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to the first draft, the revised plan adds the CLASS Act to the list of entitlement programs that must be reformed or repealed, strikes caps on non-economic damages (while retaining other liability reforms), and includes sundry other savings proposals to finance CLASS Act repeal and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 To the extent this is not possible, we advise it be repealed.”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.