Obama’s Opportunity for the “Super Committee”

Only three weeks remain before the Joint Select Committee on Deficit Reduction, popularly known as the “Super Committee,” must submit a bill to Congress that will cut the deficit by at least $1.2 trillion in ten years. By design, everything is on the table. The Super Committee only has one chance: It can bring forth only one bill, and must do so by November 23.

Although details are murky, it was reported that the Super Committee’s Democrats have proposed $600 billion in savings from Medicare, Medicaid, and other health spending, while Republicans have proposed $800 billion of cuts to health spending, as well as increased revenue of $640, some of which is scheduled to come from higher health-care premiums. Each side rejects the other’s proposal.

And the Super Committee is not just about health spending. It’s about everything, including the hot-button issue of national defense.

If the Super Committee fails to report any bill, or the Congress votes it down, the entire $1.2 trillion will be automatically “sequestered.” However, when it comes to health care, sequestration will not be too painful. Medicaid, the joint federal-state program for low-income residents, is exempt; and most of Medicare, the federal program for seniors, is limited to cuts of two percent annually. The Congressional Budget Office (CBO) estimates that total Medicare spending for 2013 through 2021 will be $40.3 trillion before sequestration and $40.2 trillion after sequestration.

And the pre-sequestration estimate assumes that Congress allows scheduled cuts to physicians’ Medicare fees to take place at the end of this year. Congress has never allowed scheduled cuts to physicians’ fees to take place, and always panicked at the last minute to kick the can of Medicare physician-payment down the road for a few months. Eliminating — once again — the scheduled cuts to Medicare’s physicians’ fees will cost $349 billion over the same nine years, according to the CBO.

Sequestration won’t result in any real reform to federal health spending at all. However, there is an opportunity for a symbolic victory by the Super Committee.

President Obama has proposed cutting a total of $328 billion from federal health spending (on civilians) over the period, of which $224 billion are further cuts to Medicare providers, $24 billion are structural reforms to Medicare, and $81 billion are cuts to Medicaid and public health.

Most of the President’s proposals are based on the same flawed thinking that got us into this mess: Faith in the federal government’s ability to determine how much to pay for each medical item or service consumed by Medicare or Medicaid dependents.

Nevertheless, the President’s proposal also contains something entirely new to his thinking on health policy: The idea that if patients control more of their own health spending, they will consume more prudently.

The President has proposed seven reforms which can be described as “consumer-driven”:

1. Reducing Medicare’s coverage of bad debts. Medicare generally reimburses 70 percent of providers’ bad debts. Reducing this to 25 percent will motivate providers to know their patients’ financial situations better, because they will be at greater risk. This is likely to improve price transparency.
2. Increase income-related premiums under Medicare Parts B and D. Medicare beneficiaries currently pay higher premiums for Medicare Parts B and D. The President proposes to increase these. This is little more than an increase in marginal income taxes. However, a slight transformation would achieve consumer-direction by increasing deductibles and co-pays, instead of premiums, for higher-income beneficiaries. (An earlier article describes how to achieve equivalence with this alternative reform.)
3. Modify Part B deductibles for new beneficiaries. To ensure patients make better choices, the President proposes to increase the Part B deductible by $25 in 2017, 2019 and 2021.
4. Introduce home health co-payments for new beneficiaries. The President proposes to levy a co-pay of $100 on beneficiaries who use five (or more) home-health visits, unless preceded by hospitalization or similar inpatient stay.
5. Introduce a Part B premium surcharge for new beneficiaries that purchase near first-dollar Medigap coverage. The President proposes to levy a surcharge of about 30 percent on the Part B premium for patients who buy Medigap coverage that covers Medicare spending from the first dollar. Such policies reduce patients’ sensitivity to health costs.
6. Apply a single matching rate to Medicaid and CHIP. Currently, federal matching funds for CHIP (Children’s Health Insurance Programs) are higher than for Medicaid. The President proposes to meld these rates. Although not strictly a “consumer-driven” reform, this will motivate states to be more creative in using limited funds.
7. Reduce the Medicaid provider tax threshold. Hospitals and other providers collaborate with states to artificially increase federal matching funds but levying a provider tax that flows right back into Medicaid while grabbing federal funds en route. The President proposes to limit this abuse. As above, reducing this threshold will motivate states to be more creative in using limited funds.

On their own, these reforms will not save much money — only about $74 billion over the period, according to the President’s score. However, it is also likely that the President’s own “score” does not adequately account for consumers’ response to higher out-of-pocket costs: Overall Medicare costs will drop.

Something is better than nothing. Most importantly, by voting for President Obama’s seven proposals to increase consumer-direction in Medicare, both parties will have collaborated in a very important development: For the first time, Democrats and Republicans will have agreed that giving patients more control of health dollars is good reform.

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