Health spending tied to debt ceiling talks

Republicans oppose any increase without corresponding cuts. Federal requirements on states to maintain Medicaid eligibility could be on the chopping block.

By Doug Trapp — Posted July 4, 2011

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The financing of Medicare and Medicaid are under a strong spotlight as negotiations continue between President Obama and congressional leaders on increasing the nation's $14.3 trillion statutory debt limit. Budget experts and members of Congress agree that changes are needed to constrain both programs' spending growth, but they disagree on how to accomplish this.

Failing to increase the debt limit would force the U.S. to stop payment on a number of vital programs, including Medicare, and lead to higher interest rates for all Americans due to decreased confidence in the ability of the U.S. to pay its debts, according to a May 13 letter from Treasury Secretary Timothy F. Geithner to Sen. Michael Bennet (D, Colo.). Congress must act by early August to avoid this scenario, Geithner wrote.

Meanwhile, a Congressional Budget Office forecast released June 21 concluded that extending tax cuts, halting health spending reductions and maintaining health benefits -- possible scenarios based on actions by Congress -- would cause the national debt to skyrocket to nearly double the nation's total economy by 2035.

"To keep deficits and debt from climbing to unsustainable levels, policymakers will need to increase revenues substantially as a percentage of [gross domestic product], decrease spending significantly from projected levels or adopt some combination of those two approaches," CBO Director Douglas Elmendorf, PhD, said June 22.

Leaders of the Republican-controlled House are demanding spending cuts at least equal to any debt ceiling increase. In addition, new tax revenues sought by Democrats must be taken off the table, said House Speaker John Boehner (R, Ohio) and Senate Minority Leader Mitch McConnell (R, Ky.). The disagreement led House Majority Leader Eric Cantor (R, Va.) and Sen. Jon Kyl (R, Ariz.) on June 23 to walk out of a six-person group led by Vice President Joe Biden that had been seeking a compromise on the debt ceiling. Obama, Boehner and other top congressional leaders have since taken up the discussions.

Democrats laid out their own requirements for a debt limit increase. It must have a balanced approach of cuts and revenue increases that do not harm the economy, said Rep. Chris Van Hollen (D. Md.), the House Budget Committee's highest-ranking Democrat. For example, Congress could end tax benefits and loopholes that have allowed certain individuals and corporations to pay very little or no taxes. Republicans have called these proposals tax increases and declared them a nonstarter. White House Press Secretary Jay Carney said June 27 that Republicans must be willing to take on some of their "sacred cows," such as taxes. "To get significant deficit reduction, there has to be a balanced approach," he said.

Congress should include a permanent repeal of the Medicare sustainable growth rate formula as part of any agreement to tackle federal deficits, according to a June 27 letter signed by 65 national and 50 state medical societies, including the American Medical Association. The 10-year cost of preventing future cuts was $48 billion as recently as 2005, the letter states. Now the cost is about $300 billion over a decade.

"The longer Congress waits to enact permanent physician payment reform, the greater the burden will be on our national debt," said AMA Immediate Past President Cecil B. Wilson, MD.

Medicaid a possible target

Advocates for Medicaid enrollees worry that Obama and leading Democrats are willing to compromise on Medicaid eligibility requirements and other access guarantees in federal law.

Sen. Orrin Hatch (R, Utah) introduced a bill in early May -- the State Flexibility Act -- to allow states to adjust their Medicaid eligibility and enrollment. But Sen. Jay Rockefeller (D, W.Va.) and 40 other Democratic senators signed letters opposing the move as well as a long-term GOP plan to convert Medicaid into a block grant program.

The Medicaid requirements -- adopted in the 2009 economic stimulus package and extended under the health system reform law -- were included to ensure that states spent Medicaid stimulus funds on the program. That funding ran out June 30, but the restrictions are still in effect.

Hatch said his measure "starts to put states back in control, empowering them to prioritize and balance their budgets, while simultaneously lowering federal entitlement spending." He said his bill would allow states to save $2.8 billion over five years.

But Rockefeller said the health reform law and Medicaid already provide several ways for states to change their Medicaid programs. These include federal waivers and a provision allowing states to opt out of the law's coverage mandates starting in 2017 if they adopt a plan that covers as many people as the national health reform law would.

"There are not enough states using the flexibilities that are in existing law to get costs down," Massachusetts Gov. Deval Patrick said.

Rockefeller said Hatch's bill effectively would end coverage for millions of children through the Children's Health Insurance Program. Hatch's "slash-and-burn approach to Medicaid is an easy way out that devalues the people who benefit from this program and the jobs that it creates."

Curbing long-term health spending

The CBO projects that Medicare and Medicaid spending will continue to increase as a portion of the economy, fueling growth in the national debt. In dispute is whether Congress must reduce program benefits to constrain entitlement growth.

Medicare, Medicaid and CHIP spending will account for 5.6% of the nation's gross domestic product in 2011, according to a CBO long-term outlook released June 21. That could reach 10% by 2035, the report said.

CBO said health care spending has grown faster than overall inflation in part because of wider use of technology, increases in personal income and the growing scope of health insurance coverage.

Medicare and Medicaid benefits are not excessively expensive by themselves, but the health system delivers them inefficiently, said Allen Dobson, PhD, former research director at the Centers for Medicare & Medicaid Services and president of health care consultant Dobson Davanzo & Associates.

A major flaw in the health system is that Medicare, Medicaid and private insurance pay for health care separately, Dobson said. Health system changes in the pilot phase or under discussion -- such as the shared risk of accountable care organizations -- could help improve care coordination, he said.

"How that will all play out, no one knows certainly," said Paul Van de Water, PhD, an economist and senior fellow at the liberal Center on Budget and Policy Priorities.

Van de Water said less evidence exists that the GOP long-term plan for Medicare, in which private health plans compete for seniors' Medicare vouchers, will restrain health spending as much as ACOs. "Health care markets are not the same as fresh vegetables," he said.

Former CBO Director Douglas Holtz-Eakin, PhD, said Medicare is financially unsustainable. Medicare payroll taxes and premiums do not nearly cover the program's costs. Ending Medicare's open-ended benefit commitments would help balance the program's budget, he said June 23 during a Senate Finance Committee hearing on health spending and the federal deficit.

Already many physicians are thinking about ending their Medicare participation despite Congress repeatedly blocking pay cuts under the SGR, Holtz-Eakin said.

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Low expectations

The federal government is logging record annual spending deficits, and the national debt situation projected under current law would become even worse if lawmakers take the expected steps of extending tax cuts, halting health spending reductions, and maintaining health benefits.

Under current law

  • Medicare physician pay would be cut by 29.4% beginning Jan. 1, 2012, and other savings would take effect, such as an excise tax on certain high-premium health insurance plans starting in 2018.
  • Tax cuts enacted in 2001 and 2003 and extended through 2012 and 2013 would expire, as would lower overall tax rates and relief from the alternative minimum tax.
  • Federal debt would reach 70% of the gross domestic product by Sept. 30, the end of fiscal 2011, up from 40% in fiscal 2008. But it would stabilize at about 75% in the next decade, reaching 85% of the economy by 2035.

Under another possible scenario

  • Congress would prevent Medicare physician payment cuts and dull the impact of other health reform spending reductions by, for example, repealing the Medicare Independent Payment Advisory Board.
  • Congress would extend the 2001 and 2003 tax cuts through 2021, including the 2012 estate tax rate.
  • Federal debt would eclipse the gross domestic product by 2021 and be nearly twice the size of the economy by 2035.

Source: "CBO's 2011 Long-Term Budget Outlook," Congressional Budget Office, June (link)

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