There are some extremely long and complicated answers to this question posted. Instead of engaging, let's hear from CMS Chief Actuary Richard Foster:

From the CMS report, page 9: “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, may end their participation in the program. Simulations by the Office of the Actuary suggest that roughly 20 percent of Part A providers would become unprofitable within the 10-year projection period as a result of the productivity improvements.”

Seems pretty clear.

The Senate and House bills would cover 31 to 36 million uninsured people, make coverage affordable to millions of others, and enhance the value for the money spent on health care, which is ultimately good news for people, government, and providers. The bills also have important benefits for older Americans--including eliminating the gap in pharmaceutical coverage known as the "doughnut hole." The House bill also calls for negotiating pharmaceutical prices. While CBO does not score savings from the authority to negotiate prices, the experience of other countries suggests that such a measure could yield substantial savings.

The bills also establish Medicare as a leader in delivery reform by including a Payment Innovation Center with authority to test innovative payment methods to improve accountability and coordination of care, for accountable care organizations that assume responsibility for quality and cost across the continuum of patient care, and for bundled hospital acute and post-acute care. The Manager's Amendment broadens the scope of the advisory board to go beyond Medicare and to make recommendations to the President and Congress on measures to slow the growth of non-federal expenditures.

Both the House and Senate bills would level the playing field between Medicare private plans and the traditional Medicare public health insurance plan, a provision supported by three-fourths of health care opinion leaders who participated in a recent Commonwealth Fund/Modern Healthcare poll. This would yield $140 billion to $170 billion in federal budget savings over 2010 to 2019, according to CBO. Rather than reduce the quality of coverage for beneficiaries, I believe this policy change could drive plans to compete on value.

Together, these provisions will not only improve Medicare but the health care system at large by encouraging competition and changing financial incentives for insurers and providers.

Updated at 11:11 a.m. on Dec. 21.

On the face of it, the reform proposals would help ease the $37 trillion unfunded obligations of Medicare, making it a tad more viable for current and future seniors. But the savings on one credit card just become new liabilities on another. Moreover, if the key cuts actually went into place it would be a disaster for seniors. In the Reid bill, physician fees are to be cut more than 20 percent in 2011 and kept there indefinitely. That would cause docs to leave in droves and mean care cutbacks from those who remain. And Medicare’s chief actuary says payment rate cuts will cause up to 20 percent of Medicare hospitals to become unprofitable. Medicare Advantage, it’s true, would not cut to the bone, but there will be a significant erosion of benefits and far fewer plans available.

But the “good” news for seniors is that much of this will not actually happen. For instance, AARP and the AMA will as usual make sure those meat axe physician cuts never happen – the Senate, like the House, will simply run up the national credit card via another bill. Many other promised savings will also turn out to be phantom cuts. Congress will never let the Medicare commission, for example, chop away enough to meet the savings target.

So seniors will not encounter the big cutbacks many predict. Instead the long-term financial problem will continue and the new coverage entitlement will add to the total unfunded debt handed to our kids and grandkids. If Congress were serious about reform and fiscal prudence it would move Medicare towards a defined-contribution premium-support system. It would also make each new coverage commitments contingent on first achieving and “banking” Medicare savings. But Congress is not serious.

On the positive side, the reductions in Medicare reimbursement, will extend the life of the HI Trust Fund and reduce some of the financial pressure on general revenue. The amount of the reductions are clearly substantial although on a relative basis, smaller than those that were included in the BBA. Of course, the BBA also produced several pieces of "give-back" legislation when the pain to providers got too great and spending slowed more than anticipated. That could happen again.

More important for reform is how and where the payment reductions occur. This is more troublesome and in general, are rarely supportive of reforms to the delivery system. Reductions in payments to nursing homes, for example, are usually justified on the grounds that on average, Medicare pays more than Medicare's share of the costs. But since Medicaid, the other major payor, substantially underpays, just reducing Medicare is likely to be problematic. Unless there is reason to expect an increase in Medicaid payments --which seems unlikely--reductions in Medicare will financially stress nursing homes--aleady a troubled sector--that accept both payments and hardly lead to reforms. Another example--reducing hospital payments for medically inappropriate readmissions also makes sense in principle, except that the hospitals most likely to have high readmissions are disproportionate share hospitals and rural hospitals--the least likely to be able to introduce programs to reduce inappropriate readmissions.

With respect to Medicare Advantage, it is hard to indefinitely justify higher payments but it will affect the benefits for a group who are mostly lower income and minority and who would otherwise be Medicare only. I would prefer to see MA as part of an FEHB type structure or use competitive bidding against other plans, including traditional Medicare.

Most disappointing is how relatively side-lined physician payment reform has become--both in terms of its financing and in terms of structuring the reform. Neither the House nor the Senate has put aside any funds for payments other than current law after 2010. Since this plus the previously accumulated sums amount to almost $250 billion, this is not a small increase to the deficit that's being contemplated--especially given the reductions in Medicare payment already proposed--reductions that otherwise might have funded physician payment reform. There are some interesting pilot projects that affect physician payment but they are quite timid in their implementation, given how central reforming physician payments are to reforming Medicare. To me, this is probably the most disappointing part of the reform process since without reforming how physicians are reimbursed, it is hard to imagine serious reforms to the delivery system.

Updated at 2:30 p.m. on Dec. 21.

The sponsor of this blog asks us to comment on three facets of the reform, to wit:

1. How serious are the Medicare cuts to be used as a source for financing health insurance for younger, currently uninsured Americans?

2. Would reduction or elimination of the extra payments to Medicare Advantage plans slice into the benefits these plans can offer beneficiaries?

3. Would an independent Medicare Commission be effective in controlling Medicare spending better than Congress has been able to do?

Let me address these three questions in turn.

The Proposed Medicare Cuts

There is something truly wondrous to hear people who in the past routinely have declared Medicare spending out of control – including the editors of The Wall Street Journal – now ring their hands over proposed cuts in the future growth of Medicare spending.

The proposed “cuts” to Medicare will do terrible things, it is argued. The “cuts” will hurt seniors who will be rationed out of needed health care. They will hurt hospitals, doctors and other providers of health care and drive them into bankruptcy. And they will shift billions of dollars of costs from Medicare to private insurers and thence to employers and employees, driving millions more Americans into the hordes of uninsured.

Here one must explain to readers who do not speak Washington English that in Washington a spending increase easily qualifies for the word “cut.” No one in the rest of the country speaks that kind of English. Sadly, many journalists have blithely adopted it, thus helping to mislead the public.

In fact, the proposal coming out of the Senate is NOT actually to cut future Medicare spending, but merely to reduce somewhat the future growth in Medicare spending.

To gain perspective on these reductions in the future growth of Medicare spending, let us look what the currently projected growth is, according to the actuaries of the Centers for Medicare and Medicaid Services (CMS). Readers can find these projections on the CMS website under “Data & Statistics.”

Total Medicare Spending: According to the CMS actuaries, total Medicare spending for 2009 is estimated to be about $503 billion, up from $213 billion (less than half the current level) in 1999.

It is expected to double again in the coming decade, to slightly over $1 trillion by 2019. (For these and the following numbers, I have extrapolated the growth rate during 2017-2018 to 2019, as the CMS projections only go to 2018).

The sum of projected future Medicare spending for the years 2010-2019 is $7.270 trillion. The proposal is to reduce the $7.270 trillion by $500 billion to help finance health insurance for the currently uninsured under age 65.

The point to note is that the $500 billion would not be lost to the health system. It would merely be recycled to finance health care for Americans under age 65.

In effect, Congress would be asking the health system to work a bit more efficiently and increase its productivity in order to serve some more people for the same money.

Medicare Spending on Hospitals: Total spending for hospitals alone is estimated by CMS to be $226 billion in 2009, up from $122 a decade earlier. It is expected to double again by 2019, to $454 billion.

The sum of projected spending on hospitals for the years 2010-2019 is $3.315 trillion, which is to be reduced by $155 billion.

Medicare Spending on Physician Services: Total spending on physician services is estimated to be $111 billion in 2009, up from $53 billion in 1999. CMS projects spending on physician services to increase to $195 billion. That number, however, clearly is an underestimate, because it incorporates a real 7% cut in spending on physician services between 2009 and 2010 (from $111 billion in 2009 to $103 billion in 2010), a cut that will never happen.

If one reasonably assumes that the cuts called for by the so-called Sustainable Growth Rate (SGR) for spending of physician services will be disregarded in the coming decade as it has been in the past decade, then one concludes that spending on physician services by Medicare also will double during the coming decade.

An interesting metric that I never ever see in the press is not the fees for individual services physicians are paid, but the annual growth in the taxpayer’s total payments to physicians per Medicare beneficiary. I recall preparing a slide on that for the period 1995-2005 for an address to a group of physicians. It turns out that the annual growth in spending for physician services per Medicare beneficiary over that period averaged 5.8% -- far faster than GDP per capita in the U.S.

The driver of this metric, of course, is not the fees paid physicians but the volume of services per beneficiary for which physicians bill Medicare – especially tests and imaging.

So taxpayers might ask physicians collectively why for that rapid annual growth in payments to them per beneficiary they could not have given the elderly first-rate health care.

Another question one may ask physicians is this: If 5.8% per year growth in Medicare physician payments per beneficiary is not enough, what percentage increase would be enough for physicians to say to U.S. taxpayers: “Thank you we can do it for that!” Would it be 10% annual growth, 15% growth? What might the figure be?

In Sum, on Medicare Cuts: This, then, appears to be the assumed social contract that the providers of health care assume exists between them, current and future Medicare beneficiaries and the taxpayer:

Spending on Medicare must double during the next decade, as it did during the last decade, lest all those terrible things mentioned above happen.

This social contract also implies, of course, that the enormous geographic differentials in Medicare spending per beneficiaries identified in the Dartmouth Atlas are fully defensible, as Dr. Richard (Buz) Cooper of the University of Pennsylvania appears to argue and as the editors of The Wall Street Journal seem to agree – they who so often decry Medicare spending to be out of control.

One can grant the proposition that the Dartmouth researchers may not have fully adjusted their data for regional differences in morbidity and socio-economic circumstances; but it is hard to believe that the spending variations they have found can be fully explained that way. Here is a fruitful target for intense, careful cost-effectiveness research.

My thought on it all is that if the managers of our health system are not able to manage their facilities in light of the fairly modest budget cuts of the projected doubling of Medicare spending with so much advance notice, then one really must fear for the future of our health system and our country.

It suggests that this nation must, indeed, earmark about 40% of its GDP for health care by 2050.

Is that then agreed upon?

The Medicare Advantage Plans

As to the Medicare Advantage plans, there is no doubt in my mind that eliminating the 14% or so extra payment granted by the Medicare Modernization Act of 2003 to these plans would deprive elderly signed up with them of some of the benefits those plans have been able to offer them with that sizeable competitive advantage.

On the other hand, there was something bizarre in the argument put forth during the past decade that privatizing Medicare would help solve Medicare’s fiscal problems and then, under the Medicare Modernization Act of 2003, pay those private health plans 14% MORE than it would have cost per beneficiary under traditional Medicare.

How can anyone make such arguments with a straight face and expect to get away with it?

The question that should have been debated all along is why one segment of the Medicare program should have this financial advantage and the other one not, and how privatization will keep Medicare solvent for a longer time if it costs taxpayers MORE per beneficiary?

An Independent Medicare Commission

Finally, the question of an independent Medicare Commission to help manage the Medicare program reminds me of the time in the mid-1990s when it was proposed, quite sensibly, that Medicare combine its payments for post-acute care with its payments to hospitals and to let hospitals be responsible for contracting such care – a precursor of the bundling of payments that is now the nouvelle vague across the political spectrum.

Then Rep. William Thomas (R-California), chairman of the House Ways and Means Health Subcommittee, rejected the idea out of hand.

As was reported in Modern Healthcare (June 19, 1995), Rep. Thomas reasoned that “I’m not wild about a payment system that involves telling a bunch of innovative entrepreneurs that they can’t be in the business anymore.”

The Congressman seemed uninterested in what made more clinical and economic sense. His was purely an industrial policy, not a health policy.

And his reasoning explains why, year in year out, Congress has rejected economically sensible proposals to attain greater efficiency in the Medicare program.

As someone who served 9 years on the Physician Payment Review Committee (the precursor of today’s MedPac), I can assure readers that no properly trained economist sitting on an independent commission on Medicare payments would ever fall for the Congressman’s spurious reasoning.

But this is precisely the sort of reasoning that makes sense to politicians in a legislative body that has become in good part a bazaar selling legislative favors almost on a fee-for-service basis.

As long as our system of governance relies on the dubious style of campaign financing of which we all are victims now, just so long is an independent Medicare Commission our only hope to gain better control of Medicare spending – and even that is only a hope.