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Analysis: Medicare, Liberals And The Lesser Of Two Evils

Aug 15, 2011

This analysis is a collaboration between Kaiser Health News and The New Republic

Why does the debt ceiling deal give liberals so much heartburn? Many reasons, obviously. But a big one is the possibility that it will trigger automatic cuts to Medicare, the jewel of the Great Society and the program on which virtually every senior citizen depends for health insurance.

Under the terms of the debt deal, which President Obama reached with Republican leaders in late July, a bipartisan "super committee" has until Thanksgiving to come up with at least $1.2 trillion, over 10 years, in deficit reduction proposals. But if this committee can’t agree on recommendations or if Congress fails to pass them – two very distinct possibilities – then a series of across-the-board spending reductions would take effect. Some of them would take money from Medicare.

The fear is that those cuts would leave the elderly without adequate financial protection or access to medical care. It’s a rational fear but, perhaps, not a necessary one. Talk to policy analysts, industry lobbyists, or advocates for the elderly, and you’ll detect an emerging, if tentative, consensus: The impact of automatic cuts would be relatively modest and, most likely, less severe than whatever that super committee would devise as an alternative.

By design, the actual benefit structure of Medicare would be exempt from the automatic cuts. That’s a critical distinction given some of the ideas under discussion in the past few months. At various points, negotiators from the administration and Congress talked about raising the age at which people become eligible for Medicare, charging higher premiums to beneficiaries with higher incomes, and forcing holders of supplemental Medigap policies to face bigger out-of-pocket charges for routine medical care. For better or for worse, or maybe for both, all of these changes would have meant less insurance coverage for seniors.

The automatic cuts, by contrast, would affect providers exclusively, by reducing what Medicare pays them by up to 2 percent. "Providers" is wonk-speak for the people, institutions, and companies that provide medical care – not just doctors and hospitals, but also skilled nursing facilities and the insurance companies that deliver Medicare benefits to some seniors. In 2013, the first year the automatic cuts would take effect, that 2 percent would work out to something in the neighborhood of $12 billion, according to estimates from the Bipartisan Policy Center.

By itself, and in the context of all U.S. health care spending, that’s not a ton of money. But it’d be in addition to Medicare cuts, roughly three times as large, that the Affordable Care Act is imposing. And unlike the cuts in the Affordable Care Act, many of which are in the form of payment reforms designed to penalize low-quality providers or reward high-quality ones, the automatic cuts in the debt deal would not make such fine distinctions.

That last part is important: Across the health care industry and even within particular parts of it, some providers can, and should, cope with reductions better than others. Paying less to specialists might be a good idea, for example, given all the data on excessive procedures in American medicine. But reducing income to family doctors could make an existing shortage of those physicians even worse. “Some see this as too blunt an instrument,” says Tricia Neuman, a vice president of the Kaiser Family Foundation. (KHN is an editorially-independent program of the foundation.)

But, as Neuman also notes, scale is important. Even if the automatic cuts took effect, the total reductions in Medicare spending providers would face over the next decade would likely be smaller, relative to the size of the program, than the ones they faced a little more than a decade ago, thanks to the Balanced Budget Act of 1997. Although Congress ultimately restored a portion of those 1997 cuts, by and large the health care industry adapted to the new reality, frequently by finding new ways to become more efficient. While automatic cuts from the debt ceiling deal could have a harsher effect, experts like Paul Ginsburg, president of the Center for Studying Health System Change, agree they would likely be "indiscriminate but not severe."

Of course, neither Ginsburg nor anybody else can be sure about that, in part because of some outside variables. Chief among them is the fate of separate, already-planned cuts to physicians under what is known as the Sustainable Growth Rate formula. In recent years, Congress has postponed the SGR cuts - the "doc fix." If Congress doesn’t postpone them again, physicians would see much more dramatic declines in income – the kind that might discourage them from seeing Medicare patients, just as low Medicaid reimbursements presently discourage specialists from seeing people who get insurance from that program.

Still, the unknowns of leaving deficit reduction to the super committee loom larger. If Congress meets the deadline for approving the super committee’s recommendations, reductions could start taking effect a year earlier than automatic cuts, on Jan. 1, 2012. "For businesses that prefer to plan ahead," Politico’s Jennifer Haberkorn noted last week, "the trigger could seem more stable and predictable."

And timing isn’t the only issue. According to Chris Jennings, president of Jennings Policy Strategies and longtime advisor to Democrats, both advocates and industry insiders are realizing that "any likely deal emerging from the super committee would include policies that are significantly bigger in size and scope than the fall-back sequester…they get that if this political environment produces anything, it would almost inevitably be new and large Medicaid cuts and a package of Medicare savings that would dwarf the 2 percent cap on Medicare spending, which the sequester limits to approximately $130 to $140 billion in savings."

Not that the automatic cuts are ideal in anybody’s estimation. A frequent complaint about the Affordable Care Act was that it didn’t reduce health care spending quickly enough. As Tevi Troy, a senior fellow at the Hudson Institute and former Bush Administration official, notes, "the lack of severity may also coincide with a lack of significant impact on the budgetary side." Even for progressives, the best possible outcome might be for Congress to head off the automatic cuts by enacting significant, but more carefully designed, Medicare reductions as part of a balanced deficit reduction plan that mixed spending cuts with new revenue.

Obama and his allies tried for such a deal a few weeks ago. They didn’t get one, primarily because Republicans refused to consider it. Unless that political reality changes, progressives may find that a set of automatic Medicare cuts are the lesser of evils, both as politics and as policy.


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