By John Reichard, CQ HealthBeat Editor
October 2, 2012 -- Talk of deficit reduction running into the trillions of dollars is heating up—and with it discussion of a proposal floated by leaders of the unsuccessful Simpson-Bowles commission as the eventual basis of compromise.
Judged against the standards of longstanding health policy, Simpson-Bowles would bring dramatic change—taxation of health benefits, a cap on overall health care spending by the federal government, an end to Medigap coverage in its current form, and possibly a premium-support based overhaul of Medicare.
But what seems radical and unconventional now may seem less so if, as some predict, the federal government faces a debt crisis in a few years on a scale now overwhelming a growing number of countries in the European Union.
So what would that mean for health care?
First, a bit of background. A majority of the White House's Simpson-Bowles commission voted to approve its November 2010 proposal. But not enough members supported it to allow it to be issued as a formal recommendation. And when the unapproved proposal went to the House floor, it only attracted a few dozen votes.
But in the coming months, as Capitol Hill aides and lawmakers debate how to compromise on large-scale deficit reduction, Simpson-Bowles is sure to come up. That's because of its detail, and the fact that it can't be identified with either party.
In terms of health care, the proposal contains two big elements: taxation of health benefits and many changes to Medicare and Medicaid to for once and for all replace the Medicare physician payment formula known as the SGR, or Sustainable Growth Rate formula.
The chairmen's mark produced by the panel—the chairmen were former Clinton chief of staff Erskine Bowles and former Republican Sen. Alan K. Simpson of Wyoming—included options for handling taxes. One would have ended the current exclusion of employer health care outlays from taxation—in effect, taxing health benefits. Another would have scaled back the exclusion.
Changing the exclusion is a policy long advocated by a number of economists as a way to incentivize employers to offer more efficient health plans. Altering the exclusion has long been opposed by Democrats and particularly by organized labor.
Global Budget Sought
Simpson-Bowles would institute another never-attempted change: a long-term global budget for total federal health care spending. Starting in 2020, it would hold yearly growth in such spending to GDP plus 1 percent. The cap would take into account federal spending for Medicare, Medicaid, the Children's Health Insurance Program, the Federal Employees Health Benefits program, TRICARE, insurance exchange subsidies and the cost of the remaining tax exclusion for health care.
If growth exceeded the target, the president and Congress would have to act. "We recommend requiring both the president and Congress to make recommendations whenever average cost growth has exceeded GDP plus 1 percent over the prior five years," the proposal says. "To the extent health costs are projected to grow significantly faster than that pace, we recommend the consideration of structural reforms to the health care system." Options in the proposal include moving to premium support in Medicare—the Romney-Ryan approach that pollsters say rates very low among the elderly. Other suggestions involved such too-hot-to-touch proposals as block granting Medicaid, adding a "robust public option in the health care exchanges," raising the Medicare eligibility age and expanding the powers of the Independent Payment Advisory Board beyond Medicare.
Proposal Would Fix Doctor Payments
In the shorter term, the proposal would make numerous changes to pay for ending the SGR. It would save $9 billion through 2020 by strengthening government powers to fight Medicare fraud. It would save $110 billion by establishing a single combined annual deductible of $550 for Medicare Part A and B and a 20 percent uniform coinsurance on health spending above the deductible. At the same time, it would provide catastrophic protection for seniors by reducing the coinsurance rate to 5 percent after beneficiary costs exceed $5,500 and cap total cost sharing outlays by seniors at $7,500.
It would scale back Medigap coverage, saving $38 billion. "This option would prohibit Medigap plans from covering the first $5,000 of an enrollee's cost-sharing liabilities and limit coverage to 50 percent of the next $5,000 in Medicare cost-sharing," the proposal says.
Another change would save $49 billion by requiring drug companies to extend Medicaid rebates to those dually eligible for Medicare and Medicaid. The drug industry has fiercely resisted this change in the past.
The proposal would reduce payments to hospitals for medical education, saving $60 billion. It would also cut Medicare home health payments to save $9 billion.
In Medicaid, it would save $44 billion by ending a tactic that involves state taxation of providers to increase the amount of federal payments. And it would save $12 billion by placing all of the dually eligible in managed care. All Medicare enrollees, including those also eligible for Medicaid, have the power now to say no to managed care arrangements. And it would save $17 billion by changing the medical practice system.
All of these changes to pay for ending the SGR would arouse intense opposition by powerful lobbies. But that doesn't mean they won't get serious consideration if the debt crisis intensifies.