The President and the House of Representatives have advanced starkly different paths for the nation with recent proposals to address the federal budget deficit. The President characterizes his plan as a balanced approach with tax increases for higher-income families, as well as savings in defense and domestic spending and provisions to control health care costs and improve efficiency in Medicare and Medicaid. Together, these changes would reduce the federal budget deficit by $1.35 trillion over 12 years relative to current law.1
The budget resolution passed by the House of Representatives is based on a House Budget Committee proposal that would cut the top rate on taxes for individuals and corporations, exempt military spending from cuts, and make deeper cuts in domestic spending. It would also repeal the health insurance expansion provisions of health reform and cap federal budget outlays for Medicare and Medicaid. The plan is estimated to reduce federal spending by $5.8 trillion over 10 years, $4.2 trillion of which would be used to finance tax cuts, leaving $1.65 trillion for deficit reduction.
With these proposals, the nation is beginning a serious debate on addressing the imbalance in projected federal budget revenues and expenditures. Health care is at the heart of this debate. The analysis that follows shows that while both approaches constrain federal spending under Medicare and Medicaid, they differ sharply in how steep cuts would be, how they would be achieved, and what effect they would have.
Contrasting Health Care Budget Proposals
The President's and House of Representatives' proposals have fundamentally different strategies for health insurance coverage for elderly and disabled Medicare beneficiaries, low-income families, and middle-class working families without employer health insurance. The President’s proposal would preserve Medicare and Medicaid benefits, along with the expansions contained in the health reform legislation to cover more low-income individuals under Medicaid, subsidize health insurance premiums for working families, and fill in the current coverage gap (or “doughnut hole”) in Medicare prescription drug coverage. A summary of the President's Health Budget Framework is included in Table 1.
The House proposal would repeal the health reform provisions expanding Medicaid and providing new premium assistance for middle-income working families, restore the doughnut hole in Medicare prescription drug coverage, convert Medicare to a voucher for private health insurance when those now under age 55 qualify for Medicare, replace Medicaid with a block grant to states, and sharply restrict the growth in the federal budgetary commitment to Medicare and Medicaid over time. A summary of the health provisions in the House Budget Resolution is available in Table 2.
While both budget proposals achieve comparable levels of deficit reduction, the President's framework raises taxes on high-income individuals, while the House of Representatives budget resolution cuts taxes. As a result, much of the Medicare and Medicaid savings in the House budget resolution would go to finance tax cuts.
The House resolution also misses the opportunity to use the federal government's leverage as a major purchaser of health care to lower the rising health care costs that are at the center of our budget deficit problem. Rather than addressing the underlying drivers of U.S. health care costs, the House resolution relies on market forces to lower costs. But as discussed in an August 2010 blog post, the health care market is not like the market for other goods and services. Without effective measures to control these costs, such as incentives to reduce hospitalizations, the cuts in Medicare and Medicaid will translate into considerably higher costs for vulnerable low-income, elderly, and disabled individuals as well as working families.
Some specific consequences of the House budget resolution include:
Tight limits on growth in federal budget outlays for Medicare and Medicaid
The House resolution would index the Medicare voucher and Medicaid per capita outlays with the Consumer Price Index, which is projected to grow at 2.5 percent annually. Health spending per capita, by contrast, is projected by the Centers for Medicare and Medicaid Services (CMS) to grow 3 percentage points faster—5.4 percent annually—over the coming decade. As a result, Medicare and Medicaid would cover a lower portion of health care spending over time under the House resolution. According to the Congressional Budget Office (CBO), federal spending on Medicare, Medicaid, the Children's Health Insurance Program, and subsidies for health insurance premiums would be reduced by 63 to 66 percent in 2050 relative to current baseline projections. By contrast, the President's budget framework would charge the Independent Payment Advisory Board with developing recommendations for holding Medicare spending per capita to the rate of growth of GDP per capita plus 0.5 percent, or approximately 4.6 percent annually.
Higher cost of private coverage for Medicare beneficiaries
The CBO estimates that privatizing Medicare would cost, rather than save, money. Initially, private coverage for similar benefits as currently covered by Medicare would be 12 percent more expensive than Medicare because of higher administrative costs and higher provider payment rates. Thus initial vouchers would need to be higher than average Medicare spending per person—if the goal at the outset were to maintain benefits. By 2030, private coverage would be about 40 percent more expensive than Medicare for the same benefits.2 Simply put, at the outset federal costs could go up and less federal dollars would go to providing benefits and more would go to insurance profits and higher payments to providers.
Higher costs for Medicare beneficiaries
Since the federal government would tie future vouchers to the Consumer Price Index rather than the rising costs of health insurance or medical care, the federal government would spend less over time as beneficiaries spend more. By replacing Medicare with a voucher or defined contribution for private insurance that buys less for the premium dollar, the value of the voucher would erode over time, resulting in higher premiums for beneficiaries and/or reductions in benefits. CBO estimates that by 2022, new enrollees would have to pay at least $6,400 more out of pocket to buy coverage comparable to traditional Medicare. By 2030, out-of-pocket costs would triple, and the portion of a typical 65-year-old's health care expenses paid for by the beneficiary would increase from 30 percent to 68 percent under the House of Representatives budget resolution. High-income beneficiaries would pay nearly all of their own health care costs. By contrast, the President's budget framework would have Medicare use its leverage to buy coverage at lower cost and share in financing a defined set of benefits for all beneficiaries.
50 million more uninsured
By repealing the health insurance expansion provisions in the Affordable Care Act, the House budget resolution would eliminate coverage for an estimated 33 million people by 2019. Cutting federal Medicaid spending by one-third by the end of the decade would potentially leave an additional 15 million people without coverage, including seniors in nursing homes, people with disabilities, children, and pregnant women. Replacing Medicare with a voucher with a limited dollar value would make private insurance premiums unaffordable for some elderly and disabled people. CBO notes that unspecified numbers of Medicare beneficiaries would become uninsured. Eliminating the subsidies for small business and the repeal of the Independent Payment Advisory Board and its powers to control health care costs would likely raise health insurance premiums for middle class and small businesses, further eroding health insurance coverage. The White House estimates that, in all, more than 50 million people would become uninsured.
Putting the U.S. on the Path to a High Performance Health System
The budget proposals offered by the President and House present the nation with divergent paths for lowering health care costs and reducing the federal budget deficit as the post–World War II generation reaches retirement. In short, the large reductions in federal health expenditures in the House budget resolution would shift costs onto consumers and other payers, forcing future Medicare beneficiaries to pay more of their own expenses directly out of pocket, requiring states to absorb rising Medicaid costs, and leading to dramatic increases in the number of uninsured. By contrast, the President’s proposal would maintain a federal commitment to affordable coverage for all and attempt to keep spending increases reasonable by creating incentives for physicians and hospitals to be accountable for both patient outcomes and the use of health care resources.
The challenge for all leaders—in government, health care, and the private sector—is to move beyond shifting responsibility for unaffordable care toward developing effective strategies for putting the U.S. on the path to a high-performance health system that yields real value for the monies invested.
The U.S. has the resources and innovative spirit to cope with the challenges ahead, as it has in the past. The health care experiences of other countries and high-performing areas within the U.S. should be carefully examined to identify policies and practices that hold the promise of achieving the triple aims of better health, better patient care experiences, and lower costs.
1 The President's proposal is estimated to reduce the deficit by $4 trillion over 12 years relative to the Office of Management and Budget's adjusted baseline, which is higher than current law baseline due to certain assumptions about future federal outlays and receipts. Estimated deficit reduction is reported here relative to current law baseline to facilitate comparison with the House budget plan.
2 Commonwealth Fund calculation based on Figure 1, Page 22 in CBO letter to the Honorable Paul Ryan, April 5, 2011, available at http://www.cbo.gov/ftpdocs/121xx/doc12128/04-05-Ryan_Letter.pdf.