Health Care and the Budget Deal: Three Steps Forward, One Step Back


(A version of this Health Alert was published by Forbes.)

Yesterday, the White House and Congressional leaders announced a last-minute budget agreement that avoids a so-called government shut-down for now. The deal has four health-related items, and is expected to reduce net federal health spending by about $4.5 billion over five years, and $15.5 billion over ten years. Overall, it is not a bad deal with respect to health care. However, some of its budget savings are fragile and it largely avoids reforms that will actually reduce the growth of health spending.

The highest profile item is rolling back Medicare Part B premiums, which were due to jump by about half next year for almost one third of Medicare beneficiaries. This year, the standard Part B monthly premium is $104.90. Without the budget agreement, the premium for about 30 percent of beneficiaries would have jumped up to $159.30. Although this prospect understandably discomforted politicians who have falsely promised that Medicare costs are under control, the premium hike was a consequence of a provision that protects taxpayers.

Medicare has a so-called “hold harmless” provision that protects most seniors from Medicare premium hikes higher than the cost-of-living adjustment (COLA) in their Social Security income for the forthcoming year. There is unlikely to be a COLA in 2016, so most Medicare beneficiaries cannot have their premiums increased at all. However, Medicare Part B costs have increased such that the appropriate premium in 2016 should be $120. On the other hand, Medicare Part B is financed one quarter by premiums and three quarters by federal taxpayers. Holding premiums at $104.90 cannot simply impose a higher share of costs on taxpayers. So, the shortfall has to be made up by 30 percent of Medicare beneficiaries who have incomes above a certain cut off.

The premium hike to $159.30 is politically intolerable. The pressure to roll it back without paying for it at all (like Congress did with the so-called Medicare “doc fix” last April) must have been immense. Congress and the President should be congratulated for agreeing to pay for a reduction in the premium to $120 next year (and, perhaps, 2017) by adding $3 to monthly premiums in future years. The “fix” is approximately budget neutral over 10 years.

However, this assumes 2016 (and, perhaps 2017) will be idiosyncratic, and future Social Security COLA increases will prevent a repeat. That depends on general price inflation increasing from zero, which largely depends on the Fed, not health policy. If COLA remains at zero for a few years, we could see this premium adjustment recur again and again – just another case of Congress kicking the can down the road.

A more promising, permanent reform is the repeal of a part of Obamacare that automatically enrolls workers in their employers’ health plans, unless they chose to opt out. This reform will increase federal revenues by about $8 billion, because workers who do not chose employer-based coverage will have higher taxable incomes. More importantly, it challenges the prejudice that Americans should be forced to take employer-based benefits, instead of making their own health choices. Real reform of this problem would give Americans who buy individual health insurance the same tax preference as those who receive it as an employer-based benefit.

A very important reform invisible to most Americans will be how Medicare pays certain hospital-owned outpatient facilities. Many services cost significantly less when provided in an outpatient setting than in a hospital. However, hospitals which own outpatient facilities are expert at claiming higher hospital-based charges for services delivered in off-campus outpatient settings. Closing this loophole for new facilities will save $9.3 billion over ten years. Far more could be done to adopt more generally “site neutral” payments. President Obama has proposed reforms that would save $29.5 billion over ten years, and we should hope that this will be just the first of many bipartisan successes in reducing unnecessarily expensive hospital charges.

The item that will likely have significant unintended negative consequences is the arbitrary rule that manufacturers of generic drugs must pay rebates to Medicaid if their prices increase greater than the rate of inflation. This is estimated to save a very small amount of $1 billion over ten years. However, inflation these days is zero. Price increases of generic drugs are caused by a number of challenges, such as slow regulatory approvals and problems in the supply chain of chemical ingredients. Simply imposing price controls without addressing the real issues will lead to more shortages, not savings.

Overall, the health care piece of the budget deal should be characterized as a moderate success.


Comments (5)

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  1. Devon Herrick says:

    One thing the budget deal would do is equalize the payments to hospital-affiliated physician practices with non-hospital affiliated physicians practices. But, it would only do it for newly acquired practices, not those already acquired. It should apply to all practices.

    • James R Chaillet Jr MD says:

      It will be interesting to see whether hospitals continue to acquire physician practices.

    • Larry Wedekind says:

      I could not agree more Devon! It is a modern day scam that hospitals are paid more in their outpatient facilities than true independent outpatient facilities receive…hospital based outpatient facilities are typically paid more than 40% more for the exact same procedures! This must be stopped. It is especially egregious and expensive to taxpayers in oncology procedures.

  2. Bob Hertz says:

    At my insurance agency, we deal every day with persons under age 65 who are seeing increases of $300 a month on their skinny health insurance plans.

    If seniors see a $50 increase on the generous Medicare Part B that actually costs about $6,000 a year to the tax payers, pardon my lack of alarm.

    • I sympathize with your view. But neither you nor I have to face angry senior voters at townhall meetings. The fact that seniors vote in higher proportions than the rest of us poses a frustrating political obstacle to reform.