare patients if the pay cut goes through.

As I travel the country, I am constantly asked, “Would Democrats really risk cutting Medicare Advantage with almost 10 million seniors already in the program?” Any other questions?

On Friday, concluding a breathtaking week, the Bush administration reaffirmed that Bush will veto the House bill if it gets to his desk and also announced that they are administratively deferring the 10.6% physician fee cut for the first ten days of July — apparently in the hope that things can get settled by then, and giving Republicans some short-term relief.

Throughout this debate, I have said that the physician fee cut will not happen — that both Republicans and Democrats are committed to not letting it go into effect. Now I am not so sure. I don’t think the Democrats are going to back down — they have really got the bit in their teeth over this one and think that even a 10.6% physician fee cut really works for them in this election year. I also don’t see Bush backing down on his threat to veto the House bill.

My sense is that the only way to avoid a 10.6% Medicare physician fee cut in July is for Senate Republicans to back down and therefore give the Democrats the 67 votes they need. This means that seven or eight Senate Republicans have to change their minds.

Congress comes back to work on July 7. During the holiday break, Senate Republicans are going to feel extraordinary pressure from the most powerful health care lobbies — the physicians, about every other provider constituency looking to establish a precedent (providers over HMOs), and AARP — giving members enormous political cover with seniors to vote against private Medicare.

Here’s another startling fact. The House bill, as well as the Baucus/Grassley compromise, would defer the physician payment cut only until 1 January 2010. The CBO has just reported that either way, the doctors will be facing a 21% cut on 1 January 2010!

That kind of unavoidable cut can only be dealt with by a fundamental restructuring of — and reduction in — – Medicare physician payments (and we just saw how powerful their lobby is) or cuts to Medicare Advantage that will have to go way beyond PFFS and cut into the heart of the mainstream Medicare Advantage program.

That discussion will take place late in 2009, when Congress will likely have an even larger Democratic advantage with a President Obama (who has already called for $155 billion in MA cuts to help pay for his health plan) or a President McCain who voted against the 2003 Medicare Modernization Act, calling it a “boondoggle.”

In the midst of all this great political theater, it is also important to point out that the Sustainable Growth Rate (SGR) scheme is telling us something by developing all of these automatic physician fee cuts: Medicare’s physician costs are not sustainable, no matter how much money the Congress finds in the various corners of the Medicare program. Ultimately that fact will become unavoidable.

But for now, whatever happens in July, one thing is clear: the tide has clearly turned in the battle over defending extra payments for Medicare Advantage in Washington.

The sky is falling.