The Deficit Reduction Report and Medicare: A Helpful Cheat Sheet to What is Proposed

by Kathryn Bailey

On December 1, President Obama’s Deficit Reduction Commission released its final report, titled, “The Moment of Truth: Report of the National Commission on Fiscal Responsibility and Reform.” A vote which was supposed to take place on the day of the release has been postponed until Friday, December 3 in order to seek the 14 votes needed for the proposal to be sent to Congress. The Commission’s report takes on many government functions and spending allocations, including defense, the tax structure, Social Security, agriculture subsidies and student loan programs.

One of the most closely-watched areas for cost containment is health care. Entitlement programs like Medicare and Medicaid earned the most attention from the Commission, with other programs such as the Federal Employees Health Benefits (FEHB) program also receiving proposed changes.

Among these, Medicare growth is seen as the most alarming and urgent issue. The Heritage Foundation estimates that it is underfunded by a staggering $38 trillion. The problems with Medicare are many. Among them is the fact that there is no cap on Medicare spending. It keeps rising, and is due to become insolvent by 2017. This problem can only sit on the back burner for so long. Jeff Goldsmith, a prominent health policy expert has said, “Either we proactively take this on as a nation, or international lenders are going to say, ‘Forget it, drop dead,’ and we’ll have an enormous economic crisis.”

The report makes several suggestions about constraining the feared escalation of Medicare costs. Below is a brief summary of these proposed policy changes:

First, the Commission suggests reforming the standard growth rate system, or SGR. This system is intended to keep Medicare cost increases within the same realm as inflation, and has indicated that doctor payment rates should be cut for several years, and for several years Congress has delayed the cuts in response to strong provider pushback. The Commission believes that Congress will never allow the mandated 23% reduction in doctor pay to take place, and instead says the government should freeze payments through 2013 and enact a one percent cut in 2014. Additionally it recommends that Congress develop a new payment formula entirely — one which, “pays doctors based on quality instead of quantity of services.” This will presumably require lower payments to providers in one way or another, which undoubtedly continue to be a tough sell in Congress.

Second, the Commission recommends a set of policies that would offset the costs of freezing physician payment rates instead of enacting the currently postponed 23 percent cut:

  • Increasing government authority and funding to reduce Medicare fraud, which is expected to save the government $9 billion through 2020. This seems straightforward, but could be expected to receive prompt opposition from health providers and suppliers who may face increased paperwork and scrutiny.
  • The panel suggests reforming Medicare cost-sharing rules. This means that costs would shifted to seniors in the form of higher out-of-pocket costs for care. This may help lower the deficit, but some groups like AARP are likely to find this politically troublesome.
  • Along the same lines, the Commission recommends that Medigap plans, which are supplemental private plans that help seniors cover costs, be restricted as to when they can kick in help. The idea is that Medigap plans are currently masking a large portion of the cost-sharing seniors would otherwise be paying, and thereby driving up utilization of care. Insurance companies that provide these plans may voice concern over new regulations.
  • The panel recommends that drug companies be forced to pay rebates back to the government for Medicare members, similar to those paid for Medicaid beneficiaries. Expect drug companies to create a huge amount of noise over this.
  • The Commission believes that Medicare should eliminate the practice of paying providers and hospitals for beneficiaries who owe them money. This is something the private sector does not do, so logically it should be an easy sell. Politically, against physician and hospital groups, it most certainly will not be.
  • Finally, the Commission recommends offsetting Medicare costs associated with the physician payment freeze by accelerating programs that offer home health to seniors. This would help relieve some of the cost burden of inpatient hospital care, which is where a tremendous amount of spending takes place. However, these programs need to be implemented wisely and with bottom-line costs in mind to avoid cost shifting instead of cost savings.

The proposed changes offered by the Commission related to Medicare would likely save the program from the projected cost increases, if and only if they are implemented. As seen above, the policies will face the same political obstacles as when they were considered last year during the health reform debate. The most interesting part, how Congress will change its handling of these ideas, is still to come.

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