Analyzing the Gimmicks in Warren’s Health Care Plan

Six weeks ago, this publication published “Elizabeth Warren Has a Plan…For Avoiding Your Health Care Questions.” That plan came to fruition last Friday, when Warren released a paper (and two accompanying analyses) claiming that she can fund her single-payer health care program without raising taxes on the middle class.

Both her opponents in the Democratic presidential primary and conservative commentators immediately criticized Warren’s plan for the gimmicks and assumptions used to arrive at her estimate. Her paper claims she can reduce the 10-year cost of single payer—the amount of new federal revenues needed to fund the program, over and above the dollars already spent on health care (e.g., existing federal spending on Medicare, Medicaid, etc.)—from $34 trillion in an October Urban Institute estimate to only $20.5 trillion. On top of this 40 percent reduction in the cost of single payer, Warren claims she can raise the $20.5 trillion without a middle-class tax increase.

The Bad, The Ugly, and The Good of Liberal Entitlement Proposals

The New England Journal of Medicine yesterday published two new papers on entitlement reform and controlling health costs.  The first, by AEI’s Joe Antos and several co-authors, highlights several market-based mechanisms to slow the growth of costs.  The second, published by a group of liberal academics convened by the Center for American Progress, includes proposals that can be described as “The Bad, The Ugly, and The Good.”

First, the bad.  The CAP paper claims that “the only sustainable solution [to entitlements] is to control overall growth in costs.”  The problem is that, as we previously noted, over the next 25 years, demographics count for at least half – and as much as three-quarters – of projected increases in spending on Medicare, Medicaid, Social Security, and Obamacare insurance subsidies.  These demographic changes make existing entitlements untenable over the long term.  Yet by putting forth a half-solution focused solely on containing health costs, the CAP paper presumes a status quo of existing entitlement structures that is fundamentally unsustainable.

Next, the ugly.  In order to contain costs, the CAP paper proposes a system of supposed “self-regulation” that amounts to Obamacare’s Independent Payment Advisory Board on steroids:

Under a model of self-regulation, public and private payers would negotiate payment rates with providers, and these rates would be binding on all payers and providers in a state….The privately negotiated rates would have to adhere to a global spending target for both public and private payers in the state.  After a transition, this target should limit growth in health spending per capita to the average growth in wages, which would combat wage stagnation and resonate with the public.  We recommend that an independent council composed of providers, payers, businesses, consumers, and economists set and enforce the spending target.

In other words, CAP proposes that a board of “experts” can set spending levels for the entire health care system, and enforce this spending cap through “self-regulation.”  Many may believe that this system of “self-regulation” wouldn’t last long, because the fundamentally arrogant premise that a group of “experts” can micro-manage the health care decisions of the entire country (or even entire states) would soon be revealed for the folly it is.  The ultimate result would be a(nother) government takeover – this one of the supposed “voluntary” boards – and a federally-imposed system of “rationing with our eyes open” previously advanced by one of the paper’s authors, Donald Berwick.

Fortunately, however, even the CAP paper focuses on some good policy.  The discussion of competitive bidding features the rare admission from a group of liberals that market-based solutions can work in health care:

Instead of the government setting prices, market forces should be used to allow manufacturers and suppliers to compete to offer the lowest price.  In 2011, such competitive bidding reduced Medicare spending on medical equipment such as wheelchairs by more than 42%….We suggest that Medicare immediately expand the current program nationwide.  As soon as possible, Medicare should extend competitive bidding to medical devices, laboratory tests, radiologic diagnostic services, and all other commodities.

Given that strong endorsement of competitive bidding for some of Medicare, the real question is why the authors don’t believe in competitive bidding for all of Medicare.  CAP said as recently as this week that private insurance plans can’t price their coverage options below traditional Medicare – meaning traditional Medicare wouldn’t lose market share under a competitive bidding plan – so what are the authors of the paper afraid of?

Some may believe the reason why liberals are afraid to let traditional Medicare compete is the same reason why liberals won’t admit Medicare’s significant demographic problems: A desire to cling to the shibboleth that government-run Medicare represents the epitome of progressivism, and must remain unchanged and inviolate in perpetuity.  For all the demographic and other reasons we’ve outlined previously and above, that’s simply not going to happen, no matter how hard the left tries to (over-)regulate the health sector.  Stein’s Law guarantees that the demographic problems constituting more than half of Medicare’s increase in spending will not go unaddressed.

So the real question for the left is when liberals will admit that traditional Medicare cannot survive unchanged, or with mere tweaks at the margins, and needs fundamental structural reform.  Perhaps at that point the left will recognize that the competitive bidding structure they have promoted for parts of the Medicare program is best served to change the entire program.  Now THAT would be a change we could all believe in.

Liberals Defend RationCare

In the past several days, various liberal bloggers have come out to defend the RationCare program promoted by the Administration in the form of the Independent Payment Advisory Board.  The Center for American Progress blog makes “The Case for Bureaucrats in Health Care” by arguing that “there should be no question that if you give 15 bureaucrats in Washington a budget with which to run Medicare, that they’ll deliver health care services inside the budget cap.”  The problem is the access problems for seniors that will result from these arbitrary payment reductions to remain under the cap – the Medicare actuary said that the IPAB cuts would be “difficult to achieve in practice,” not least because other provisions in the law could result in 40 percent of providers becoming unprofitable over the long term.

Of course, the Center for American Progress (CAP) also proposed applying the IPAB’s RationCare scheme to the ENTIRE health care sector, which would subject ALL health care expenditures to a spending target – and could make individuals spending their own health care dollars above that target ILLEGAL.  CAP has yet exactly to explain how this provision would work:

  • Would individuals be subject to fines or taxes for daring to buy health care that bureaucrats did not approve?
  • What if someone wanted to fly overseas to obtain health care elsewhere – would they be permitted to leave the country?
  • Could individuals be jailed for having the audacity to pursue health care spending not approved by a bureaucrat?
  • Would doctors be subject to fines, taxes, or criminal penalties for treating their patients even though national spending levels exceeded the bureaucrat-determined cap?
  • CAP believes that women have a constitutional right to abortion.  How exactly does CAP propose to reconcile this purported “constitutional right” with the statutory spending targets it wants to place on ALL health spending?  Is CAP saying that women will always be able to obtain their “constitutional right” to an abortion, but may not be able to obtain pre-natal care if bureaucrats determine the spending target has been exceeded?

Separately, the Economist also expresses its support for having “experts” make health care spending decisions for all Americans, arguing that patients are unable to make these decisions for themselves because “health care is different:”

Patients aren’t going to experience a loss of freedom or satisfaction because an expert reviewer at the Independant [sic] Payment Advisory Board makes the call as to whether a procedure is medically beneficial, rather than the corresponding bureaucrat at their insurance provider or at the for-profit clinic they’re attending.  Health care is different from buying shoes.  Which is why it wouldn’t be at all surprising if a board of 15 experts could play a major role in reducing expenses and improving care outcomes in the American medical industry.

This argument TOTALLY misses the point.  If an insurance company “bureaucrat” makes an incorrect decision regarding a medical procedure, a senior can always go to another insurer and obtain coverage – but if government bureaucrats make such a decision, individuals likely won’t be able to obtain other insurance (not least because of Obamacare’s cuts to Medicare Advantage).

The fact that even Democrats are moving away from RationCare shows how unpopular the idea of having a board of unelected, unaccountable bureaucrats is to most Americans – even if liberal elitists continue to believe that “experts” should determine what type of health care all Americans receive.

Democrats’ Hypocrisy on Spending Restraints and Entitlement Reform

The Hill reports that outside advocacy groups (i.e., lobbyists) have been invited to a meeting this afternoon regarding proposed changes to the Medicaid program.  Topics for discussion include “threatened changes to the Medicaid program, including global spending caps, a block grant, the loss of the maintenance of effort requirement (the Medicaid MOE), and other cuts to the Medicaid program that may be contemplated during budget negotiations.”

The article from The Hill notes that “the invitation…criticizes global spending caps” and “offers the strongest evidence yet that Democrats intend to fight” Medicaid reforms.  But there’s only one problem with the message: Democrats who claim to oppose “global spending caps” in Medicaid voted for global caps in Medicare as part of Obamacare.  Specifically, Section 3403 of the law enacts a global budget for Medicare, and empowers a new board of 15 unelected, unaccountable bureaucrats to enforce these spending restraints.

So it’s worth asking:  Why are global spending caps acceptable for Medicare but not Medicaid?  If Democrats oppose “global spending caps” so much because they impede access, why did they vote to impose them as part of Obamacare?  Or do Democrats support global spending caps when they’re used to finance new entitlements, but NOT when they’re used to reduce the deficit?

Do Liberals Want to Make Spending Your Own Health Care Dollars Illegal?

In conjunction with the Peterson Foundation’s Fiscal Summit today, various think tanks have released their deficit reduction proposals.  The Center for American Progress plan includes an interesting sentence buried within it:

Our plan also includes a failsafe mechanism that would ensure significant savings throughout the system.  Our failsafe would be triggered if, starting in 2020, total health care expenditures—not just those in the public sector—grow at a rate faster than that of the economy itself.  Should that happen, we would empower the Independent Payment Advisory Board—subject to the same congressional review process as exists currently in the health care law—to extend successful reforms in the public sector to all insurance plans offered in the health care exchanges, and then potentially to all health care plans, such that the target is met.

As background, the health care law created the Independent Payment Advisory Board (IPAB) – an unelected, unaccountable board of 15 appointed bureaucrats – to make binding rulings on Medicare policy.  But the IPAB was created to enforce a hard cap on total Medicare expenditures.  While the CAP paper (by accident or design) doesn’t include details on this proposed failsafe, extending IPAB “targets” to the private sector sounds strikingly similar to a global cap on total health care spending – which could mean that individuals would be PROHIBITED from using THEIR OWN MONEY to purchase health care.  This issue of global caps was one of the downfalls of the Clinton health care plan – yet CAP apparently wants to revive this mechanism to “reform” health care.

Many people would find this type of proposal – extending unelected bureaucrats’ reach well into the private sector – strikingly radical.  But one person who doesn’t is CMS Administrator Donald Berwick.  He’s written frequently – and admiringly – about imposing global caps on health care spending, which again could well prohibit individuals from spending their own money on health care:

“If I could wave a wand…Health care can and should find a route to both higher quality and lower cost—‘The budget is now capped.’” [i]

“We must have absolute caps on healthcare expenditures at some level in this country.  So long as we continue to believe that the survival of our organizations depends on finding additional revenues, we will not reorient ourselves to the internal restructuring that is so crucial.”[ii]

“The third principle is that we need to control costs and the way to do that is probably not through price controls at the level of individual deeds or actions or resources, but rather thinking about population-based payment, the idea of controlling costs per capita, for a population.  It’s sort of the same idea as establishing a budget for the population that can then be rationally spent, optimizing the use of resources.  That will require an integrator, somebody that can be [a] steward of a population-based budget.”[iii]

“The integrator would be responsible for deploying resources to the population, or for specifying to others how resources should be deployed.  Segmentation of the population, perhaps according to health status, level of support from family or others, and socioeconomic status, will facilitate efficient and equitable resource allocation.”[iv]

“If we could ever find the political nerve, we strongly suspect that financing and competitive dynamics such as the following, purveyed by governments and payers, would accelerate interest in the Triple Aim and progress toward it: global budget caps on health care spending for designated populations”[v]

In recent months, liberals have dismissed arguments about the IPAB rationing care; Paul Krugman argued last month that “we’re not talking about limits on what health care you’re allowed to buy with your own (or your insurance company’s) money.  We’re talking only about what will be paid for with taxpayers’ money.”  Some may find it bad enough that under Obamacare, a board of appointed officials will be charged with making arbitrary determinations about what types of care seniors will be able to obtain.  But the unfortunate problem for Dr. Krugman – and for Democrats – is that they’re NOT just talking about what will be paid for with taxpayers’ money – now that CAP has proposed giving unaccountable bureaucrats free rein over ALL of the health care sector.

 

[i] “Take Two Policies and Call Me in the Morning” by Donald Berwick, presentation slides from speech to Healthcare Management Association and Massachusetts Hospital Association, October 22, 2008

[ii] “Seeking Systemness” by Donald Berwick, Healthcare Forum Journal March/April 1992, p. 28

[iii] “Health Policy and Quality Principles,” Health Care Reinvented: Discussions with Don Berwick, Institute for Healthcare Improvement, June 2008, http://www.ihi.org/ihi/files/Promotions/ProfilesInImprovement/Berwick/Health_Policy_and_Quality_Principles.wma

[iv] “The Triple Aim: Care, Health, and Cost” by Donald Berwick, Thomas Nolan, and John Whittington, Health Affairs May/June 2008, p. 764

[v] “The Triple Aim: Care, Health, and Cost” by Donald Berwick, Thomas Nolan, and John Whittington, Health Affairs May/June 2008, pp. 767-78

Obama’s Next CMS Administrator?

Press reports over the past several months have indicated that Senate Democrats are unlikely to act on the controversial nomination of Dr. Donald Berwick for a full-time appointment as CMS Administrator – in which case Dr. Berwick’s term in office would end with the expiration of his recess appointment next year.  However, the Administration may have found one possible replacement in an unlikely source late last week, when Paul Krugman wrote a column on health care, patients as consumers, and the inevitability of government rationing.  This column should be a must-read for critics of the House Republican budget, as it sets out the only alternative vision developed by Democrats to date – one built around arbitrary rationing by government bureaucrats.  As the below spreadsheet shows, Dr. Krugman’s vision for health care as an outside observer closely aligns with the views of Dr. Berwick, the chief implementer of Democrats’ health care law:

  Paul Krugman Donald Berwick
Patients as Feeble-Minded Consumers “There’s something terribly wrong with the whole notion of patients as ‘consumers’ and health care as simply a financial transaction….Making [health care] decisions intelligently requires a vast amount of specialized knowledge.” “I cannot believe that the individual health care consumer can enforce through choice the proper configurations of a system as massive and complex as health care. That is for leaders to do.”
Need to Enact Caps on Government Health Spending “The point is that choices must be made; one way or another, government spending on health care must be limited.” “The social budget is limited—we have a limited resource pool.”
Bureaucrats Rationing Care “We have to do something about health care costs, which means that we have to find a way to start saying no.” “The decision is not whether or not we will ration care—the decision is whether we will ration with our eyes open.”

Krugman’s broader point is that bureaucrats will have to ration care because patients are incapable of functioning as health care consumers due to the technical nature of health care decisions, many of which are made in emergencies.  A response would go something like this: Of course patients will not function as pure consumers in all circumstances – the heart attack patient will obviously go to whichever emergency room an ambulance takes him.  But as Regina Herzlinger and others have pointed out, a small vanguard of the population functioning as educated consumers can drive important changes within the entire health care system – just as early adopters help spread technological innovations.  Put another way: You may not know the details of how a car works – I sure don’t – but a small percentage of educated consumers, and a ruthlessly competitive marketplace, can easily drive innovation while penalizing firms with lax attention to quality control.  (If Dr. Krugman cares to take issue with that comparison, I would be happy to provide him a copy of the latest innovation in government-run automobile manufacturing, to provide an illustration of what happens when bureaucrats micro-manage car companies, just as he would have bureaucrats micro-manage Medicare.)

The central debate around entitlement reform is whether patients or government bureaucrats will make the critical decisions in health care.  By setting out a vision closely mirroring the Administration’s, in language starker than the President himself has dared to use, Dr. Krugman has helpfully clarified the stakes for patients – and illustrated the fact that the Administration’s version of health “reform” will be far more costly to patients than the President would have most Americans believe.

A Revised Review of Deficit Reduction Plans

Wanted to follow up my earlier missive this week with a preliminary analysis of the co-chairs’ revised plan.  In general, when compared to the first draft, the revised plan adds the CLASS Act to the list of entitlement programs that must be reformed or repealed, strikes caps on non-economic damages (while retaining other liability reforms), and includes sundry other savings proposals to finance CLASS Act repeal and lower estimated savings from liability reform.  The plan also goes further in reforming – and ultimately repealing – the employee tax exclusion for employer-provided health insurance, echoing some of the proposals made by the Rivlin-Domenici Bipartisan Policy Center plan.  Details of the plan include:

Sustainable Growth Rate:  The plan largely retains the earlier draft’s proposals to pay for a long-term fix to the Medicare physician reimbursement formula though savings elsewhere within Medicare – coupled with the development of a new formula that “encourages care coordination across multiple providers…and pays doctors based on quality instead of quantity of services.”  The final plan provides a bit more specific detail than the draft, proposing a freeze in physician payment levels through 2013 and a one percent cut in 2014.  The final plan also heavily criticizes the SGR mechanism, noting that current budget projections rely on “large phantom savings from a scheduled 23 percent cut in Medicare physician payments that will never occur.”

CLASS Act:  This program – which was not addressed at all in the draft document – is criticized in the report as fiscally dubious: “it is viewed by many experts as financially unsound,” because of the significant adverse selection risks inherent in a voluntary long-term care program.  The report’s conclusion: “Absent reform, the program is therefore likely to require large general revenue transfers or else collapse under its own weight.  [Therefore the] Commission advises the CLASS Act be reformed in a way that makes it credibly sustainable over the long term.  To the extent this is not possible, we advise it be repealed.”  Additional savings to fund the repeal (because the CLASS Act will collect premiums that technically reduce the deficit in its first several years) are suggested in the final report, as outlined below.

Liability Reform:  The final report does recommend reforms on 1) collateral source damages (meaning outside benefits like worker’s comp should be considered when awarding damages), 2) a uniform statute of limitations, 3) joint-and-several liability (defendants only responsible for the portion of damages directly correlating to their share of responsibility), 4) specialized health courts, and 5) safe harbors for providers following best practices.  The plan however does NOT propose a cap on non-economic damages, instead recommending “that Congress consider this approach and evaluate its impact.”  Because the damage caps were removed from the final plan, the estimated deficit reduction under this proposal falls to $17 billion, as opposed to more than $60 billion under the draft proposal.

Employee Tax Exclusion for Employer-Provided Health Insurance:  The tax section of the final plan goes further than the draft, proposing to cap the value of the exclusion at the 75th percentile of premium levels, beginning in 2014.  The cap would NOT be adjusted for inflation after 2018, and the newly capped exclusion would be phased out (the specific details of which are unclear) by 2038.  In exchange, the value of the “Cadillac tax” included in the health care law for years beginning in 2018 would be reduced from 40% to 12%; it is unclear how the “Cadillac” tax would interact with the newly capped exclusion under the proposal.  As part of this tax reform proposal, the existing brackets would be rolled into three brackets, of 12%, 22%, and 28%.  Also of note: The revised plan increases the amount of net revenues devoted to deficit reduction (i.e., net tax increases) from $80 billion per year in the draft plan to $80 billion in 2015 and $180 billion in 2020.

Other Savings Proposals:  To fund SGR reform and CLASS Act repeal, the plan includes a series of savings proposals, many of which appeared in the earlier draft plan (all scores cited are total savings through 2020):

  • Increase in Medicare anti-fraud funding and authority: Not included in the initial draft; saves $9 billion.
  • Reform to Medicare cost-sharing, along with restrictions to supplemental insurance: The final plan takes the initial proposal (a version of CBO’s Budget Option 83) and extends proposed restrictions on first-dollar cost-sharing in Medigap plans to ALL forms of Medicare supplemental coverage, including Tricare for Life, FEHB retirees, and retirees in private employer-sponsored coverage.  The modification saves an additional $38 billion, for a total of $148 billion over ten years.
  • Part D drug rebates:  Similar to the draft plan, the revised version would extend Medicaid pharmaceutical rebates to Part D beneficiaries; however, for reasons that are unclear, the revised plan predicts smaller savings ($49 billion compared to $59 billion in the draft version).
  • Graduate Medical Education:  Reduces both graduate medical education (GME) and indirect medical education (IME) payments to hospitals, saving a total of $60 billion (compared to $54 billion in the draft plan).
  • Medicare bad debt:  The final plan would phase out over time Medicare payments to hospitals for unpaid cost-sharing owed by beneficiaries, saving $23 billion (compared to $15 billion in the draft plan).
  • Home health:  The plan accelerates savings proposals included in the health care law by beginning productivity adjustments for home health agencies in 2013, and phases in rebasing of the home health prospective payment system by 2015 (instead of 2017 under current law), saving $9 billion through 2020. (The draft plan proposed accelerating Medicare Advantage and DSH cuts in addition to home health reductions, but the final plan omitted MA and DSH provisions.)
  • Medicaid provider taxes:  The plan criticizes as a “tax gimmick” states that utilize provider taxes to receive additional Medicaid federal matching funds, and proposes “restricting and eventually eliminating this practice,” saving $44 billion (down from $49 billion in the draft).
  • Medicaid managed care:  Proposes “giving Medicaid full responsibility for providing health coverage for dual eligibles and requiring that they be enrolled in managed care,” saving $12 billion (compared to $11 billion in the draft).
  • Medicaid administrative costs:  Eliminates federal funding of Medicaid administrative costs “that are duplicative of funds originally included in the Temporary Assistance for Needy Families (TANF) block grants,” saving $2 billion (down from $17 billion in the draft).
  • FEHB premium support:  Rather than increasing cost-sharing for federal retirees, as the draft proposed, the final plan “recommends transforming the Federal Employees Health Benefits program into a defined contribution premium support plan that offers federal employees a fixed subsidy that grows by no more than GDP plus one percent each year.”  This proposal mirrors the premium support systems that the Rivlin-Ryan and Rivlin-Domenici plans suggested could be applied to Medicare – and the final Simpson-Bowles proposal suggests using the FEHB as a test model for premium support, including a “rigorous external review process to study the outcomes,” with an eye toward a possible premium support program for Medicare.

Other Short-Term Policies:  The final plan also includes a few proposals that do not have a cost/deficit impact.  First, the plan proposes extending the reach of the Independent Payment Advisory Board (IPAB) created in the health care law to all providers, removing the temporary exemptions for some providers included in the law.  The plan also encourages the acceleration of state Medicaid waivers and payment reform options within Medicare, including accountable care organizations.

Long-Term Savings:  The final proposal largely tracks the earlier draft plan’s concept of adopting a cap for all federal health care spending (including Exchange subsidies, Medicare, Medicaid, SCHIP, and the employee health insurance tax exclusion) equal to GDP growth plus one percent from 2020 forward.  The plan also suggests – but does not officially recommend – additional options should spending exceed the targets, including premium support proposals for Medicare, “giving CMS authority to be a more active purchaser of health care services using coverage and reimbursement policy to encourage higher value services,” extending IPAB’s scope beyond Medicare, converting the federal share of Medicaid into a block grant, raising the Medicare retirement age, a “robust” government-run health plan in Exchanges, or an all-payer system for health care.

Health Care Law:  Finally, an interesting passage in the report notes the divergence of opinion among commission members about the new health care law:

Some Commission members believe that the reforms enacted as part of ACA will “bend the curve” of health spending and control long-term cost growth.  Other Commission members believe that the coverage expansions in the bill will fuel more rapid spending growth and that the Medicare savings are not sustainable.  The Commission as a whole does not take a position on which view is correct, but we agree that Congress and the President must be vigilant in keeping health care spending under control and should take further actions if the growth in spending continues at current rates.

A Review of Deficit Reduction Plans

This Wednesday’s deadline for the fiscal commission to report a deficit reduction plan provides an opportunity to examine the health care components of the three proposals that have been released thus far:

  1. The Simpson-Bowles plan, named for the co-chairs of the fiscal commission, who released their own draft recommendations just after the midterm election;
  2. The Rivlin-Domenici plan, named for former CBO Director Alice Rivlin and former Senate Budget Committee Chairman Pete Domenici (R-NM), who released their own proposal as chairs of an independent commission operating under the aegis of the Bipartisan Policy Center; and
  3. The Rivlin-Ryan plan, which Alice Rivlin and House Budget Committee Ranking Member Paul Ryan released as an alternative to the Simpson-Bowles proposal, as both Dr. Rivlin and Rep. Ryan also sit on the fiscal commission.

CBO has conducted a preliminary analysis of the Rivlin-Ryan plan (the above link includes both the plan’s summary and score), and the Simpson-Bowles plan incorporates CBO scoring estimates where available.  However, it is unclear where and how the Rilvin-Domenici plan received the scores cited for its proposals.  The timing of the plans also varies; the Rivlin-Domenici plan postpones implementation of its plan until 2012, when the authors believe the economy will be better able to sustain a major deficit reduction effort.

The following analysis examines the similarities and differences of the three plans’ health care components in both the short term and the long term.  Keep in mind however that these are DRAFT proposals, which may a) change and b) be missing significant details affecting their impact.  Note also that the summary below is not intended to serve as an endorsement or repudiation of the proposals, either in general terms or in their specifics.

Short-Term Savings

Liability Reform:  All three plans propose liability reforms, including a cap on non-economic damages.  The Rivlin-Ryan and Simpson-Bowles plans both rely on specifications outlined in CBO’s October 2009 letter to Sen. Hatch; both presume about $60 billion in savings from this approach.  The Rivlin-Domenici plan is less clear on its specifics, but discusses “a strong financial incentive to states, such as avoiding a cut in their Medicaid matching rate, to enact caps on non-economic and punitive damages.”  Rivlin-Domenici also proposes grants to states to pilot new approaches, such as health courts; overall, the plan estimates $48 billion in savings from 2012 through 2020.

Prescription Drug Rebates:  Both the Simpson-Bowles and Rivlin-Domenici plans would apply Medicaid prescription drug rebates to the Medicare Part D program.  The Simpson-Bowles plan estimates such a change would save $59 billion from 2011 through 2020, whereas the Rivlin-Domenici plan estimates this change would save $100 billion from 2012 through 2018.  The disparity in the projected scores is unclear, as both imply they would extend the rebates to all single-source drugs (i.e., those without a generic competitor) in the Part D marketplace.  The Rivlin-Ryan plan has no similar provision.

Changes to Medicare Benefit:  All three plans propose to re-structure the Medicare benefit to provide a unified deductible for Parts A and B, along with a catastrophic cap on beneficiary cost-sharing.  The Rivlin-Ryan and Simspon-Bowles plans are largely similar, and echo an earlier estimate made in CBO’s December 2008 Budget Options document (Option 83), which provided for a unified deductible for Parts A and B combined, a catastrophic cap on beneficiary cost-sharing, and new limits on first-dollar coverage by Medigap supplemental insurance (which many economists believe encourages patients to over-consume care).  Conversely, the Rivlin-Domenici proposal provides fewer specifics, does not mention a statutory restriction on Medigap first-dollar coverage, and generates smaller savings (an estimated $14 billion from 2012 through 2018, as opposed to more than $100 billion from the Rivlin-Ryan and Simpson-Bowles proposals).

Medicare Premiums:  The Rivlin-Domenici plan would increase the beneficiary share of Medicare Part B premiums from 25 percent to 35 percent, phased in over a five-year period, raising $123 billion from 2012 through 2018. (When Medicare was first established, seniors paid 50 percent of the cost of Part B program benefits; that percentage was later reduced, and has been at 25 percent since 1997.)  The Rivlin-Ryan and Simpson-Bowles plans have no similar provision.

“Doc Fix:  The Simpson-Bowles plan uses the changes discussed above (i.e., liability reform, Part D rebates, and Medicare cost-sharing), along with an additional change in Medicare physician reimbursement, to pay for a permanent “doc fix” to the sustainable growth rate (SGR) formula.  The Simpson-Bowles plan would generate the final $24 billion in savings necessary to finance a permanent “doc fix” by establishing a new value-based reimbursement system for physician reimbursement, beginning in 2015.

The introduction to the Rivlin-Domenici plan notes that it “accommodates a permanent fix” to the SGR, but the plan itself does not include specifics on how this would be achieved, nor what formula would replace the current SGR mechanism.  Likewise, the Rivlin-Ryan plan does not directly address the SGR; however, the long-term restructuring in Medicare it proposes means the issue of Medicare physician reimbursement would become a moot point over several decades.  (See below for additional details.)

Other Provisions:  The Rivlin-Domenici plan would impose an excise tax of one cent per ounce on sugar-sweetened beverages; the tax would apply beginning in 2012 and would be indexed to inflation after 2018. (This proposal was included in Option 106 of CBO’s December 2008 Budget Options paper.)  The plan estimates this option would raise $156 billion from 2012 through 2020.

The Rivlin-Domenici plan also proposes bundling diagnosis related group (DRG) payments to include post-acute care services in a way that allows hospitals to retain 20 percent of the projected savings, with the federal government recapturing 80 percent of the savings for a total deficit reduction of $5 billion from 2012 through 2018.  Finally, the Rivlin-Domenici plan proposes $5 billion in savings from 2012 through 2018 by removing barriers to enroll low-income dual eligible beneficiaries in managed care programs.

The Simpson-Bowles plan includes a laundry list of possible short-term savings (see Slide 35 of the plan for illustrative savings proposals) in addition to the savings provisions outlined above that would fund a long-term “doc fix.”  Most of the additional short-term savings proposed would come from additional reimbursement reductions (e.g., an acceleration of the DSH and home health reductions in the health care law, and reductions in spending on graduate medical education), or from proposals to increase cost-sharing (e.g., higher Medicaid co-pays, higher cost-sharing for retirees in Tricare for Life and FEHB).

Long-Term Restructuring

Employee Exclusion for Group Health Insurance:  In its discussion of tax reform, the Simpson-Bowles plan raises the possibility of capping or eliminating the current employee exclusion for employer-provided health insurance.  (The Associated Press wrote about this issue over the weekend.)  One possible option would eliminate the exclusion as part of a plan to lower income tax rates to three brackets of 8%, 14%, and 23%; however, this proposal presumes a net $80 billion per year in increased revenue per year to reduce the deficit.  The plan invokes as another option a proposal by Sens. Gregg and Wyden to cap the exclusion at the value of the FEHBP Blue Cross standard option plan, which would allow for three income tax rates of 15%, 25%, and 35%, along with a near-tripling of the standard deduction.  Separately, the Simpson-Bowles plan also proposes repealing the payroll tax exclusion for employer-provided health insurance as one potential option to extend Social Security’s solvency.

The Rivlin-Domenici plan would cap the exclusion beginning in 2018, at the same level at which the “Cadillac tax” on high-cost plans is scheduled to take effect in that year.  However, the proposal would go further than the “Cadillac tax” (which would be repealed) by phasing out the income and payroll tax exclusion entirely between 2018 and 2028.  (This proposal would also prohibit new tax deductible contributions to Health Savings Accounts, on the grounds that health care spending would no longer receive a tax preference under any form.)  Notably, the Rivlin-Domenici plan accepts that some employers might stop offering coverage from this change to the tax code, and projects some higher federal spending on Exchange insurance subsidies as a result; however, if more employers drop coverage than the authors’ model predicts, the revenue gain from this provision could be entirely outweighed by the scope of new federal spending on insurance subsidies.

Although Rep. Ryan has previously issued his “Roadmap” proposal that would repeal the employee exclusion, the Rivlin-Ryan plan does NOT address this issue.

Medicare:  The Rivlin-Domenici program would turn Medicare into a premium support program beginning in 2018.  Increases in federal spending levels would be capped at a rate equal to the average GDP growth over five years plus one percentage point.  Seniors would still be automatically enrolled in traditional (i.e., government-run) Medicare, but if spending exceeded the prescribed federal limits, seniors would pay the difference in the form of higher premiums.  Seniors could also choose plans on a Medicare Exchange (similar to today’s Medicare Advantage), with the hope that such plans “can offer beneficiaries relief from rising Medicare premiums.”

The Rivlin-Ryan proposal would turn Medicare into a voucher program beginning in 2021.  (Both the Rivlin-Domenici premium support program and the Rivlin-Ryan voucher program would convert Medicare into a defined benefit, whereby the federal contribution toward beneficiaries would be capped; the prime difference is that the premium support program would maintain traditional government-run Medicare as one option for beneficiaries to choose from with their premium dollars, whereas the Rivlin-Ryan plan would give new enrollees a choice of only private plans from which to purchase coverage.)  The amount of the voucher would increase annually at the rate of GDP growth per capita plus one percentage point – the same level as the overall cap in Medicare spending included in the health care law as part of the new IPAB.  Low-income dual eligible beneficiaries would receive an additional medical savings account contribution (to use for health expenses) in lieu of Medicaid assistance; the federal contribution to that account would also grow by GDP per capita plus one percent.

The Rivlin-Ryan plan would NOT affect seniors currently in Medicare, or those within 10 years of retirement, except for the changes in cost-sharing described in the short-term changes above.  However, for individuals under age 55, the plan would also raise the age of eligibility by two months per year, beginning in 2021, until it reached 67 by 2032.

While the Rivlin-Domenici and Rivlin-Ryan plans restructure the Medicare benefit for new enrollees to achieve long-term savings, the Simpson-Bowles plan largely relies on the health care law’s new Independent Payment Advisory Board (IPAB) to set spending targets and propose additional savings.  The Simpson-Bowles plan suggests strengthening the IPAB’s spending targets, extending the IPAB’s reach to health insurance plans in the Exchange, and allowing the IPAB to recommend changes to benefit design and cost-sharing.  The plan also suggests setting a global budget for all federal health spending (i.e., Medicare, Medicaid, exchange subsidies, etc.), and capping the growth of this global budget at GDP plus one percent – the same level that IPAB capped spending in Medicare.  If costs exceed the target, additional steps could be taken to reduce spending, including an increase in premiums and cost-sharing or a premium support option for Medicare.  The plan also suggests overhauling the fee-for-service reimbursement system, or establishing an all-payer model of reimbursement (in which all insurance carriers pay providers the same rate) if spending targets are not met.

Medicaid:  The Rivlin-Domenici plan suggests that in future, Medicaid’s excess cost growth should be reduced by one percentage point annually.  The plan implies some type of negotiation between states and the federal government over which services in the existing Medicaid program that the state should assume and fund and which services the federal government should assume and fund.  While specifics remain sparse, the overriding principle involves de-linking Medicaid financing from the open-ended federal matching relationship as a way to reduce future cost growth by one percentage point per year.

The Rivlin-Ryan plan converts the existing Medicaid program into a block grant to the states, beginning in 2013.  The size of the federal block grant would increase to reflect growth in the Medicaid population, as well as growth in GDP plus one percent.  The costs of the new Medicaid expansion would be covered according to current law through 2020; in 2021 and succeeding years, the Medicaid expansion would be rolled into the block grant.

The Simpson-Bowles plan includes conversion of Medicaid into a block grant as one option to generate additional savings; however, it does not explicitly advocate this course of action.

CLASS Act:  The Rivlin-Ryan plan would repeal the CLASS Act.  The Rivlin-Domenici and Simpson-Bowles plans do not discuss any changes to this program.  This is the ONLY provision in the three deficit reduction plans that proposes elimination of any part of the health care law’s new entitlements.

Deficit Commission Co-Chairs’ Draft Recommendations on Health Care

As you may have seen, the co-chairs of the deficit commission – Erskine Bowles and former Sen. Alan Simpson – released their draft recommendations earlier today.  Recommendations on mandatory spending can be found in this Powerpoint; a longer list of potential discretionary spending cuts are found here.  (The discretionary cuts document largely avoids health care, except for two proposals to re-structure defense and veterans’ health spending, including potential inflation increases in cost-sharing, saving a total of $6.7 billion in 2015.)

For mandatory spending on health care, slides 31-36 include several proposals.  To pay for the estimated $276 billion cost of a long-term “doc fix,” the proposal would:

  • Modify the sustainable growth rate mechanism with a new system based on value and quality (savings of $24 billion);
  • Restructure Medicare cost-sharing, coupled with a limitation on cost-sharing coverage in Medigap (savings of $135 billion); CBO formerly outlined this proposal in its December 2008 budget options (Option 83);
  • Expand drug rebates to Medicare Part D (savings of $59 billion); and
  • Enact liability reform (savings of $64 billion).

Longer term, the proposal includes suggestions to expand the Independent Payment Advisory Board (IPAB) included in the health care law by strengthening savings targets, allowing the IPAB to submit cost-cutting recommendations in years where spending is BELOW the target, extending the IPAB’s reach to Exchange health plans, and setting a global cap on federal health expenditures equal to GDP plus 1%.  (Budget wonks may recall that it was the Clinton health bill’s global caps on spending, coupled with the individual and employer mandates, that led CBO to designate health insurance as a largely federal function under the measure and place the entire bill on-budget.)  The proposal includes a series of reforms to physician payments and cost-sharing, including a conversion of the Medicaid long-term care program into a capped allotment (i.e., block grant).  The Powerpoint report suggests converting Medicare to a premium support mechanism only if the global caps on spending prove ineffective.

On taxes, there are a variety of options discussed that would reduce or eliminate tax expenditures, potentially limiting, or eliminating entirely, the employee exclusion for group health insurance.  Option 1 also discusses the impact of eliminating all tax expenditures in reducing tax rates across the board; however, it is unclear whether or not this model classifies the $464 billion in insurance subsidies included in the health care law as “tax expenditures.”  The very last slide contains Social Security options that would subject employer-sponsored health insurance to payroll taxes “in the same manner as 401(k) plans” are taxed for FICA benefits currently.

Two final points worth noting: First, the chart on slide 11 of the Powerpoint claims $733 billion in savings over the 2012-2020 period from mandatory spending programs, compared to twice that amount – $1.46 trillion – from the discretionary side of the budget (which includes defense).

Second, the report also included as one of the options (if costs continue to exceed a set target of GDP +1%) legislation to create a “robust” government-run health plan.  You may recall that Rep. Jan Schakowsky, one of the members of the deficit commission, previously admitted that such a plan “will put the private insurance industry out of business and lead to single payer.”

New York Times on Donald Berwick’s Continuing “Struggles”

Robert Pear has an article in this morning’s edition highlighting the controversy surrounding Donald Berwick’s recess appointment to head the Centers for Medicare and Medicaid Services (CMS): “Two weeks after taking office, Dr. Berwick is still struggling to tamp down a furor over past statements in which he discussed the rationing of health care and expressed affection for the British health care system.”  The article repeats several of Dr. Berwick’s former quotes regarding rationing, bureaucrat-imposed medical guidelines, and his “romance” with Britain’s National Health Service.  Regarding these and other quotes,  “Dr. Berwick never had a confirmation hearing and has not responded publicly to critics.  The White House declined to make him available for an interview.”

While once again declining to make their nominee publicly available to answer questions, the Administration attempted to rebut Dr. Berwick’s critics by claiming that they were “harping on ‘a handful of cherry-picked quotes.’”  But an earlier New York Times piece last month rebutted that notion: “In fact, many of the comments have been repeated, with slight variations, in Dr. Berwick’s articles and lectures over the years.”  And over a week ago, the Wall Street Journal published a lengthy series of Dr. Berwick’s quotes illustrating his support for caps on health care expenditures, bureaucrat-imposed guidelines for physician care, and other similar examples of top-down medicine.

Of course, if the White House wishes to complain about Dr. Berwick’s critics cherry-picking quotes, they can easily solve the problem by asking Finance Committee Chairman Baucus to hold a confirmation hearing for the nominee.  That way, Dr. Berwick can respond to his critics publicly, and both sides can exchange views in a transparent manner.  During his campaign, the President promised to televise health care negotiations on C-SPAN.  Given that pledge, is a public hearing for an official heading an agency that “finances health care for one in three Americans” too much to ask?