The Boehner-Pelosi deal to replace Medicare’s physician payment system has been unveiled. As Congress awaits the Congressional Budget Office’s assessment of the budgetary impact of the package, some are suggesting that this deal is “the most significant structural entitlement reform in two decades.” In fact, from a policy perspective, the Medicare structural reforms are timid and their fiscal impact are small. The suggestion that the deal amounts to significant Medicare reform misunderstands the size and scope of the Medicare problem.
Medicare has enormous unfunded liabilities: promised benefits that are not financed. For Medicare Part B alone, these obligations amount to $24.7 trillion over the next 75 years. To finance Medicare, taxpayers’ burdens will get progressively heavier. The drawdown on general revenues to finance Medicare Part B will accelerate, and the income taxes needed to fund these transfers for Part B are projected to grow from 13.8 percent to 30.6 percent by 2080. The time for serious structural reforms is long overdue. Yet, the Boehner-Pelosi deal barely scratches the surface with its minor policy changes.
Means-Testing. As a general rule, “means testing” is a sound and fiscally responsible policy when the nation’s fiscal future is at risk. But the proposed increase in means-testing is slight—much smaller than most other proposals.
Under current law, wealthy Medicare recipients get less of a taxpayer subsidy than all other Medicare beneficiaries. Today, the initial threshold for reduced taxpayer subsidies is $85,000 in annual income for a single person or $170,000 for a couple. As an individual‘s income rises so does their share of the total Medicare premium. Depending on the size of their annual income, these wealthy recipients pay 35, 50, 65, or 80 percent of their Medicare premiums compared to the typical Medicare recipient who pays only 25 percent of their premium, with taxpayers funding the remaining 75 percent. Under current law, for example, a retired couple with an annual income of $428,000 is required to pay 80 percent of the premium costs and taxpayers pick up the remaining 20 percent.
Under the Boehner-Pelosi proposal, a Medicare recipient with an annual income between $133,000 and $160,000 would see their premium share increase from 50 percent to 65 percent, and a recipient with an annual income between $160,000 and $214,000 would be responsible for 75 percent rather than 65 percent of the Medicare premium. But, the initial income thresholds would be unchanged, meaning that only about 6 percent the size of the Medicare population would be affected by this change. The change itself would be not go into effect until 2018.
These “means-testing” changes are much smaller than most other proposals. Just last year, Sen. Claire McCaskill, D-Mo., and former Sen. Tom Coburn, R-Okla., for example, proposed reducing the initial income threshold for higher Medicare premium payments from $85,000 to $50,000. The Heritage Foundation proposed an initial income threshold of $55,000 for an individual, gradually reducing the taxpayer subsidy by 1.8 percent for every $1000 increase in income. The result: Taxpayer subsidies would be reduced for about 10 percent of upper income Medicare recipients. That change, starting right away, would save an estimated $538 billion between 2016 and 2025. Even President Obama’s fiscal year 2016 budget proposal would apply “means testing” until 25 percent (as compared to 6 percent) of all Medicare recipients pay more than the standard Medicare Part B and Part D premiums and would result in savings of over $66.4 billion.
Medigap Changes. When it comes to reforming Medigap, the Boehner-Pelosi deal is paltry and delayed until 2020. Private Medigap plans supplement traditional Medicare, and fill in crucial coverage gaps, including protection from catastrophic illness. But, the current arrangement between traditional Medicare and Medigap plans stimulates excessive utilization of services and drives up the program’s overall costs. The reason: “first dollar coverage.” As Heritage analysis has shown, it substantially increases seniors’ premiums as well as taxpayers’ burdens.
The Boehner-Pelosi deal limits first dollar coverage of certain Medigap plans by prohibiting plans from covering the Part B deductible, or $147, but delays the change until 2020.
By way of contrast, CBO’s alternative budget option would restrict Medigap coverage of the first $650 in cost sharing in 2017, while capping beneficiaries’ total annual cost sharing at $3,575. The 10-year savings would amount to $53 billion.
Key Non-Medicare Provisions. The deal provides new funding for the Children’s Health Insurance Program (CHIP) but includes no policy reforms in the program. This is another missed opportunity.
Earlier this year, the House Energy and Commerce Committee and the Senate Finance Committee released an outline and draft legislation for extending and reforming CHIP. Unfortunately, this deal circumvents the normal legislative process, bypassing committee hearings and most importantly mark ups where open debate over the future of CHIP (including funding levels) would be properly vetted. Another missed policy opportunity.
The deal also provides additional funding for Community Health Centers, extending Obamacare’s spending spree for another two years. The provision includes language to the community health care funding that would prohibit the use of those taxpayer dollars to pay for abortions, except in cases of rape, incest, or when the life of a mother is in danger. That funding restriction, known as the Hyde Amendment, would only apply to the expanded health center funding in fiscal year 2016 and fiscal year 2017.
While this is important policy, it is also longstanding and non-controversial. As a matter of fact, the Hyde Amendment is widely supported by the American people. It has won approval on both sides of the aisle for nearly 40 years, and has been attached to every federal appropriations bill for the Department of Health and Human Services since 1976.
Fix the SGR With A Real Down Payment for Medicare Reform
In this deal, the “means-testing” and Medigap changes are timid and do not go far enough. More robust structural reforms are well documented and have bipartisan support. Here’s what’s missing: First, combine Medicare Part A and Part B, create a single deductible and add a catastrophic benefit. CBO says that the 10-year savings of such a set of positive changes would amount to $111 billion. Second, gradually update the age of eligibility to 68, or at least 67, tracking the change in Social Security eligibility. CBO says that change would yield $63.5 billion by 2023. Third, replace Medicare Advantage’s flawed payment system with real, market-based competitive bidding that would intensify price competition among health plans. When President Obama introduced that budget proposal in 2009, the Office of Management and Budget (OMB) estimated that it would generate a 10-year savings of $175 billion.
These changes would not only improve the current Medicare program, they would easily finance replacement of the flawed SGR, and lay the groundwork for real Medicare reform, based on “premium support.” In comparison, as Medicare “reform” efforts go, the Boehner-Pelosi deal is a drop in the bucket in the face of the ocean of fiscal problems facing Medicare.
The sentence, “The drawdown on general revenues to finance Medicare Part B will accelerate, and the income taxes needed to fund these transfers for Part B are projected to grow from 13.8 percent to 30.6 percent by 2080,” was corrected to reflect that the year was 2080, not 1980.
