Deficit Plan Would Boost Medicare Costs for Seniors
Policy + Politics

Deficit Plan Would Boost Medicare Costs for Seniors

Nick Bhardwaj / The Fiscal Times

Among the sleeper provisions contained in the presidential fiscal commission’s final proposal released Wednesday, none will generate more controversy than the recommendations to contain Medicare costs in the coming decade.

Rather than holding down spending, the proposal by the commission’s co-chairmen would actually send Medicare costs soaring, before gradually reining them in. That’s because the plan starts by repealing physician pay cuts through 2014, and doing away with the new long-term care insurance program in President Obama’s signature health care reform bill, which will lose $76 billion in revenue. Combined, these two line items would substantially increase Medicare’s shortfall between now and 2020.

To make up for that shortfall, the fiscal commission plans to charge much higher out-of-pocket costs to Medicare beneficiaries. The 18-member bipartisan commission is scheduled to take a final vote on the proposals on Friday. Bowles and Simpson need a total of at least 14 votes to send their proposals to Congress for action, but it appeared unlikely they can achieve that supermajority.

The first item on their Medicare agenda is to remove the pay cuts slated for physicians, which Congress recently postponed for another month as it has done every year since 2002. While that may win plaudits from the nation’s physicians, the plan authored by Erskine Bowles, former chief of staff to President Clinton, and former Republican Senator from Wyoming, Alan Simpson, only gives doctors a temporary reprieve. They would give the Center for Medicare and Medicaid Services until 2015 to figure out how to deliver health care services more efficiently, without having to cut physicians’ payments.

The proposal highlights the possibility that the cost-saving approaches contained in President Obama’s health care reform law will result in enough savings to pay for maintaining doctors’ Medicare pay without further cuts. But if those don’t succeed, the commissioners’ proposal would reinstate scheduled reductions using 2014 spending as the base year.

Repealing CLASS
Second on the Commission’s Medicare to-do list: repealing part of President Obama’s signature health care reform bill, including eliminating the Community Living Assistance Services and Supports (CLASS) act, which creates a long-term care insurance program run by the government. “The benefits [of the insurance program] dwarf revenue in the out years,” Bowles said at Wednesday’s final full commission meeting. “It’s a very big unfunded mandate.”

From a budgetary standpoint, however, it is actually a revenue raiser through 2020 – to the tune of $76 billion. The premiums from the voluntary insurance program will in its first decade more than cover the claims for long-term care. In fact, CLASS act premiums are a major reason why the health care reform law is projected to lower the deficit over its first 10 years, according to the Congressional Budget Office analysis.

Bowles’ assumption that the cost-benefit equation flips around beyond 2020 was immediately called into question by John Rother, chief of public policy for AARP, the nation’s senior citizen lobbying group. He said the commission’s assumption fundamentally misunderstands the program. “It’s an insurance program. It takes five years to vest and the premiums are fairly high,” he said. “There’s no fiscal reason to repeal the bill.”

CBO weighed in on CLASS during the health care reform debate at the request of Sen. Kay Hagen, D-N.C. Using the initial premium of $65 a month starting when a person turns 55 and a payout of $75 a day for incapacitated seniors needing long-term care, CBO chief Douglas Elmendorf estimated the program would exhaust the reserves built up in its first decade sometime beyond 2019.

But at that time, raising the premium to $85 and lowering the daily benefit to $50 would ensure the program’s solvency through 2050. The law gives the secretary of Health and Human Services the right to adjust premiums to cover shortfalls. In essence, it’s a government-run insurance program, one of whose benefits would be a reduction in Medicaid expenses since that program currently pays for the elderly who can’t take care of themselves and have no other resources.

Elmendorf’s response to Hagen was noncommittal. “If the secretary did act to ensure the program’s solvency,” he wrote on his blog, “the program and its effects on Medicaid spending and revenues might — or might not — add to future budget deficits, depending on the specific actions that were taken.”

Higher Out-of-Pocket Costs
Whatever some future HHS secretary chooses to do about CLASS, repealing the program right away would open up a huge new hole in Medicare financing over the next decade, which the Bowles-Simpson plan fills by sharply increasing first-dollar payments by Medicare beneficiaries. The plan would raise $110 billion by making the first $550 of physician and hospital visits the responsibility of seniors, keeping the 20 percent co-insurance payment, and not capping total out-of-pocket costs until they reach $7,500.

The plan would also limit seniors’ Medigap plans’ coverage of those out-of-pocket costs – the argument being that forcing seniors to have “more skin in the game” will make them wiser consumers. “It’s a very punitive approach,” Rother told The Fiscal Times. “This solution puts all the sacrifices on one group – retirees and future retirees, and among them, those who are the sickest.”

The Bowles-Simpson plan for Medicare has other revenue raisers certain to provoke the ire of health care special interests. Over the next decade, the plan would raise an additional $49 billion from pharmaceutical firms by forcing Medicare to seek substantial discounts similar to those extended to Medicaid; $60 billion by reducing payments to hospitals for medical education; and $18 billion from federal employees by turning their health insurance program into a voucher that couldn’t grow faster than the growth in the economy plus 1 percent, which in most years is significantly below the rising cost of health care.