This Wednesday’s deadline for the fiscal commission to report a deficit reduction plan provides an opportunity to examine the health care components of the three proposals that have been released thus far:
- The Simpson-Bowles plan, named for the co-chairs of the fiscal commission, who released their own draft recommendations just after the midterm election;
- The Rivlin-Domenici plan, named for former CBO Director Alice Rivlin and former Senate Budget Committee Chairman Pete Domenici (R-NM), who released their own proposal as chairs of an independent commission operating under the aegis of the Bipartisan Policy Center; and
- The Rivlin-Ryan plan, which Alice Rivlin and House Budget Committee Ranking Member Paul Ryan released as an alternative to the Simpson-Bowles proposal, as both Dr. Rivlin and Rep. Ryan also sit on the fiscal commission.
CBO has conducted a preliminary analysis of the Rivlin-Ryan plan (the above link includes both the plan’s summary and score), and the Simpson-Bowles plan incorporates CBO scoring estimates where available. However, it is unclear where and how the Rilvin-Domenici plan received the scores cited for its proposals. The timing of the plans also varies; the Rivlin-Domenici plan postpones implementation of its plan until 2012, when the authors believe the economy will be better able to sustain a major deficit reduction effort.
The following analysis examines the similarities and differences of the three plans’ health care components in both the short term and the long term. Keep in mind however that these are DRAFT proposals, which may a) change and b) be missing significant details affecting their impact. Note also that the summary below is not intended to serve as an endorsement or repudiation of the proposals, either in general terms or in their specifics.
Liability Reform: All three plans propose liability reforms, including a cap on non-economic damages. The Rivlin-Ryan and Simpson-Bowles plans both rely on specifications outlined in CBO’s October 2009 letter to Sen. Hatch; both presume about $60 billion in savings from this approach. The Rivlin-Domenici plan is less clear on its specifics, but discusses “a strong financial incentive to states, such as avoiding a cut in their Medicaid matching rate, to enact caps on non-economic and punitive damages.” Rivlin-Domenici also proposes grants to states to pilot new approaches, such as health courts; overall, the plan estimates $48 billion in savings from 2012 through 2020.
Prescription Drug Rebates: Both the Simpson-Bowles and Rivlin-Domenici plans would apply Medicaid prescription drug rebates to the Medicare Part D program. The Simpson-Bowles plan estimates such a change would save $59 billion from 2011 through 2020, whereas the Rivlin-Domenici plan estimates this change would save $100 billion from 2012 through 2018. The disparity in the projected scores is unclear, as both imply they would extend the rebates to all single-source drugs (i.e., those without a generic competitor) in the Part D marketplace. The Rivlin-Ryan plan has no similar provision.
Changes to Medicare Benefit: All three plans propose to re-structure the Medicare benefit to provide a unified deductible for Parts A and B, along with a catastrophic cap on beneficiary cost-sharing. The Rivlin-Ryan and Simspon-Bowles plans are largely similar, and echo an earlier estimate made in CBO’s December 2008 Budget Options document (Option 83), which provided for a unified deductible for Parts A and B combined, a catastrophic cap on beneficiary cost-sharing, and new limits on first-dollar coverage by Medigap supplemental insurance (which many economists believe encourages patients to over-consume care). Conversely, the Rivlin-Domenici proposal provides fewer specifics, does not mention a statutory restriction on Medigap first-dollar coverage, and generates smaller savings (an estimated $14 billion from 2012 through 2018, as opposed to more than $100 billion from the Rivlin-Ryan and Simpson-Bowles proposals).
Medicare Premiums: The Rivlin-Domenici plan would increase the beneficiary share of Medicare Part B premiums from 25 percent to 35 percent, phased in over a five-year period, raising $123 billion from 2012 through 2018. (When Medicare was first established, seniors paid 50 percent of the cost of Part B program benefits; that percentage was later reduced, and has been at 25 percent since 1997.) The Rivlin-Ryan and Simpson-Bowles plans have no similar provision.
“Doc Fix:” The Simpson-Bowles plan uses the changes discussed above (i.e., liability reform, Part D rebates, and Medicare cost-sharing), along with an additional change in Medicare physician reimbursement, to pay for a permanent “doc fix” to the sustainable growth rate (SGR) formula. The Simpson-Bowles plan would generate the final $24 billion in savings necessary to finance a permanent “doc fix” by establishing a new value-based reimbursement system for physician reimbursement, beginning in 2015.
The introduction to the Rivlin-Domenici plan notes that it “accommodates a permanent fix” to the SGR, but the plan itself does not include specifics on how this would be achieved, nor what formula would replace the current SGR mechanism. Likewise, the Rivlin-Ryan plan does not directly address the SGR; however, the long-term restructuring in Medicare it proposes means the issue of Medicare physician reimbursement would become a moot point over several decades. (See below for additional details.)
Other Provisions: The Rivlin-Domenici plan would impose an excise tax of one cent per ounce on sugar-sweetened beverages; the tax would apply beginning in 2012 and would be indexed to inflation after 2018. (This proposal was included in Option 106 of CBO’s December 2008 Budget Options paper.) The plan estimates this option would raise $156 billion from 2012 through 2020.
The Rivlin-Domenici plan also proposes bundling diagnosis related group (DRG) payments to include post-acute care services in a way that allows hospitals to retain 20 percent of the projected savings, with the federal government recapturing 80 percent of the savings for a total deficit reduction of $5 billion from 2012 through 2018. Finally, the Rivlin-Domenici plan proposes $5 billion in savings from 2012 through 2018 by removing barriers to enroll low-income dual eligible beneficiaries in managed care programs.
The Simpson-Bowles plan includes a laundry list of possible short-term savings (see Slide 35 of the plan for illustrative savings proposals) in addition to the savings provisions outlined above that would fund a long-term “doc fix.” Most of the additional short-term savings proposed would come from additional reimbursement reductions (e.g., an acceleration of the DSH and home health reductions in the health care law, and reductions in spending on graduate medical education), or from proposals to increase cost-sharing (e.g., higher Medicaid co-pays, higher cost-sharing for retirees in Tricare for Life and FEHB).
Employee Exclusion for Group Health Insurance: In its discussion of tax reform, the Simpson-Bowles plan raises the possibility of capping or eliminating the current employee exclusion for employer-provided health insurance. (The Associated Press wrote about this issue over the weekend.) One possible option would eliminate the exclusion as part of a plan to lower income tax rates to three brackets of 8%, 14%, and 23%; however, this proposal presumes a net $80 billion per year in increased revenue per year to reduce the deficit. The plan invokes as another option a proposal by Sens. Gregg and Wyden to cap the exclusion at the value of the FEHBP Blue Cross standard option plan, which would allow for three income tax rates of 15%, 25%, and 35%, along with a near-tripling of the standard deduction. Separately, the Simpson-Bowles plan also proposes repealing the payroll tax exclusion for employer-provided health insurance as one potential option to extend Social Security’s solvency.
The Rivlin-Domenici plan would cap the exclusion beginning in 2018, at the same level at which the “Cadillac tax” on high-cost plans is scheduled to take effect in that year. However, the proposal would go further than the “Cadillac tax” (which would be repealed) by phasing out the income and payroll tax exclusion entirely between 2018 and 2028. (This proposal would also prohibit new tax deductible contributions to Health Savings Accounts, on the grounds that health care spending would no longer receive a tax preference under any form.) Notably, the Rivlin-Domenici plan accepts that some employers might stop offering coverage from this change to the tax code, and projects some higher federal spending on Exchange insurance subsidies as a result; however, if more employers drop coverage than the authors’ model predicts, the revenue gain from this provision could be entirely outweighed by the scope of new federal spending on insurance subsidies.
Although Rep. Ryan has previously issued his “Roadmap” proposal that would repeal the employee exclusion, the Rivlin-Ryan plan does NOT address this issue.
Medicare: The Rivlin-Domenici program would turn Medicare into a premium support program beginning in 2018. Increases in federal spending levels would be capped at a rate equal to the average GDP growth over five years plus one percentage point. Seniors would still be automatically enrolled in traditional (i.e., government-run) Medicare, but if spending exceeded the prescribed federal limits, seniors would pay the difference in the form of higher premiums. Seniors could also choose plans on a Medicare Exchange (similar to today’s Medicare Advantage), with the hope that such plans “can offer beneficiaries relief from rising Medicare premiums.”
The Rivlin-Ryan proposal would turn Medicare into a voucher program beginning in 2021. (Both the Rivlin-Domenici premium support program and the Rivlin-Ryan voucher program would convert Medicare into a defined benefit, whereby the federal contribution toward beneficiaries would be capped; the prime difference is that the premium support program would maintain traditional government-run Medicare as one option for beneficiaries to choose from with their premium dollars, whereas the Rivlin-Ryan plan would give new enrollees a choice of only private plans from which to purchase coverage.) The amount of the voucher would increase annually at the rate of GDP growth per capita plus one percentage point – the same level as the overall cap in Medicare spending included in the health care law as part of the new IPAB. Low-income dual eligible beneficiaries would receive an additional medical savings account contribution (to use for health expenses) in lieu of Medicaid assistance; the federal contribution to that account would also grow by GDP per capita plus one percent.
The Rivlin-Ryan plan would NOT affect seniors currently in Medicare, or those within 10 years of retirement, except for the changes in cost-sharing described in the short-term changes above. However, for individuals under age 55, the plan would also raise the age of eligibility by two months per year, beginning in 2021, until it reached 67 by 2032.
While the Rivlin-Domenici and Rivlin-Ryan plans restructure the Medicare benefit for new enrollees to achieve long-term savings, the Simpson-Bowles plan largely relies on the health care law’s new Independent Payment Advisory Board (IPAB) to set spending targets and propose additional savings. The Simpson-Bowles plan suggests strengthening the IPAB’s spending targets, extending the IPAB’s reach to health insurance plans in the Exchange, and allowing the IPAB to recommend changes to benefit design and cost-sharing. The plan also suggests setting a global budget for all federal health spending (i.e., Medicare, Medicaid, exchange subsidies, etc.), and capping the growth of this global budget at GDP plus one percent – the same level that IPAB capped spending in Medicare. If costs exceed the target, additional steps could be taken to reduce spending, including an increase in premiums and cost-sharing or a premium support option for Medicare. The plan also suggests overhauling the fee-for-service reimbursement system, or establishing an all-payer model of reimbursement (in which all insurance carriers pay providers the same rate) if spending targets are not met.
Medicaid: The Rivlin-Domenici plan suggests that in future, Medicaid’s excess cost growth should be reduced by one percentage point annually. The plan implies some type of negotiation between states and the federal government over which services in the existing Medicaid program that the state should assume and fund and which services the federal government should assume and fund. While specifics remain sparse, the overriding principle involves de-linking Medicaid financing from the open-ended federal matching relationship as a way to reduce future cost growth by one percentage point per year.
The Rivlin-Ryan plan converts the existing Medicaid program into a block grant to the states, beginning in 2013. The size of the federal block grant would increase to reflect growth in the Medicaid population, as well as growth in GDP plus one percent. The costs of the new Medicaid expansion would be covered according to current law through 2020; in 2021 and succeeding years, the Medicaid expansion would be rolled into the block grant.
The Simpson-Bowles plan includes conversion of Medicaid into a block grant as one option to generate additional savings; however, it does not explicitly advocate this course of action.
CLASS Act: The Rivlin-Ryan plan would repeal the CLASS Act. The Rivlin-Domenici and Simpson-Bowles plans do not discuss any changes to this program. This is the ONLY provision in the three deficit reduction plans that proposes elimination of any part of the health care law’s new entitlements.