Heading into the August recess and in advance of the anticipated release of the Medicare and Social Security trustees report, the Obama administration released a new report this morning predicting large cost savings from the recently passed Patient Protection and Affordable Care Act.

The report relies heavily on work by the Office of the Actuary at the Centers for Medicare and Medicaid Services, but the new report differs from the opinions of CMS Chief Actuary Richard Foster on some key points. Health and Human Services Secretary Kathleen Sebelius was challenged on these divergences during a conference call this morning, but she and Jonathan Blum, director of the Center for Medicare Management at CMS and acting director of the CMS Center for Drug and Health Plan Choice, strongly defended the report’s conclusions.

Each year, CMS’s independent Office of the Actuary produces highly regarded retrospective and prospective spending reports that are published in Health Affairs.

“According to estimates from the Centers for Medicare and Medicaid Services, reforms from the new law that are already being implemented, along with other administration efforts, will save Medicare almost $8 billion over the next two years” and $418 billion over the next decade, Sebelius said during the call. The changes included in the calculation include quality of care improvements such as reducing the number of hospital readmissions and hospital-acquired conditions; delivery system reforms such as promoting accountable care organizations; pricing reforms such as ending overpayments to Medicare Advantage plans and improving productivity adjustments and market-basket adjustments to provider payments; and a range of provisions to reduce waste, fraud, and abuse.

All told, the Affordable Care Act will save $575 billion in Medicare spending over ten years and extend the life of the Medicare Hospital Insurance Trust Fund by 12 years, the new report says.

Expanding Coverage And Extending The Trust Fund – Can You Claim Both? On the call, Sebelius and Blum were challenged by reporters on two departures from Foster’s findings. First, they were asked how the same Medicare savings could be counted as both extending the Medicare Hospital Insurance Trust Fund and paying for the coverage expansions contained in the Affordable Care Act. The questioner quoted Foster’s conclusion: “In practice, the improved HI financing cannot be simultaneously used to finance other Federal outlays (such as the coverage expansions) and to extend the trust fund, despite the appearance of this result from the respective accounting conventions.”

Sebelius did not back down. “The CMS actuary, in the report that you cite, differs in his strategic opinion from the accounting methodology that is used for every other program in the federal government and that has been traditionally used for Medicare. He has a different interpretation that is not agreed upon by either the Congressional Budget Office or the Office of Management and Budget, or traditionally by Congress,” Sebelius said. (For a contrary take on CBO’s stance, see Philip Klein’s post on the call at the American Spectator’s blog.)

How Much More Efficient Can Providers Get? Second, citing research by the CMS Office of the Actuary, the new report attributes Medicare savings of $205 billion over ten years to better productivity and market-basket adjustments. As Foster explains, the Affordable Care Act adjusts provider payment levels by assuming that providers will increase their productivity in line with economy-wide productivity increases. However, he cautions:

While such payment update reductions will create a strong incentive for providers to maximize efficiency, it is doubtful that many will be able to improve their own productivity to the degree achieved by the economy at large. Over time, a sustained reduction in payment updates, based on productivity expectations that are difficult to attain, would cause Medicare payment rates to grow more slowly than, and in a way that was unrelated to, the providers’ costs of furnishing services to beneficiaries. Thus, providers for whom Medicare constitutes a substantive portion of their business could find it difficult to remain profitable and, absent legislative intervention, might end their participation in the program (possibly jeopardizing access to care for beneficiaries). Simulations by the Office of the Actuary suggest that roughly 15 percent of Part A providers would become unprofitable within the 10-year projection period as a result of the productivity adjustments. Although this policy could be monitored over time to avoid such an outcome, changes would likely result in smaller actual savings than shown here for these provisions.

When asked about Foster’s warning on the projected productivity savings, Blum said experience favored the new report’s optimism over Foster’s caution. “When you look at the history of hospital financing and provider payments, when large payers like the Medicare program impose continued financial pressure, hospitals become more productive and they invest in system changes,” said Blum, and he cited agreement for this proposition among hospital executives. (A paper published earlier this year in Health Affairs by researchers from the Medicare Payment Advisory Commission can be seen as providing support for Blum’s argument. In the Health Affairs paper, Jeffrey Stensland and colleagues found that “relatively abundant financial resources can drive [hospital] spending up and that limited financial resources can constrain spending.” The authors said that “payers will need to set rates so that hospitals feel financial pressure to constrain costs.”)

Sebelius suggested that Foster was worried that Congress would not stick to the productivity adjustments in the Affordable Care Act, but she pointed to a “growing bipartisan consensus within the halls of Congress” on the importance of controlling health care cost growth. This consensus provides a “higher degree of confidence” that the projected savings will materialize, she said.