Politics & Policy

Spending $716 Billion, Twice

Time for an honest debate on Medicare.

The issue of $716 billion in spending cuts to Medicare has taken center stage, with accusations flying about who is raiding Medicare and pushing Granny off the cliff.

So here are the facts:

In 1997, the Republican Congress passed, and President Bill Clinton signed, the Balanced Budget Act (BBA), which gradually reduced payments to Medicare providers as part of a plan to reduce overall federal spending. The key to the policy is the Sustainable Growth Rate, which requires the government to adjust payments for physician services each year so that growth in Medicare spending does not exceed the growth of GDP.

But Medicare’s fee-for-service model works at cross-purposes with this policy, and incentivizes doctors to bill for more and more services, driving up Medicare spending to higher levels year after year. Further, each time the payment cuts are about to be triggered, doctors swarm Capitol Hill to get Congress to postpone them. At first, the payment cuts would have been just 1 or 2 percent if doctors hadn’t succeeded in killing them. But over time they have accumulated, and now doctors would be paid 27 percent less for treating Medicare patients if the originally intended cuts had gone into effect. And the cuts would continue in perpetuity.

Doctors say these payment reductions would cripple their practices and make it difficult for them to see Medicare patients, especially since Medicare already pays doctors less than private plans.

The American Medical Association wants a permanent “doc fix” that would end the threat of these cuts, and the fix was the main demand the AMA made when it was at the negotiating table over Obamacare. The White House promised the fix, but reneged at the last minute. The doc fix was yanked from the bill, largely because of its $208 billion price tag. Astonishingly, and much to the dismay of doctors across the country, the AMA endorsed Obamacare anyway, giving the bill an important push over the finish line.

Last month, following the Supreme Court’s disastrous decision about Obamacare, the Congressional Budget Office recalculated the ten-year cost of the health-overhaul law to determine what the court’s decision would mean to the overall cost of the law. The CBO concluded that the cuts to Medicare now total $716 billion over 10 years — chiefly because the ten-year window is moved three years into the future and, as health costs grow every year, so does Medicare spending. (The law contains other Medicare payment reductions as well.)

The president’s plan to “save” Medicare relies primarily on paying doctors and hospitals less and less by keeping in place the 1997 trajectory for spending cuts. According to Medicare actuaries, this would mean that 40 percent of providers eventually will either go bankrupt or stop seeing Medicare patients altogether.

To make sure that these spending targets are met, Obamacare creates the dreaded Independent Payment Advisory Board to enforce the cuts — and even more if needed. The IPAB puts the thumb screws in the Obamacare strategy, because the law makes it nearly impossible for Congress to override the board’s orders and shields the board’s decisions from judicial review — and patient input.

So now we get to the crucial dispute. Obamacare counts the same Medicare savings twice — once to allegedly extend the solvency of Medicare, and again to pay for Obamacare’s massive new subsidies for private health insurance through the exchanges.

Medicare actuaries have chastised the administration and its allies in Congress for this double-counting. Health and Human Services secretary Kathleen Sebelius was asked about the double-counting during a congressional hearing last year. “Are you using [the Medicare savings] to save Medicare or are you using it for health reform?” asked Representative John Shimkus (R., Ill.). “Both,” Sebelius answered.

If Obamacare were repealed, we would be protecting taxpayers from this dishonest trick of counting the Medicare savings twice. (All of these numbers, by the way, represent reductions in the rate of growth of Medicare spending, not actual cuts. Medicare spent $549 billion in 2011 and is projected to spend $809 billion in 2018. In any family budget, that definitely is not a cut.)

So what about the claims that House Budget Committee chairman Paul Ryan also cuts Medicare by $716 billion? Ryan’s budget follows current law. The BBA Medicare-payment reductions are federal law, and his budget necessarily uses federal law as a baseline.

Governor Mitt Romney says that if he is elected, he will eliminate the cuts. That’s actually a realistic promise, because that is what Congress does every year anyway. But this promise also will provide added incentive for a “permanent doc fix,” the Holy Grail of the AMA.

So here’s the bottom line: President Obama leaves the $716 billion in Medicare reductions in place, and he spends the money again to create a vast new Obamacare entitlement program. Paul Ryan doesn’t double-count this money. His budget leaves the BBA Medicare payment cuts in place, but also creates a plan to make the program more efficient by injecting market forces through competition and consumer choice. Ryan’s premium-support model would require health plans to compete for the business of future seniors by offering better benefits at lower prices. Seniors would be guaranteed coverage because Medicare would fully cover the premium costs of the second-lowest-cost plan or the cost of traditional Medicare, whichever is lower. Those who are older or sicker, or have lower incomes, would get additional help.

The market model has been proven to work in the Medicare Advantage and prescription-drug programs. Three Harvard researchers published a study in The Journal of the American Medical Association (you can find it here, but it requires a subscription) examining how premium support would have worked if it had been in effect in 2009. They found that, nationally, the benchmark plan bid an average of 9 percent below traditional Medicare costs.

Further, the Part D prescription-drug program in Medicare is saving taxpayers money and giving seniors better benefits. Seniors can choose the drug plan that offers them the best benefits at the lowest prices, and these smart shoppers have brought the cost of the program 42 percent lower than expected when the drug benefit was created in 2003.

It’s now a choice between the Romney-Ryan market-based model and Obamacare’s double-counting and price controls enforced by an unelected, unaccountable board charged with paying doctors less and less, to the point that 40 percent of them drop out. Let’s have an honest debate about which of the two visions actually would sustain Medicare, and has the best chance of getting the federal budget on a more sustainable track.

— Grace-Marie Turner is president of the Galen Institute and a co-author of Why ObamaCare Is Wrong for America.