Obama's 2014 Budget: Changes Ahead for Medicare?
Business + Economy

Obama's 2014 Budget: Changes Ahead for Medicare?

Chris Hondros/Getty Images

On April 10, President Obama will enter the ongoing 2014 budget battle when the White House releases its budget blueprint, joining Senate Democrats and both parties in the House in a partisan scuffle over the nation’s fiscal future.

If it’s anything like what the president put forth last year, the Medicare-related parts of the White House budget will focus on containing costs by reforming the Medicare payment system and reducing fraud and waste while maintaining the Traditional Medicare structure.

The president’s proposal will go up against the House Republican budget from House Budget Chairman Paul Ryan (R-Wis.), which advocates turning Medicare into a premium support system. Also in the running are the House and Senate Democratic budget proposals, which each have rejected any form of privatization in favor of building on the reforms in the Affordable Care Act (ACA).

During efforts to work out a deficit reduction deal with Republicans, Obama expressed a willingness to make significant changes to Medicare. The president has told House Republicans that he was open to combining Medicare coverage for hospitals and doctor services (Part A and Part B) in order to contain costs.

Obama’s plan to avoid sequestration cuts also hints at the Medicare changes that he’s willing to make. During negotiations to avoid the automatic spending cuts that kicked in March 1, the president suggested reducing overall health care spending by a total of $400 billion.

He plans to reduce payments to drug companies (for $140 billion in savings); reduce hospital payments for patients who don’t pay their bills ($30 billion); encourage efficient care after hospital stays ($50 billion); and encourage the use of high-value care while asking wealthier patients to pay more for their care ($35 billion).

Another $25 billion in savings would come from Medicaid; pay-for-delay (addressing drug industry deals that stall consumers’ access to cheaper generic drugs); program integrity; and the Independent Payment Advisory Board (IPAB), a panel created under the ACA to keep Medicare cost growth under control.

Stacy Sanders (federal policy director at the Medicare Rights Center), David Lipschutz (a Center for Medicare Advocacy policy attorney), and Paul Van de Water (a senior fellow specializing in Medicare at the Center on Budget and Policy Priorities) predicted that when Obama issues a budget proposal, he will probably include the same Medicare spending provisions outlined in his 2013 budget.

Cato Institute Senior Fellow and entitlement reform expert Jagadeesh Gokhale also said he doesn’t expect major changes in the president’s Medicare reform approach, and predicts a focus on tax adjustments rather than on new spending reductions, considering recent health care cost projections. The Congressional Budget Office’s new budget outlook report, released earlier this month, decreased its 2020 Medicare spending estimate by $126 billion, taking into account slower-than-anticipated health care cost growth in recent years.

“I think [White House officials] are going to say that Medicare cost growth has been slower recently. It’s been only 2.9 or 3 percent a year since 2010 and therefore we need not take such strong measures on Medicare as might once have been thought to be necessary when the Medicare cost growth was in the range of 7 or 8 percent a year,” Gokhale said. “My guess is they will emphasize tax hike solutions. The obvious proposal they might have is to increase the Medicare payroll tax rate.”

Obama’s State of the Union address on Feb. 12 also seemed to indicate that he will be sticking to the same Medicare reform proposals. He called for “modest reforms” for Medicare and said he is in favor of reducing taxpayer subsidies to prescription drug companies, more cost-sharing for wealthy seniors (or expanded means-testing) and moving toward a pay-for-performance reimbursement strategy in order to reduce costs.

Obama 2013 Budget Priorities Likely to Remain

His 2013 budget proposal put these same ideas on the table. Opposing any form of premium support system, the president’s fiscal plan for 2013 focused on reforming the Medicare payment system and reducing fraud and waste while maintaining the Traditional Medicare structure.

Last year, the White House Office of Management and Budget estimated that the president’s suggested changes to Medicare, Medicaid and other health programs would save $364 billion over the next decade.

“The goal of these reforms is to make these critical programs more effective and efficient, and help make sure our health care system rewards high-quality medicine,” Obama wrote in his introduction to the 2013 budget. “What it does not do—and what I will not support—are efforts to turn Medicare into a voucher or Medicaid into a block grant. Doing so would weaken both programs and break the promise that we have made to American seniors, people with disabilities, and low-income families—a promise I am committed to keeping.”

In order to achieve that goal, the president proposed better aligning payments for graduate medical education and rural providers with actual patient costs, as well as reducing payments to providers for bad debts resulting from beneficiaries’ failure to pay deductibles or copayments.

He also suggested aligning Medicare drug payment policies with Medicaid policies for low-income beneficiaries, promoting efficient postacute care and increasing income-related premiums for Part B and Part D.

In last year’s budget, the president additionally planned to increase the Part B deductible by $25 for new beneficiaries in 2017, 2019 and 2021; to introduce home health copayments for new beneficiaries; to introduce a Part B premium surcharge for new beneficiaries who decide to purchase Medigap policies with low cost-sharing requirements; and to strengthen IPAB.

The budget also called for a solution to the flawed sustainable growth rate (SGR) formula, which lawmakers have overridden for years to prevent steep cuts to physician payments. The president additionally called for containment of costs stemming from chronic illnesses via expanded coverage for preventive services under the ACA.

Another major savings source for Medicare emphasized in the president’s 2013 budget is reducing fraud, waste and abuse. The proposal suggests that the government should authorize civil monetary penalties or other immediate sanctions on providers who don’t update enrollment records or exclude from the program providers affiliated with entities already sanctioned for fraud or other prohibited practices.

Finally, the president also called on lawmakers to affirm that Medicaid should be a last resort payer when other entities are legally liable for beneficiary claims and that Medicaid should rescreen 1.5 million home health agencies, medical equipment suppliers, doctors, hospitals and other providers for potential fraud.

What’s Already on the Table in the 2014 Budget Debate

Ryan’s 2014 House Republican budget would balance the federal budget in a decade, cutting spending by $4.6 trillion through 2023. The budget preserves the $716 billion in Medicare spending reductions included in the ACA, although it would repeal the provisions of the law responsible for IPAB, subsidized insurance exchanges and the Medicaid expansion.

Like his previous budgets, Ryan’s latest proposal would transform Medicare into a premium support system. Beginning in 2024, Medicare beneficiaries would receive a “defined contribution,” or set amount of money, from the government with which to buy insurance. They could choose Traditional Medicare coverage or one of a range of competing private plans.

The fiscal year 2014 Senate budget resolution put forth by Senate Budget Committee Chairman Patty Murray (D-Wash.) would reduce the deficit by $1.85 trillion and includes $275 billion in health care cost cuts. This budget rejects the idea of premium support, stating that it would dismantle the Medicare program. The Senate budget calls for building on the reforms included in the ACA, which would involve further realignment of incentives, reducing waste and fraud and encouraging greater engagement to contain costs.

Similar to the Senate budget, the House Democratic 2014 budget proposal rejects the idea of turning Medicare into a premium support system, saying that it would shift the risks of rising health care costs onto beneficiaries. House Democrats propose $141 billion in Medicare spending reductions over the next decade; the budget would prevent Medicare cuts under sequestration and support the ACA reforms to the program.

Their proposal calls for achieving savings through efficiency improvements rather than through budget cuts. House Democrats support the cost containment provisions in the ACA as well as Obama’s proposal to give Medicare the same prescription drug rebates as Medicaid for low-income beneficiaries. Additionally, the House Democrats suggest enacting measures to reduce overpayments and correct misaligned incentives.