Medicare policy and politics: The Obama debt reduction plan

My reaction to Obama’s debt reduction plan is posted at Health Affairs Blog and reproduced here with permission. Copyright ©2010Health Affairs by Project HOPE – The People-to-People Health Foundation, Inc.

Today, President Obama offered his plan to reduce the national debt by $3 trillion over 10 years, relative to current law. Most media attention will focus on his “Buffett rule,” the principle that millionaires should not pay average tax rates below those of the middle class, and on his ultimatum to “veto any bill that takes one dime from the Medicare benefits seniors rely on without asking the wealthiest Americans and biggest corporations to pay their fair share.” However, the plan also includes some proposed changes to health programs.

In broad terms, two important changes for Medicare policy and politics are included in the plan. They are (1) targeted cuts in provider payments (saving $224 billion over 10 years) and (2) 15 percent increases in income-related Parts B and D premiums and the fixing of thresholds so that, in time, one-quarter of beneficiaries are subject to a premium surcharge (generating about $20 billion in revenue over 10 years). The former is consistent with the spirit of the Affordable Care Act (ACA), which also cuts provider payments. The latter is consistent with the Buffett rule, which aims to make wealthy Americans pay a greater share of the cost of social programs.

Though not the principle focus of this post, the president’s plan also includes other ideas. Among them are increases in the Medicare Part B deductible, the introduction of a home-health copayment and a Medicare supplement surcharge (all beginning in 2017 for new beneficiaries). Additionally, it calls for Medicare to receive the same prescription drug rebates as Medicaid for beneficiaries enrolled in the Part D Low-Income Subsidy program (beginning in 2013) and for limitations in Medicaid provider taxes and simplification of federal matching payments to Medicaid programs.

Among the other items in the plan is a proposal to strengthen the Independent Payment Advisory Board (IPAB). It would require the board to recommend Medicare changes to Congress if the program’s growth rate exceeds that of GDP by 0.5 percentage points, rather than one percentage point as called for by the ACA. In addition, the board would be given the ability to consider value-based design elements for the Medicare benefit.

With his proposal, Obama has solidified his view that Medicare’s fundamental structure is sound. It does not include an increase in the Medicare eligibility age from 65 to 67, an idea he and others floated this summer and one supported by the health care industry. Moreover, it is in contrast to the GOP’s endorsed vision for the program, which is to gradually transition it into a voucher-based one that includes only private plans.

None of these ideas—not Obama’s, not the GOPs, not raising the Medicare retirement age—are likely to become law in the forms proposed, if at all. They’re largely political signals, designed to serve the 2012 campaign. However, because the debate over them will be waged, in part, over their policy implications, it’s worth spelling out what they might be.

Income-Related Premiums in Medicare

Medicare premiums vary by income now. The Medicare Modernization Act of 2003 (MMA) established income-varying Part B premiums, which were implemented in2007. The Affordable Care Act of 2010 (ACA) brought them to Part D; they became active this year. In addition Medicare benefits are implicitly means tested through a number of premium and cost-sharing support programs for low-income beneficiaries, such as the Medicare Savings Program (Part B), the Low Income Subsidy Program (Part D), and Medicaid. Obama’s debt reduction plan would build on the Parts B and D structure of income-varying premiums by increasing the surcharges 15 percent. The income bands to which the surcharges apply would be held constant until 25 percent of Medicare beneficiaries paid a higher premium level.

The policy rationale for income-related premiums in Medicare is to preserve the program’s structure while raising revenue badly needed for long term viability. Since revenue cannot be raised where it does not exist—e.g., from the millions of beneficiaries living at or near poverty—increasing premiums on wealthier program participants seems like a natural way to shore up program finances.

Opponents of tying premiums to income in Medicare say that it undermines the broad support for the program. As the cost of the program increases for higher-income beneficiaries, they are less likely to favor its current structure and more likely to be sympathetic to changes to it. On these grounds, the AARP has signaled that it does not support the president’s plan to increase premiums on higher-income beneficiaries.

Have we reached the tipping point where increased premiums for higher-income beneficiaries will threaten popular support for Medicare in a significant, meaningful way? It’s instructive to recall the Catastrophic Coverage Act of 1988, repealed one year after enactment after a revolt by seniors who were asked to shoulder the costs of the program through income-related premiums. Though the uprising against the Catastrophic Coverage Act was due in part to confusion over the law, it stands as a reminder of the political power of beneficiaries and interest groups in the context of the introduction of income-based premiums. The wealthy are a potential source of revenue for Medicare but also possess the means to finance the most strident challenge to it.

Cutting Provider Payments

Cutting payments to providers, whether broadly or in a targeted fashion, is the time-honored way to address Medicare financing problems. The ACA is the latest in decades of laws passed with the objective of reducing payments to the health care industry. According to projections by the Centers for Medicare and Medicaid Services (CMS) Office of the Actuary, those payments are scheduled to fall further and further below those paid by private health insurers. Obama’s proposal will accelerate that trend with a variety of targeted cost cutting measures that will hit drug manufacturers, teaching hospitals, rural providers, and post-acute care providers, among others.

The policy rationale for cutting provider payments is to reduce program spending. They’re either the driver of long-term growth in national debt under (if you prefer the CBO’s Alternative Fiscal Scenario) or the source of need for ever-expanding tax revenue (if you prefer the CBO’s Baseline Scenario). The claim is that by reducing provider payments, it forces them to be more efficient but does not harm beneficiaries. Evidence from past cuts to providers shows that doing so does provide incentives for efficiencies for providers, such as shifting care from inpatient to outpatients settings.

A counterargument we may hear is that lower provider payments may harm beneficiaries by creating incentives for providers to stint on care or reduce beneficiary access to care. Reduced hospital lengths of stay may be short-term efficient, for example, but may increase the probability of a worse health outcomes, like readmission or mortality. Physicians may see fewer Medicare patients as private insurance payments become increasingly more profitable in comparison.

The threat to profitability (or, more generally, to revenue streams) also explains why health care industry leaders, including the American Hospital Association, among others, object to additional Medicare cuts. Their stated preference is for the Medicare eligibility age to be increased instead.

From Policy to Politics

The debate over health reform, the 2010 election cycle, and the political rhetoric since has demonstrated that Medicare is front and center in our political debate. The big picture contrast is between those who see the program’s current structure as a strength to be preserved and those who see it as the source of its problems. The president appears to be in the former camp, though the health care reform law he signed and his latest proposal clearly demonstrate that he is aware of the financing problems the program faces. Heading into 2012, he is attempting to position himself as a defender of the program in its current form while appearing to be reasonable about its future needs. To be sure, some will argue that income adjusting Medicare premiums undermines the program and, in that sense, the president is threatening its current structure. But it is not clear what political role additional income adjusting will play going forward. It exists today and the program enjoys overwhelming popularity.

The two principal alternatives that have been offered in recent months would change the structure of Medicare and the federal government’s liabilities commensurately. Congressional Republicans support a plan to privatize Medicare by removing FFS Medicare as an option for beneficiaries in 2022. Meanwhile, under their plan, public support for private coverage would erode over time so beneficiaries would bear more of the cost of care. Eventually, the government’s fiscal responsibility for the program would become vanishingly small in real terms.

Instead of reduced payments that President Obama has proposed, the health care industry supports increasing the age of Medicare eligibility from age 65 to 67, saving the program an estimated $125 billion over 10 years, though just $5.7 billion in 2014 alone (less than 1 percent of program spending) and costing other payers twice that amount. Once suggested by president Obama himself, increasing the Medicare eligibility age would be a larger change to the program’s structure than embodied in the president’s latest proposal. It would be a smaller change than the privatization plan the GOP favors, though still a dramatic and controversial one.

Though it is possible to assess president’s debt proposal through policy analysis, as I’ve done above, doing only that misses what it is. It’s as much a political statement as a policy one. It is a statement about how the president views Medicare and how he intends to defend it. The message of his proposal is this: Medicare requires change, but that change should be within, not to, its current structure. The big news is that changing Medicare’s fundamental form is itself grounds for debate.

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