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What Obama’s deficit proposal means for health care

Finally! For months now, most economists have been saying that politicians should adopt a two-pronged strategy for dealing with the economy: 1) spending now to boost employment; and 2) balanced long-term deficit reduction. Instead, since Republicans took control of Congress, we got months of debate over how much spending to cut, with no action on jobs.

If you look at the bills they’ve passed, Democrats have actually been pursuing the two-pronged strategy since Obama was sworn in, but last week the President finally articulated it. Earlier this month, he released the American Jobs Act, a $450 billion plan to boost employment. That was followed up last Monday with a plan for $2 trillion in new deficit reduction over the next ten years. And as Jonathan Cohn points out the emphasis is on “new”:

If you count the savings from drawing down military forces in Afghanistan and Iraq, as many budget estimates do, and if you include the spending cuts already taking place because of the summer debt ceiling deal, then the total deficit reduction of this proposal is actually above $4 trillion.

[For more on the debt ceiling deal, check out our earlier coverage here and here.]

Much of the deficit reduction comes from higher taxes on the wealthy– what the president is calling the “Buffet rule” after the billionaire Warren Buffet, who has spoken out about how he pays a smaller share of his income in taxes than many of his employees.

Still though, there are some major spending cuts, including about $320 billion from government health care programs. Where exactly is this money coming from? Glad you asked…  

Much of the savings comes from a bunch of minor rule changes and spending cuts– a few hundred million dollars here, a couple billion there (which sounds like a lot, but remember we’re talking about a multi-trillion dollar budget). However there are a few big changes:

Extending Medicaid Drug Rebates to Medicare

What it means: The U.S. government doesn’t negotiate with pharmaceutical companies to get the best prices on prescription drugs, but it does save some money by getting rebates from drug companies.

The way it works for Medicaid is that the law specifies how big a rebate pharmaceutical companies pay the government. With Medicare though, private companies administer the prescription drug program, and each of them negotiates individually with drug companies over the size of the rebate. Turns out that private companies suck at negotiating the rebates, so Medicare ends up paying way more for prescription drugs than Medicaid.

President Obama proposes to take the same rebate Medicaid receives and apply it to plans that cover low income seniors.

How much it saves: $135 billion

Higher Medicare premiums for wealthy seniors

What it means: Exactly what it sounds like- wealthy seniors would pay a little more for Medicare Parts B and D (non-hospital medical coverage and prescription drugs). This is a cut in benefits, but it’s unlikely to cause a huge uproar. As The Washington Post’s Sarah Kliff points out: “[The] cut would build on existing policy: In 2007, Medicare began requiring higher-income beneficiaries to pay a greater share of average Part B costs (35 to 80 percent, depending on their income).”

How much it would save: $20 billion

Payment cuts to some providers

What it means: Most of the cuts are targeted at long-term care providers: skilled nursing facilities, long-term care hospitals, and inpatient rehabilitation centers. In recent years, the amount Medicare spends on those services has increased dramatically, so they’re hoping the cuts will encourage more efficient care. Other cuts are targeted very specifically in the hopes of improving care while saving money.

To take one example, when patients are released from a hospital to a skilled nursing facility, 14% end up back in the hospital for conditions that could have been avoided. Obama’s proposal would reduce payments to nursing facilities with the highest rates of avoidable re-admissions.

How much it would save: $42 billion

Strengthen the Independent Payment Advisory Board

What it does: The Independent Payment Advisory Board, which we’ve covered before, is a 15-person advisory board created by the Affordable Care Act that will propose ways to reduce health spending. By law, the board isn’t allowed to “ration care,” raise Medicare premiums or copays, or restrict benefits– which means it can really only reduce payments to providers. The board’s recommendations will take effect automatically, unless Congress comes up with an alternate way to save the same amount of money.

In the original law, the IPAB is required to bring down the health care growth rate to match the growth of our GDP +1%. In his latest proposal, Obama would have the IPAB bring spending down to GDP + o.5%.

What it would save: The budget office didn’t say how much it would save- it depends on how fast the economy is growing, and how effective some of the other savings proposals are. The IPAB is really a backstop in case other payment reforms don’t work as well as expected.

Cuts to Medicaid

What it means: There are a bunch of different cuts to the amount Medicaid pays providers and states, but here are the big ones:

  • New blended rate formula: Right now states get different amounts of Medicaid funding for different populations. Back in April, the White House proposed switching to a “blended rate” formula that would pay a state the same rate for all it’s Medicaid beneficiaries. Originally this would mean a huge cut in Medicaid funding for states, but now it’s much smaller and therefore, less likely to do much damage to the program.
  • Include social security income in determining if someone is eligible for Medicaid
  • Reduce the Medicare provider tax threshold: This one’s weird. Medicaid is paid for by states and the federal government. What some states do to get the federal government to cough up a bigger share is tax certain health care providers, use that money to increase payments to the same providers. The state is now technically paying more money for Medicaid (even though it’s just giving health care providers their own money back) so the federal government has to pay more money now too. Obama’s proposal would limit these types of practices.

How much it will save: $66 billion

We should note too that Medicaid advocates are upset that the program was targeted for spending reductions at all. There just isn’t much to cut- it already pays providers really low rates and states are having a hard time maintaining the program as is. Still they were also worried that the program would be a target for bigger cuts, since it helps a group without a lot of political clout– namely the poor. And And so, according to Ron Pollack, director of Families USA:

“Any cost-shifts to Medicaid enrollees would be unacceptable. That being said, this is not as bad as our base fears.”

Contrast with Republicans

Obama’s proposal does make cuts to Medicare and Medicaid, but unlike recent Republican proposals the cuts don’t shift the burden of paying for care onto seniors, the poor, and disabled. The cuts Obama makes fall on those who can afford it– the wealthy, pharmaceutical chains, and giant health care systems– with an eye on improving the quality of care at the same time.

But in addition to these proposed cuts, Obama has drawn a line in the sand: he’s threatened to veto any bill that cuts into Medicare or Medicaid without increasing revenue as well. In other words, no spending cuts if Republicans refuse to negotiate on raising tax rates on millionaires.

We’re glad to see the president taking a firm stand on taxes, and we’re glad that some of the dumber ideas for cutting health spending (like raising the Medicare eligibility age to 67) aren’t included in this new plan. We’re a little worried that in negotiations with Republicans Obama will offer a deal that’s way more heavily weighted towards spending cuts, like he did during the debt ceiling debate. But according to The New Republic’s Jonathan Cohn, who has talked to higher-ups in the White House:

A senior administration official on Sunday evening made clear that this proposal came with a different spirit in mind: This time, the administration isn’t trying to put a compromise on the table, in the hopes Republicans will come around to it. Instead, the administration is laying out its preferred vision for reducing the deficit, in the hopes it can establish an ideal for an eventual compromise or — in case no compromise can be reached — convey to the voters what principles this White House and the president care about most.

Here’s hoping.

{ 1 comment… add one }
  • Zan Zibar January 10, 2012, 1:16 pm

    It is good that higher tax rates were not passed, and that the demagoguery of the “Buffet Rule” had no effect on policy.

    That is a problem with a lot of Obama’s rhetoric: it effectively uses generalizations and divisiveness, pitting people against each other instead of using a problem-solving approach.

    Instead of pointing out the difference between the CAPITAL GAINS tax system and the INCOME tax system, Obama instead sought to use Buffet’s comments to pit people against each other (wanting to raise taxes for some, but not others, based on the people, and not the various systems).

    Had Obama instead posed the question in a way like “We have a huge deficit — and we have to lower it. Is there a reason the Income tax structure is different than the capital gains structure?” — Then people would not have gotten so defensive or felt targeted. But his way is to pit people against each other.

    Instead, he was counting on people not having a clear understanding of the different tax systems (or WHY they are set up differently), and counted on using jealousy instead of a problem-solving approach.

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