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Deficit Reduction Plans Would Squeeze Medicare

Nov 29, 2010

Spurred by growing concerns about the federal deficit, plans to curb Medicare spending are proliferating -- setting the stage for potentially bruising battles between seniors’ advocates and budget cutters.

The proposals, put forth by members of bipartisan deficit-reduction panels as well as Republican lawmakers, aim to help reduce the $1.3 trillion federal budget deficit as well as the mounting national debt. The plans would require beneficiaries to pay a larger share of Medicare, the federal health program for the elderly and disabled. One idea would fundamentally transform the 45-year-old program by giving seniors a set amount of money to buy their own Medicare coverage.

President Barack Obama’s deficit commission, which has attracted the most attention, faces a Wednesday deadline to come up with a package of recommendations for stanching the nation’s red ink. Whether the full commission will be able to agree on anything is unclear.

Commission chairmen Erskine B. Bowles, who was White House chief of staff under President Bill Clinton, and Republican former Sen. Alan Simpson of Wyoming have presented a variety of far-reaching ideas. They include setting a budget target for Medicare spending and increasing premiums or beneficiary cost-sharing to limit the growth of the program. Two members of the commission want to go further and turn Medicare into a voucher program in which the government would in effect cut beneficiaries a check for coverage rather than promising a specific set of benefits as the current Medicare program does. The voucher proposal, which would not go into effect until 2021, faces tough odds with commission Democrats.

Three liberal groups -- Demos, The Century Foundation and the Economic Policy Institute – said Monday the new health law already includes cost-saving measures that would help reduce the growth of health care spending, including by Medicare.

Even if the president’s commission can’t agree on how to tame health care spending – or the deficit in general – the debate over Medicare isn’t going away. The program, which covers 47 million people, is expected to spend $519 billion this year and grow to $929 billion in 2020.

“I don’t think there’s any question that there’s intensifying pressure to control Medicare costs and that pressure is only going to intensify more over time when you look at the deficit and you see that really Social Security is a minor contributor going forward. It’s mainly health care,” said Jonathan Oberlander, professor of social medicine and health policy at the University of North Carolina. "Medicare has long been budget politics, particularly budget deficit politics."

AARP, the big seniors’ group, says proposals to require seniors to pay more will only hurt lower-income beneficiaries. "The burden of Medicare out-of-pocket costs is already very high, to the point where many people are literally having to choose between necessities of life and health care," said John Rother, AARP executive vice president. "I don’t think it’s possible or advisable to further load people of modest incomes with very high health care costs."

But proponents say changes are necessary to narrow the nation’s budget gap, which hit more than $1.3 trillion for fiscal year 2010, according to the Congressional Budget Office. In August, the CBO projected that the fiscal 2011 deficit would be $1.066 trillion.

"America faces a quiet killer that is eating away at the foundation of America – the growing deficit," said Republican former Sen. Pete Domenici of New Mexico, a past chairman of the Senate Budget Committee. He and Alice Rivlin, President Bill Clinton’s budget director, head another bipartisan task force on the deficit. 

One of the most controversial ideas, included in the task force report and the proposals of Obama’s commission chairmen, is called "premium support." Seniors would get a set amount of money and use it to buy coverage from the traditional fee-for-service program or from a menu of private plans.

Separately, two members of the president’s panel, Rivlin and Rep. Paul Ryan, a Wisconsin Republican who is expected to head the House Budget Committee, would go a step further, and replace the current Medicare fee-for-service program with one that would give seniors vouchers to purchase coverage on their own in the private market.

Moving Medicare to either a "premium support" or voucher plan "shifts Medicare from the concept of a defined benefit toward a defined contribution," said Tricia Neuman, vice president of the Kaiser Family Foundation and director of its Medicare Policy Project. (KHN is a program of the foundation.) That means that Medicare beneficiaries might receive fewer benefits or pay more in premiums than they do under the current Medicare program, particularly if payments do not keep up with rising costs, she said.

Both ideas would make sweeping and historic changes for future enrollees. Some analysts fear the proposals would result in beneficiaries receiving fewer benefits and paying more for coverage because the increases in the amount that the government contributes won’t cover the projected increase in health care costs.

"The increases aren’t going to keep up with the cost of the premium and cost sharing is going to go up as result of that," said Vicki Gottlich, senior policy attorney with the nonprofit, nonpartisan Center for Medicare Advocacy.

Many details of the proposals are unclear, so it’s difficult to know if either the "premium support" or voucher ideas would require insurers to cover a specific set of benefits as the traditional Medicare and current Medicare Advantage plans now do.

Both the bipartisan task force report and the Rivlin-Ryan plan would allow government payments to increase slightly faster than the gross domestic product. Among other changes, the task force would increase from 25 percent to 35 percent the portion of Medicare Part B costs borne by beneficiaries. Part B covers physician costs and other outpatient services.

Supporters of “premium support” and vouchers say limiting the government’s contribution would encourage seniors to be more cost-conscious in choosing a health plan, increase competition among insurers and drive down costs.

The chairmen’s draft also proposes beefing up the authority of the Independent Payment Advisory Board, which was created in the new health law. Beginning in 2014, the panel would recommend Medicare cuts if the program grows too quickly. But the board is prohibited from submitting proposals that would ration care, increase taxes, change Medicare benefits or eligibility or increase beneficiary premiums and cost-sharing requirements. The deficit commission chairmen have recommended that those and other constraints be lifted to make the board more effective.

There are political perils for both parties in making major changes to Medicare. Democrats, who got hammered in the elections on voters’ concerns about the health law’s impact on Medicare, will be cautious.

Republicans may be wary, too. “The last time the Republicans won big in a midterm election they pushed cuts in Medicare spending and that didn’t turn out too well for them politically,” Oberlander said. In 1995 when then-House Speaker Newt Gingrich, a Republican, pressed to reduce the growth of Medicare spending, the result was two government shutdowns – and a disastrous outcome for the GOP in the 1996 elections.

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