Finding $600 Billion in Health Savings, Continued...

We hope all of our beloved and faithful readers have been following the conversation developing between us and some other experts, notably at Center on Budget and Policy Priorities and at the Washington Post, over the past few days over how to reduce federal health costs while protecting the disadvantaged. It's a very important issue, and we thank these experts for joining in the conversation.

For a little background, CBPP recently argued that the Super Committee could not achieve $600 billion of health savings without harming the most disadvantaged, to which we showed a path to not only save the money but actually help many of the disadvantaged. Since then, CBPP posted a follow-up response raising questions about the options we put forward. To recap, here is what we suggested:

Policy Savings Effect on the Disadvantaged
Helps Little Effect Hurts
Reduce Provider Payments $175 billion   X  
Prescription Drug Rebates $112 billion    X  
Restrict Medigap $93 billion X    
Reform Cost Sharing X    
Raise the Eligibility Age $125 billion X    
Medical Malpractice Reform $62 billion X    
Increase Income-Related Premiums $40 billion   X  
Total Savings $607 billion $280 billion $327 billion $0 

CBPP did not raise concerns with the Medigap, malpractice, or income-related premium changes -- but they did express concerns with the other policies. In particular, they argue:

  • The $287 billion in prescription drug rebates and provider payment reductions are unrealistically high.
  • Cost-sharing reforms would have serious impacts on sicker low-income beneficiaries.
  • Linking increases in the eligibility age to the Affordable Care Act is not adequate to ensure protection of the most vulnerable unless or until it is successfully implemented.

These are valid concerns, so we'll address each of them (in reverse order).

Raising the Medicare Age

In our previous analysis, we showed that raising the Medicare age is progressive because -- assuming the implementation of the Affordable Care Act (PPACA) -- lower income individuals would actually become eligible for subsidies or Medicaid coverage more generous than Medicare. We suggested that to ensure this was this case, policymakers could link the increase in the age to PPACA staying in place. CBPP, however, argues that this isn't enough. As they explain:

Contrary to CRFB’s claim, simply providing for cancelation of an increase in the Medicare eligibility age from 65 to 67 if Congress repeals the Affordable Care Act (ACA) is not adequate to protect lower-income 65- and 66-year-olds, who could be left uninsured if the Medicare age is raised but the new health insurance exchanges that the ACA establishes cannot function effectively as a result of a Supreme Court decision striking down the law’s “individual mandate,” state resistance, or other factors.  (This is why policymakers should not consider this proposal until we know that the exchanges are indeed functioning adequately.)

CBPP's analysis presumes an "all or nothing" trigger that just links the Medicare age increase to the continued existence of any of the health care, but this need not be the case. We won't try to design the exact mechanism in a blog, but there are numerous variations on a more nuanced trigger that would turn off the age if the subsidies are scaled back too deeply, coverage provisions are weakened, overall coverage falls below a certain level, the individual or employer mandate are not in place, etc. etc. The Secretary of HHS could even be in charge of certifying such criteria before any age increase goes into effect.

Reforming Cost Sharing Rules

The comprehensive overhaul to cost-sharing that we outlined would protect or improve Medicare for the most vulnerable. That is, it would protect those with income low enough to qualify for Medicaid support and improve the situation of beneficiaries with high costs because it would include a cap on out of pocket costs so that seniors would no longer need to fear a potentially unlimited financial burden. It also would reduce out-of-pocket costs on average, meaning that even though many more people in a given year will face higher cost-sharing (an average of $500), when netted against the average savings of $4,500 for about one tenth of beneficiaries the net result is no increase in mean cost-sharing.

Where CBPP does have a point is with regards to those who may be vulnerable, but not the most vulnerable. There will inevitably be some segment of the population which has lower incomes (but not low enough to qualify for Medicaid) and has high health care costs (but not high enough to hit the catastrophic cap). Those folks could potentially see an increase in their cost-sharing that is financially difficult to manage. But the fact that some people may be worse off is not argument enough to not provide much-needed protections and enhancements to the most vulnerable in society.

This concern could be further mitigated fairly easily. For example, overall cost-sharing could be increased some (for example, a 5 percent catastrophic coinsurance for some amount of spending over the $5,500 threshold we describe), with additional savings redirected toward providing support for lower-income beneficiaries. There are other provisions related to Medicare cost-sharing that we did not include in our initial illustrative list, such as applying the Medigap first-dollar limitation to TRICARE for Life, which could also be included in the package to achieve savings that could be used to offset additional low-income support.

Prescription Drug and Provider Payment Reforms

The illustrative approach we laid out included $112 billion in savings from allowing Medicare to use its buying power to require "rebates" from drug companies and about $175 billion from reducing payments to various Medicare providers -- including for graduate medical education, post-acute care, rural hospitals, reforming the SGR, and other payments. CBPP contends that these are unrealistic given the $200 billion and $100 billion offers in these areas from Democrats and Republicans, respectively, on the Super Committee.

Yes, we recognize that these savings would be politically difficult, but that doesn't mean these are not legitimate policies that should be seriously considered. Policymakers concerned about the impact of Medicare savings on vulnerable beneficiaries should push to achieve greater savings from areas that do not affect beneficiaries instead of assuming that achieving savings from areas such as drug rebates are impossible. In addition, the bundling of these policies reflects the Go Big approach in a microcosm: the larger the overall package is, the more room there is for Republicans to compromise on issues like drug rebates and Democrats on things like cost-sharing. Such a trade-off resulted in both policies (in some form) being in the Fiscal Commission and in the Obama-Boehner talks, highlighting that Go Big could actually improve the chance of success!

We do see CBPP's point, though, that $287 billion might be on the high side of what is achievable.The Bipartisan Policy Center did include $305 billion of such savings, but the President's submission includes closer to $220 billion and the Fiscal Commission just over $200 billion.

But if our provider payment and drug rebate suggestions are too high, there are plenty of other health savings which would have very little effect on the most vulnerable individuals. Here is around $150 billion worth of options:

Policy Possible Savings
Apply Medigap reforms to TRICARE for Life $43 billion
Transform FEHB into a premium support program $31 billion
Increase TRICARE drug co-payments $15 billion
Correct income definition for PPACA eligibility  $13 billion
Reduce erroneous Medicare Advantage payments $2 billion
Medicaid bidding on durable medical equipment $4 billion
Rebase DSH payments in 2021 $4 billion
Prohibit Pay-for-Delay for prescription drugs $5 billion
Reduce exclusivity period for generic drugs $4 billion
Medicare Part A premium for higher-earners $10 billion
Restrict allocation to Medicaid of common administrative costs $3 billion
Equalize Medicaid matching rates at 50% for administrative functions  $20 billion
Total Additional Potential Savings $154 billion

We think we've laid out plenty of options to reduce health care spending without hurting the most vulnerable, but this list isn't exhaustive.

We would love to hear how our readers, other groups (including CBPP!), and outside experts would save $600 billion -- or as much as they can -- in health care costs. Send us your ideas (or a link to your blog post) through the comment function of this page, and we'll highlight other approaches and ideas.

Controlling federal health spending is an absolute imperative to get our debt under control, and we look forward to ideas of how to do that in the least disruptive and most helpful way.