I had a vivid glimpse of this trend in my own family this past winter. In late February, my mother, age 99, had a bad fall. She was taken by ambulance to the closest hospital, Mass. General. Miraculously, she broke no bones, but her face was so badly swollen and bruised that she was unrecognizable and in severe pain.

THE COST OF Medicare, the top driver of runaway entitlement outlays, seems to be stabilizing at last. For the past three years, Medicare inflation has moderated to an annual average of 3.9 percent. But if you look more deeply, a lot of these supposed savings are actually a shift in costs to patients. As Congress and the administration devise new ways to restrain Medicare, this disguised form of rationing is likely to worsen.

My mother ended up staying four days. A couple of days in, we got an unpleasant financial surprise. Even though she was placed in the MGH’s maxillofacial inpatient unit, where she got excellent care, my mother was classified as being there “for observation” — meaning that she was considered an outpatient for billing purposes.


This meant that the bill — over $20,000 — was coded under the Medicare outpatient category (Part B) with a 20 percent patient co-pay. Being classed as an outpatient also disqualified my mother from any Medicare benefits in a rehab facility or skilled nursing home after she was discharged.

How could a 99-year-old badly injured woman on an inpatient unit be an “outpatient?” And why would Mass. General, one of our most distinguished community resources, do such a thing?

The culprit, it turns out, is Medicare cost containment.

In order to cut costs — actually shift them, partly to hospitals and partly to patients — Medicare applies extreme financial pressure on hospitals to book admissions as outpatients whenever possible. This shifts them from Medicare Part A (the hospital program) to Medicare Part B, which is designed to cover only doctor bills. The hospital gets paid a lot less and the patient gets stuck for a lot more.

Medicare does this through outside, for-profit vendors known as “recovery audit contractors,” who are paid based on how much they save Medicare. They achieve savings by punishing hospitals after the fact if a patient who might have been booked as an outpatient is classified by the admitting doctor as an inpatient. The contractor only gets paid when it overturns a medical decision — which sure seems like a gross conflict of interest.


So if the emergency room doctors make the medical judgment that a patient needs to be admitted, and the audit later concludes that the condition turned out to be not serious enough and the patient should have been considered an outpatient, the hospital not only doesn’t paid at the inpatient rate, it doesn’t get reimbursed at all.

The hospital can appeal, but appeals are often more expensive than just eating the cost. They typically take three or four years before they get to an administrative law judge. The patient can also appeal, but this is so unusual that the quality organization that supposedly monitors the process did not know how to handle my mother’s appeal. Mass. General reviewed my mother’s case and concluded that given Medicare rules, the “outpatient” classification was appropriate even though my mother was not discharged for four days.

A recent study by the journal Modern Healthcare reported that Medicare reimbursements for complex “outpatient” procedures, such as pulmonary treatments and ultrasounds, paid the hospital as little as two cents on the dollar for its charges.

Hospitals, needless to say, hate this system, and for good reason. “It makes no sense medically,” says John Belknap, Mass. General’s director of corporate compliance. “We deliver the same care to patients whether the classification is inpatient or observation. There is the presumption that the case is different, but it’s the same bed and the same nurse.”


The American Hospital Association has a lawsuit pending against Medicare to overturn the whole concept. Medicare, in an effort to settle the suit, partly modified its policy last March and hospitals denied claims by auditors will now be permitted to rebill in a less expensive category. But the suit is going forward. An official of the American Hospital Association told me that as hospitals have responded defensively to avoid getting punished, doctors end up getting second-guessed.

This system was the result of two George W. Bush-era laws aimed at reducing Medicare costs using “market incentives.” In 2003, the Medicare Modernization Act directed Medicare to conduct a demonstration project to use outside auditors to recover excessive hospital costs after the fact. After the three-year demonstration, held in five states including Massachusetts, recovered $900 million, Congress made it national and mandatory in the Tax Relief and Health Care Act of 2006, to take effect in 2010.

Today, hospital resources are wasted in complying with these arbitrary rules, and a lot of money goes into the pockets of the Medicare contractors or is absorbed by patients. The system doesn’t deter patients from seeking unnecessary treatment, since the process is one of bewildering complexity and patients typically learn about it only when they get the bill.

Though Medicare administers these rules, Medicare officials don’t necessarily consider them a sensible way to balance good medical care with cost containment. Don Berwick, an expert on cost-effective medicine, was interim national head of the Medicare program in 2010 and 2011 until Republicans blocked his confirmation as the permanent appointee. Berwick, who is now a candidate for governor of Massachusetts, is a critic of the current use of the categories of observation and inpatient to contain costs. “It’s a blunt instrument,” he told me. “The way it often nets out is that the patient pays more. The patient has far less sophistication and power in the system than the hospitals and the medical specialty societies.”


The big players in the system — hospitals, doctors, insurers — spend a small fortune working to game it, while patients remain in the dark. Thirty years of cost containment efforts using market incentives, beginning with the creation of health maintenance organizations in the Nixon era, have not altered the fundamental inefficiencies in the system. The more complications the forces of cost containment add, the more money the big players spend working the rules.

In addition to imposing gimmicks to shift costs to patients, Congress works with the health industrial complex to deny Medicare far more consequential savings. The privatized Medicare drug benefit, enacted in 2003, explicitly prohibits Medicare from negotiating bulk discounts with pharmaceutical companies. Medicare Part C allows commercial HMOs to target healthy seniors and reap big profits. These two gifts to big commercial players cost Medicare hundreds of billions of dollars.

The latest fad in the ideology of using commercial incentives and intermediaries to contain costs goes under the name of consumer-directed care. The idea is to combine tax-favored “health savings accounts” with high-deductible health insurance plans and to rely on the consumer’s capacity to shop around for the most suitable plan. But as the system becomes ever-more convoluted, the idea of consumers having the knowledge or market power to intelligently navigate it is laughable.


Converting Medicare to a voucher, as proposed by many Republicans, would make the cost-shifting trend explicit. People would get a fixed sum to buy private health insurance. But the fixed sum would likely cover only a bare-bones plan, and many seniors would have to bear more of the expense of getting sick — or forgo necessary care. The affluent could pay out of pocket or buy more expensive policies. Unless Congress devises more sensible and fundamental reforms, cost cutting by cost shifting is our likely future.

Happily, my mother has fully recovered, and celebrated her 100th birthday last week. Happily, too, she avoided the out-of-pocket costs associated with her “observation” status, because she is one of a minority of seniors with supplemental insurance that covers bills that Medicare shifts to patients. But that policy costs over $3,000 a year, and most elderly people can’t afford such extra insurance.

Medicare has been one of the crown jewels of American social policy. Historically, it has been far more cost effective than the commercial parts of the system because it has far fewer middlemen. Today, however, instead of being a model of a comprehensive national system that provides Medicare for all, Medicare is at risk of being pushed into the commercialized model that has made the rest of America’s health system such a costly and inefficient mess.

The risk is that as Congress seeks Medicare savings, it will require the Centers for Medicare and Medicaid Services to come up with more such self-defeating cost-containment tricks. Gimmicks that take money out of Medicare are the wrong means to address the federal deficit. The reform of Medicare is properly part of the larger project of getting a comprehensive and universal health coverage system.

Robert Kuttner’s new book is “Debtors’ Prison: The Politics of Austerity Versus Possibility.’’ He is co-editor of The American Prospect and a senior fellow at Demos.