Medicare is the largest long-term piece of the nation’s looming budget crisis. Once the presidential election is over, Congress will try to address the Medicare cost shortfall one way or another.

They will almost certainly consider a method that is guaranteed to fail: Medicare rate cuts for doctors and hospitals.

It’s been tried before, most notably as part of the 1997 Balanced Budget Act. Not once since the BBA required annual physician rate cuts have those cuts been implemented, leading every year to the predictable and depressing final-hours “doc fix” vote.  

Why is such an obvious answer so obviously the wrong one?

Two reasons: first, doctor and hospital participation in Medicare is voluntary. If rates are cut, some providers will flee – leaving beneficiaries high and dry.

And second, for those providers who stay in Medicare, cutting rates is nothing more than shifting costs. It has nothing to do with saving money.

The example on the chart above shows why. In a recent year the overall profit margin for California hospitals, regardless of tax-paying status, was 3.2 percent. Sounds reasonable. But as the chart indicates, here are the profit margins by payer: Medi-Cal was minus 19.8 percent; Medicare was minus 14.2 percent; the uninsured was minus 57.2 percent and Commercial was plus 42.5 percent.

Why? Commercial business – primarily from people covered by employer-sponsored health plans – is the only one of the four revenue streams that hospitals can control. Consequently, this is where prices are increased. But businesses, the payers of these inflated bills, cannot sustain expenses that come with a 42.5 percent markup. They will (and already have) drop coverage for their workers, which increases Medicaid and uninsured costs, or drastically cut benefits. Yes, it’s like squeezing a balloon. It’s a cost shift to business (and therefore to businesses’ customers – you and me) on the order of $80 billion to $90 billion a year, according to America’s Health Insurance Plans (AHIP). And no, it does not save money.

Let’s look at a much more promising money-saving alternative – the one the Obama administration favors. It’s Accountable Care Organizations (ACOs), a major element of the Affordable Care Act. ACOs organize care, measure outcomes, incent providers to raise quality and lower cost, use technology to connect the system, and empower consumers with actionable information.

Guess what? ACOs do save money. We ought to know. Humana and other health plans have been operating ACOs for 25 years through the government’s own Medicare Advantage program.

Unlike traditional Medicare, which merely writes checks for services when providers send in bills, Medicare Advantage is characterized by integrated systems of care that coordinate the various doctors, hospitals, pharmacies, and ancillary providers who interact with beneficiaries. Already at Humana, our Medicare Advantage members are receiving care for nearly 15 percent less than the cost of comparable care through traditional Medicare, with no diminution of quality. And we see lots more cost-saving, quality-enhancing runway ahead of us, like further reductions in the already diminishing 30-day hospital readmission rate for our members.

No wonder 27 percent of Medicare beneficiaries have chosen Medicare Advantage. The number grows each year – disproportionately among those just turning 65.

There is a right answer to reducing Medicare costs. It’s working today. Let’s hope Congress chooses to encourage it.