Paragon Health Institute Releases Proposals to Lower Health Care Costs

The Paragon Health Institute recently released a report highlighting 12 options to decrease federal health care spending. The report, titled “Turning the Tide on Red Ink: Commonsense Policies to Make Federal Health Programs More Sustainable”, compiles estimates from the Congressional Budget Office (CBO) and the Office of Management and Budget (OMB) of policies that would reduce spending on federal health programs.

Each proposal would save at least $10 billion over the next ten years, totaling $2.1 trillion in gross potential savings over the decade. The proposals include a number of ideas that have had bipartisan support in the past and are included in the Committee for a Responsible Federal Budget’s Fiscal Blueprint for Reducing Debt and Inflation.

Paragon Health Institute’s Recommended Health Savings Options

Policy Ten-Year Savings
Medicaid Savings  
Eliminate Medicaid Provider Tax Safe Harbor $526 billion
Remove the FMAP Floor $667 billion
Implement Community Engagement Requirements $121 billion
Reduce Federal Share of Medicaid Administrative Costs to 50 Percent $68 billion
Medicare Savings  
Restrict First-Dollar Coverage by Medigap Plans $100 billion
Implement Site Neutral Payments for Certain On-Campus Hospital Services $102 billion
Eliminate Exceptions for Off-Campus Hospital Site Neutrality $39 billion
Establish Unified Post-Acute Care Payment System $79 billion
Modify Medicare Payments to Hospitals for Uncompensated Care $88 billion
Eliminate Medicare's Coverage of Bad Debt $74 billion
Reinstate 340B Payment Reforms $13 billion
Other Mandatory Savings  
Use a More Accurate Measure of Inflation for Mandatory Programs $256 billion

Source: Paragon Health Institute.

Medicaid is one of the largest federal programs, and CBO projects spending on the program to increase from $539 billion in 2024 to $879 billion in 2033, over a 60 percent increase within the ten-year budget window. First, Paragon highlights elimination of the Medicaid provider tax safe harbor, which permits states to tax providers (up to 6 percent of their net revenue) to pay for Medicaid reimbursements and effectively increases payments to states from the federal government by making Medicaid costs seem higher than they actually are. Provider tax reforms have received bipartisan support in the past, and CBO estimates that this would save $526 billion over ten years.

The other proposals would directly modify the federal share of Medicaid spending and program eligibility. One, removing the 50 percent federal medical assistance percentage (FMAP) floor, which Paragon suggests advantages wealthier states, would currently impact 13 states and would lower those states’ spending on optional medical services, saving an estimated $667 billion. In addition, altering Medicaid eligibility by including employment, training, or community service requirements for prospective enrollees, less formally known as “work requirements,” would save an estimated $121 billion over a decade. Finally, Paragon suggests capping the federal share of Medicaid administrative expenses at 50 percent, down from 62 percent today, to shift some administrative burdens onto states and save $68 billion over a decade.

In addition to Medicaid proposals, Paragon also highlights several options for reducing Medicare spending. Medicare is the largest federal health program, and its spending is projected to more than double over the next decade from $845 billion in 2024 to $1,731 billion in 2033.

Some of the most significant savings in Medicare could come from incorporating “site-neutral” payments for some on- and off-campus services and for post-acute care. As our Health Savers Initiative has written, payment differentials based on site-of-care drive service provisions to higher-cost sites and incentivize provider consolidation, driving up costs for the federal government and private sector. Combined, these proposals would save $220 billion.

Another option for Medicare savings would restrict first-dollar coverage in private supplemental Medigap insurance for Medicare beneficiaries. By reducing the incentives for high utilization, it could save $100 billion.

Rounding out the Medicare proposals are three provider payment policies to address misaligned funding for (1) uncompensated care (“bad debt”), (2) financial assistance (“charity care”), and (3) prescription drugs under Part B. The first proposal would redistribute Medicare’s portion of uncompensated care funding based on hospitals’ share of charity care and non-Medicare bad debt, saving $88 billion. The second would eliminate Medicare’s reimbursement of bad debt altogether and save $74 billion. The third proposal would save $13 billion by reforming payments for so-called 340B drugs, which are drugs hospitals are allowed to purchase at discounted rates while Medicare reimburses them at higher, non-discounted rates.

Finally, Paragon highlights a proposal to shift inflation indexing of all mandatory spending programs (including Social Security) to using the more accurate “chained CPI” index, which is already used to index the tax code. Using this index would save $256 billion, including $41 billion in health care program savings. Paragon also suggests that Congress should more strictly adhere to Pay-As-You-Go (PAYGO) rules instead of repeatedly waving them.

Given the importance of reducing health care costs in order to address the long-term budget outlook, the Paragon report is a welcomed compilation of reforms that could help lower health care costs, sustain Medicare’s finances, lower deficits, and combat inflation.