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Politics of Medicare Cuts

From: The Hospitalist, November 2011

Deficit reduction faces an uphill battle in polarized political landscape

by Bryn Nelson, PhD

It reads like a brainteaser from hell: Twelve members of Congress must identify at least $1.2 trillion to cut from the federal budget over the next 10 years. Social Security cuts are a virtual nonstarter with Democrats. Tax hikes on the wealthy are anathema to Republicans. Significant Medicare cuts will invoke the wrath of seniors. The Joint Select Committee on Deficit Reduction, evenly split between both political parties, must somehow reach a majority agreement on what to trim by the Nov. 23 deadline. Then the full Congress must approve the committee’s recommendations by Dec. 23.

Here’s another caveat: In a Sept. 20 letter, SHM and 117 other medical groups urged the deficit reduction “super-committee” to “include a full repeal of the fatally flawed Medicare sustainable growth rate (SGR) formula in its final legislation.” Unless Congress repeals or delays the widely despised SGR mechanism, Medicare reimbursement rates for doctors will be cut by a catastrophic 29.4% in January. A full repeal, however, could cost $300 billion or more over 10 years, according to estimates by the nonpartisan Congressional Budget Office (CBO). If the super-committee takes up the SGR challenge, it will need to find at least $1.5 trillion worth of mutually agreeable cuts.

In a final twist, President Obama has threatened to veto any deficit reduction plan that slashes Medicare benefits and fails to raise taxes on the wealthy. The punchline is that unless the divided super-committee, a polarized Congress, and the president can all agree, $1.2 trillion in domestic and military spending cuts will automatically kick in, giving both political parties a lump of coal just in time for Christmas.

If any solution is possible, it might have to rely on some old numbers regarding potential cuts to Medicare and other federal programs. “There’s no time to develop new policy,” says Joseph Antos, PhD, a health policy expert at the American Enterprise Institute, a conservative think tank. “The old ideas that have been kicking around for years are scorable [by the CBO], and because they’ve been around for so long, it’s easier to write the legislative language.”

Here’s a look at perennial Medicare proposals and the chances of their inclusion in serious deficit-reduction negotiations.

It’s easier to go after a supplier of products—and drugs are the biggest one—than it is to go after doctors or hospitals. And it’s hardest to go after beneficiaries.

—Joseph Antos, PhD, health policy expert, American Enterprise Institute, Washington, D.C.

Reduced Payments

Obama’s proposal to the super-committee includes $248 billion in Medicare cuts and savings. Of most direct relevance to hospitalists, about $57 billion comes from reduced payments to providers over 10 years. The proposal would reduce Indirect Medical Education add-on payments to teaching hospitals by 10%, end an add-on payment for hospitals and physicians in low-population states, and reduce payments to post-acute-care facilities.

Separately, the Medicare Payment Advisory Commission (MedPAC) released a proposal that would save $233 billion over 10 years—designed in large part to offset the costs necessary for a permanent SGR fix. Among its suggestions, the MedPAC proposal would freeze reimbursements for primary-care providers (PCPs) and trim payments to specialists by 5.9% per year for three years. Despite agreement by virtually everyone that the SGR has to go, groups like the Alliance of Specialty Medicine and American College of Surgeons have expressed concerns with MedPAC’s suggested offsets.

Dr. Antos says MedPAC has adopted the view that preventing the 29.4% cut in Medicare reimbursements will require spreading the pain more generally throughout the health sector. “That makes sense until you realize that politically, when you do that, you just generate lots of resistance from lots of organizations,” he says. So what about the SGR? Dr. Antos sees a permanent fix this year as “extremely unlikely,” especially given the general pessimism over the super-committee’s ability to agree on $1.2 trillion in cuts. Instead, he predicts a two-year fix that would require tens of billions in offsets but delay (yet again) more difficult political choices until after the 2012 elections. “They definitely do not want to be arguing about this next fall,” he says.

Drug Rebates

Under the president’s proposal, Medicare would receive the same rebates as Medicaid’s discount for brand name and generic drugs given to beneficiaries under the Medicare Low-Income Subsidy. This proposal alone is estimated to net some $135 billion in savings over 10 years, an inclusion that Judith Stein, executive director of the Center for Medicare Advocacy, says her organization was “delighted” to see. “We think that’s extremely reasonable, fair, good public policy, and good economic policy,” she says. Left-leaning groups are particularly vehement on this issue, given Medicare’s prohibition against negotiating with pharmaceutical companies on drug prices, a restriction that other bulk buyers, such as the Veterans Administration, don’t face.

Dr. Antos expects some form of the president’s proposal to be taken seriously. “This is something that is easy to do, and I think politically, it’s easier to go after a supplier of products—and drugs are the biggest one—than it is to go after doctors or hospitals,” he says. “And it’s hardest to go after beneficiaries.”

Premium Surcharges

Another element of President Obama’s proposal would save $20 billion by increasing wealthier beneficiaries’ insurance premiums on prescription drugs and doctors’ services. Beginning in 2017, income-based premiums for Medicare Part B and Part D both would rise by 15% for beneficiaries earning more than $85,000 annually.

AARP opposes the idea, and Stein says she’s concerned about the overall notion of basing Medicare premiums on income. “The problem is that we want to keep higher-income people satisfied with the Medicare program, because they’re the ones that get listened to,” Stein says.

Austin Frakt, PhD, a healthcare economist at Boston University, makes a similar point in a recent Health Affairs blog post: “The wealthy are a potential source of revenue for Medicare but also possess the means to finance the most strident challenge to it,” he writes. Even so, Stein says, “it’s easier to swallow than some other things,” especially if drug companies and others are required to share in the sacrifices.

Medicare Eligibility

President Obama’s proposal excludes any discussion about raising the age of Medicare eligibility, signaling a harder line on a change that Republicans and groups like the American Hospital Association have favored and that Obama himself floated as a trial balloon earlier this year. The Democratic base and AARP, however, rebelled against the notion, and Dr. Antos says the idea has “zero” chance of being included in the super-committee’s proposal. “This is the sort of thing that you don’t really want to bring up when you’re running for president, which is why the president backed off, and which is why the Republicans won’t be eager to see it, either,” he says.

Dr. Antos expects the eligible-age proposal to re-emerge in 2013, though he cautions against taking any “extravagant claims for savings” at face value. To be publicly acceptable, Medicare’s minimum age would need to rise slowly, he says, perhaps phased in over 20 years, and in a way that likely wouldn’t save a huge sum of money.

If Medicare raised its minimum age to 67 in 2014, the federal government would save roughly $5.7 billion, according to the nonprofit Center on Budget and Policy Priorities. In an “Incidental Economist” blog post, however, Dr. Frakt points out that the savings would simply shift the cost to beneficiaries, employers, private insurers, and others, a point echoed by Stein.

“All told, the cost to the system of raising the Medicare age to 67 would be $11.4 billion in 2014,” Dr. Frakt writes, “which is a high price to pay for $5.7 billion in federal savings.”

Bryn Nelson is a freelance medical writer based in Seattle.


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