Don’t Let Budget Cuts Wreck Medicare Reform

Congressional House leaders plan legislation this year to tackle deficits by curbing entitlements, just weeks after digging a deeper deficit hole with a tax plan that will add an estimated $1.5 trillion to the national debt over the next 10 years.

Entitlement reform is certainly needed. Even before the tax legislation, the Congressional Budget Office (CBO) forecast a major rise in federal deficits, from 2.9% of gross domestic product (GDP) in 2017 to nearly 10% within 30 years. Over that period, says the CBO, health spending, and in particular Medicare, will be one of the largest drivers of spending.

With an eye on their voter base, Republicans in Congress seem poised to cut Medicaid rather than focus on reforming Medicare. That’s a mistake. Although changes in Medicaid are needed to stabilize and improve that program, Medicare is the bigger fiscal problem. And it also requires important reforms.

Congress needs to address Medicare in at least 3 ways, and certain changes could even win some bipartisan support.

The Affordable Care Act (ACA) established a formula cap on Medicare spending, related to medical inflation and economic growth, and created an automatic procedure to enforce that cap by using an appointed body called the Independent Payment Advisory Board (IPAB). Medicare’s trustees expect the procedure to be triggered by 2021. The House has already voted to eliminate the IPAB as part of its attempted ACA repeal, but jettisoning the IPAB could add another $17.5 billion to deficits over the next decade. So, if Republicans want to avoid actually expanding spending on a major entitlement, they must keep an effective version of the IPAB in place and ideally tighten the ACA’s growth rate formula.

Congress should also strengthen earlier legislation that took some steps to reduce the unfunded cost of Medicare benefits that is constantly being passed on to future generations. According to projections by C. Eugene Steuerle, PhD, and Caleb Quakenbush, MS, at the Urban Institute, current and future retirees will receive substantially higher benefits than the taxes and premiums they will pay, in “present value” terms (that is, adjusted for the time value of money). Since 2007, retirees who are more affluent must pay increased premiums for Medicare Part B (which covers physician visits, outpatient and preventive services, and some home health visits), which trims the transfer for these retirees. The ACA further reduced the net transfer for more affluent households by adding a surcharge to the Medicare payroll tax for high earners. Significantly, the surcharge was not one of the “Obamacare taxes” repealed in the tax reform legislation.

To help tackle the deficit, Congress should continue to adjust Medicare contributions according to income by increasing the proportion of Part B (physician) and D (drug) costs that the most affluent seniors pay as premiums, beyond the current 80%. That’s a change both parsimonious conservatives and redistributionist progressives should be able to support.

Medicare Advantage (MA) plans, through which beneficiaries can enroll in a private health plan that offers Part A (inpatient hospital) and Part B benefits for a fixed premium (often with additional services), have been growing in popularity. Some 33% of beneficiaries (and roughly half of new enrollees) chose them in 2017 and a projected 41% will do so by 2027. These plans are attractive to many beneficiaries because they provide comprehensive, and often integrated, services at a predictable total cost to enrollees. With payments to plans based on an area benchmark, which is then risk-adjusted for expected enrollee costs, MA plans also have an incentive to look for ways to offer premiums and organize services that improve efficiency while maintaining quality.

Although MA plans have attracted bipartisan support during their history, recent Republican Medicare proposals have threatened potential agreement on encouraging more rapid MA growth. In particular, a premium support proposal by House Speaker Paul Ryan (R, Wisconsin) and others was attacked by Democrats as potentially undermining traditional fee-for-service (FFS) Medicare by placing new enrollees into MA plans with premium support plans. Under premium support, the government pays a limited amount on behalf of each Medicare beneficiary deciding to enroll in MA, who then chooses from among competing private plans.

Congress could boost MA enrollment and gain broader backing for premium support by considering ideas that have traction outside Republican circles. For instance, to address concerns with the premium support idea they pioneered, including the difficulty many seniors have in choosing between managed care plans, economists Henry Aaron, PhD, and Robert Reischauer, PhD, argue that a firm commitment to maintaining affordable FFS Medicare is needed. They go on to argue for a single, simplified insurance structure for FFS, and for consolidating Parts A, B, and D into a single insurance system. Meanwhile, economist Alice Rivlin, PhD, argues that using an ACA-style exchange and an improved version of competitive premium bidding would permit a workable form of premium support to be extended to FFS insurance.

A third important reform would be to enable Medicare to emulate Medicaid in exploring ways to use its funds to invest in nonmedical services, such as social services and safer housing, that can improve quality of life while reducing illness and costly hospitalizations. Medicaid has led the way in allowing funds to be used for such “social determinants.” This is in part because Medicaid’s federal-state design encourages states to integrate health and other services to find ways to save money, and also because the federal 1115 waiver program permits such experimentation.

A way to encourage states to propose similar cross-sector experiments in Medicare would be through a new Medicare waiver program. The federal waiver would allow states to share in the net savings to Medicare resulting from a state initiative. In addition, Medicare could authorize MA plans greater discretion to use premium revenue for social determinants, as is the case with Medicaid managed care organizations. A good start would be to launch experiments that more easily allow plans to integrate long-term supports and services with medical care.

Still, achieving reforms of Medicare in a Congress focused on curbing entitlements will not be easy, even if some reforms appeal to both sides. Medicare waivers to explore social determinants likely will not reduce deficits in the near term, even if they improve the health of beneficiaries. Moreover, most Democratic supporters of MA expansion and other reforms see these as ways to improve Medicare, not as instruments to cut the program. Thus, the challenge will be to avoid creating so much bad blood during the debate over Medicare spending that the opportunity for bipartisan program reform is lost.

Corresponding Author: Stuart M. Butler, PhD (smbutler@brookings.edu).

Published Online: February 2, 2018, at https://newsatjama.jama.com/category/the-jama-forum/.

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