Rivlin-Domenici Put Medicare on a Weight Loss Diet
Life + Money

Rivlin-Domenici Put Medicare on a Weight Loss Diet

The latest entry in the deficit reduction sweepstakes from the Bipartisan Policy Center calls for a major overhaul of Medicare financing that would turn most of the program over to the private insurance industry and cap government support. 

The budgetary heart of the Rivlin-Domenici deficit-reduction plan is a cap on government Medicare spending for seniors. While significantly more generous than the rigid budget caps contained in the Presidential Fiscal Commission chairmen’s proposal released last week, which made no provision for the increasing number of senior citizens served by Medicare in coming decades, it would still entail a large shift in costs to seniors.

Restoring America’s Future,” the budget reduction plan offered Wednesday by former Congressional Budget Office Director Alice Rivlin and former Republican Senator Pete Domenici of New Mexico, would provide the elderly with limited financial support for buying health insurance. Those plans could be obtained either through the traditional fee-for-service program or from private firms offering Medicare Advantage-style plans. Medicare Advantage covers about a quarter of seniors now and until health care reform was passed, was more expensive than traditional Medicare.

Most seniors will opt for private insurance, the authors predicted, since it will become substantially cheaper than traditional fee-for-service medicine because of the other major element in their proposal – the total elimination of the tax exclusion for employer-provided insurance. The working age population will become more cost conscious when buying health care services and insurance with after-tax dollars and thus lower overall costs, the plan assumed.

Starting in 2018, the Rivlin-Domenici cap would limit the increase on spending on each Medicare beneficiary each year to the rate of economic growth plus 1 percent. In recent decades, Medicare spending has gone up on average 1.7 percentage points a year faster than the rest of the economy.

The Rivlin-Domenici plan, which is called premium support, mirrors Republican proposals for overhauling Medicare. A proposal outlined by Rep. Paul Ryan, R-Wis., on the New York Times’ Economix blog “would provide seniors with a payment, a list of Medicare-approved coverage options and the ability to choose a plan that works best for them.”

Yet limiting government support would do nothing by itself to limit health care costs. Coupled with removing the tax exclusion for premiums paid for employer-provided care, their hope is that the incessant rise in health spending would finally come to an end and limit the amount of additional out-of-pocket expenses for seniors.

“If capping and phasing out the tax exclusion for employer-sponsored insurance curbs the growth of healthcare costs, Medicare spending could slow enough that additional premiums are not triggered,” the Rivlin-Domenici report said.

That’s a big if and drew immediate fire from defenders of the traditional Medicare system. John Rother, top lobbyist for AARP, told Kaiser Health News the nation’s largest senior group would oppose premium support. "It’s hard to see either party embracing a full-blown premium support plan," said Henry Aaron, a Brookings Institution expert and Fiscal Times columnist who originated the premium support concept in the mid-1990s. “The Democrats would be largely against it because of cuts in benefits and not enough Republicans would have a stomach for it. It would mean big benefit cuts and a substantial increase in out-of-pocket costs."

Partial Medicare privatization through premium support isn’t the only major change to the senior health care program contained in the Rivlin-Domenici proposal, which was sponsored in part by the Peter G. Peterson Foundation, which also provides financial support for The Fiscal Times. To save money in the medium term, the plan calls for phasing in higher co-payments for Medicare Part B, which covers physician office visits, to 35 percent of costs from 25 percent (higher income seniors already pay at higher rates). The higher fees would save Medicare $123 billion through 2018, according to the report.

The plan also calls for giving Medicare the right to negotiate lower drug prices, which has long been advocated by liberals and could be used in part to lower premiums in the Part D drug benefit program. Achieving the same discounts as Medicaid would save Medicare $100 billion by 2018, according to the proposal. “The federal government can more effectively use its potential purchasing power by requiring a minimum rebate for all single-source drugs, and thereby achieve substantial budget savings,” the report said.

The Medicare cap contained in the Rivlin-Domenici plan isn’t contingent on turning the program over to private insurers. That part of their proposal could gain bipartisan support on Capitol Hill since the Patient Protection and Affordable Care Act passed by the Democratic Congress already embraced the concept.

The reform law created an Independent Payment Advisory Board, which starting in 2015 will send a menu of Medicare budgets cuts to Capitol Hill for an up-or-down vote anytime cost growth per beneficiary exceeds economic growth plus 1 percent and other factors. While it will be averaged with the consumer price index (CPI) and the medical cost component of CPI, the formula is very similar to the one contained in the Rivlin-Domenici proposal.

Budget analyst Isabel Sawhill said at a forum at the Brookings Institution Wednesday that there are two ways to live with a capped budget for health care. The government could either set a global budget for the program as it is, or it could limit its own exposure through programs like premium support. The Rivlin-Domenici proposal, she said, combined the two. “Providers might be forced to find more efficient ways of delivering care, and consumers will become wiser consumers for each individual dollar spent,” she said.

Medicare, the federal health insurance program for 47 million elderly and disabled Americans, helps to pay for hospital and physician visits, prescription drugs, and other acute and post-acute services. This year, spending on Medicare will account for12 percent of the federal budget – or benefits totaling $509 billion.

The Rivlin-Domenici plan projects huge savings from adopting a budget cap. Medicare spending over the next 30 years would decline by a cumulative $7 trillion compared to current projections, according to the report.

Ending the health insurance tax exclusion would raise $10 trillion over the same period, which could be used to both reduce the deficit and increase subsidies for lower income-seniors and working-age households who will be buying insurance through the exchanges, according to the plan.