Orszag: Critics wrong about Medicare payment board

For Medicare, this has been a summer of good and bad news. On one hand, the program's costs continue to rise remarkably slowly. So far this fiscal year, they have gone up by only 2.7 percent in nominal terms, the Congressional Budget Office reports.

On the other hand, opposition to the Independent Payment Advisory Board — created as part of the Affordable Care Act — continues to mount. And opponents continue to mischaracterize the whole point of the board.

What they seem not to understand is that the board is needed mostly so that Medicare can continue to encourage slower growth in costs.

One reason costs have been rising so slowly is that systems for paying hospitals and doctors are changing. We're moving away from the old fee-for-service plan and toward paying for value in health care — and we're making the shift more rapidly than expected.

Redesigning the payment system is a fundamentally different approach to containing costs. The old way was to simply slash the amounts that Medicare pays for services. And here is where the criticism of the Independent Payment Advisory Board becomes somewhat Orwellian.

The point of having such a board — and here I can perhaps speak with some authority, as I was present at the creation — is to create a process for tweaking our evolving payment system in response to incoming data and experience, a process that is more facile and dynamic than turning to Congress for legislation.

In particular, as Medicare experiments with accountable care organizations, bundled payments and other new strategies, the agency will inevitably need to make adjustments. Questions will come up, such as: How should the payments to doctors, hospitals and other providers be changed to reflect what is learned about the quality of care they provide? How much should the penalties or bonuses be? Is it better to have hospitals face all the costs associated with patient (as in an accountable care organization) or only the costs incurred during a specific episode of care (as in bundled payments)?

As even preliminary answers come in, the Independent Payment Advisory Board is supposed to make the adjustments, allowing Medicare to move as smoothly and quickly as possible toward an improved system for rewarding value in health care. Congress could never act so nimbly.

With that in mind, consider the recent attack on the Independent Payment Advisory Board in the Wall Street Journal by Howard Dean, the former chairman of the Democratic National Committee. His critique begins by claiming that the board "is essentially a health-care rationing body," even though the legislation specifically states that the board is not allowed to make any recommendations that would ration care.

He goes on to argue that the board would use a bureaucratic rate-setting process to bluntly lower payments. Which is exactly what Congress does today. The board, in contrast, is mostly meant to navigate — outside the political realm — the two- steps-forward and one-step-back process of testing new payment structures.

Dean correctly notes that the board is not expected to save money over the medium term. This is not, as he implies, because it would engage in ham-fisted rate-setting. It is because the board is not meant to act until Medicare costs grow more rapidly than certain thresholds. The present slowdown makes it increasingly unlikely that cost growth will exceed those thresholds over the coming decade.

Next, Dean argues that "If Medicare is to have a secure future, we have to move away from fee-for-service medicine, which is all about incentives to spend more, and has no incentives in the system to keep patients healthy." Bravo! But what he fails to grasp is that the core rationale for the board is exactly to accomplish this shift.

Dean seems to think that Congress will be perfectly able to fine-tune Medicare's shift away from fee-for-service payment, despite there being nothing in its 50-year record of legislating on Medicare to support such a belief.

The slowdown in health-care costs is a promising sign that efforts to move away from fee-for-service are working. But it's still early in the game, and the next steps, taken in response to lessons learned, will need to be careful ones. That's why the Independent Payment Advisory Board was created, and why it should not be eliminated.

Peter Orszag is vice chairman of corporate and investment banking at Citigroup and a former director of the Office of Management and Budget in the Obama administration.