Tax reform, entitlement reform and discretionary spending are expected to be addressed
by Cara C. Bachenheimer

Most Washington insiders agree that in 2013 Congress will focus on deficit reduction and entitlement spending, which includes three major elements: 1) tax reform; 2) entitlement reform, including significant changes to Medicare and Medicaid; and 3) overall reductions/caps in discretionary spending. This month we’ll  take a closer look at entitlement reform as it relates to health care and some of the concepts outlined by President Barack Obama’s Fiscal Commission that continue to be raised as part of a general blueprint for the 2013 deficit reduction package.

Over the long run, as Baby Boomers retire and health-care costs continue to grow, the outlook for health-care entitlements will become far worse. By 2025 revenue will be able to finance only interest payments, Medicare, Medicaid and Social Security. Every other federal government activity—from national defense to transportation and energy—will have to be paid for with borrowed money. These mandatory payments, which buy absolutely no goods or services, will squeeze out funding for all other priorities. Therefore, reforms to Medicare and Medicaid will presumably be the centerpiece of any deficit reduction effort.

In February 2010 the president created by executive order the President’s National Commission on Fiscal Responsibility and Reform, known as the Simpson-Bowles Commission. It was co-chaired by former Senator Alan Simpson, a Republican from Wyoming, and former White House Chief of Staff Erskine Bowles, who worked for President Bill Clinton. The debt commission voted 11-7 on December 1, 2010, falling short of the 14 votes needed to formally endorse the plan to Congress. In its effort it produced proposals to cut $3.8 trillion from the budget by limiting domestic and defense spending and overhauling the tax code. Entitlement reform recommendations from the Simpson-Bowles Commission continue to be raised as part of a general blueprint for deficit reduction in 2013.

The commission recommended reforming the formula for physician payments (known as the Sustainable Growth Rate, or SGR) and the CLASS Act, and finding savings in the health-care system to offset their costs. It also recommended several other reforms designed to reduce federal health spending and slow the growth of health-care costs more broadly.

Beyond 2020 the commission proposed reasonable targets for federal spending levels on program-specific and overall targets. It acknowledged that controlling federal health spending would pose challenges if the growth in overall health-care costs were not addressed, recommending in its tax reform component reducing and potentially eliminating the exclusion for employer-provided health insurance. The following is a brief summary of reform proposals on the table:

Curbing Medicare Spending Growth

  • SGR repeal (direct CMS to develop an improved formula that encourages care coordination and pays doctors based on quality instead of quantity of services)
  • Capping Medicare spending (starting in 2020, hold growth to GDP plus 1 percent and require action by the president and Congress if growth exceeds the targets)

Structural Medicare Reforms

  • Transform federal employee health to a premium support plan Reform cost-sharing rules (establish a single combined annual deductible of $550 for Parts A and B along with 20 percent uniform coinsurance on spending above the deductible, with catastrophic protection for seniors available)
  • Raise the Medicare eligibility age Increase basic premium for Part B

Medicaid Payment Reforms

  • Eliminate state gaming of Medicare provider tax
  • Extend Medicaid drug rebate to dual eligibles in Part D
  • Place dual eligibles in Medicaid managed care
  • Reduce the floor on federal matching rates for Medicaid services
  • Convert Medicaid long-term care services to block grants

Other Health Care Spending Reforms

  • Medical malpractice reform
  • Reduce Medicare fraud and abuse
  • Restrict the first dollar coverage in Medicare supplemental insurance policies