The Reckoning

The law slows the reimbursement increases that Medicare offers hospitals each year, makes substantial cuts in special payments to safety-net providers, and establishes a board of experts with the authority to change payment formulas if Medicare spending grows faster than the GDP plus 1 percent, a historically low rate of growth. It also slashes subsidies to private insurers that participate in the alternative Medicare Advantage program. Those cuts enabled the Congressional Budget Office to score the law as a money saver and spurred the Medicare trustees to estimate that the law gives the program eight more years of solvency. Critics, including Medicare’s chief actuary, say that the assumptions about Medicare cost savings are unrealistic.

On Medicaid, the president has endorsed a massive expansion of the program as part of the law’s larger plan to achieve universal health coverage. Beginning in 2014, Medicaid could grow to cover all individuals earning up to 133 percent of the federal poverty line—about 17 million more people in total, assuming that every state signs on. Although the federal government will initially pick up the tab for the new patients, the change will be a massive undertaking for most states, many of which currently bar coverage for many nondisabled adults. Over time, the program is likely to shift more costs to state governments that are already feeling the budget pinch from rapidly rising Medicaid bills.

Still, the president has recently acknowledged that the reforms in the Affordable Care Act may not be enough to address persistently high budget deficits. In his fiscal 2013 budget, Obama proposed a series of additional cuts, including reductions in the prices paid to drug companies for certain patients, increases in co-payments for home health services, and fees on supplemental health insurance purchased by seniors to cover certain costs. He says that his proposals would save more than $300 billion over 10 years. Obama was also reported to have considered supporting an increase in the Medicare eligibility age during debt-ceiling negotiations with House Speaker John Boehner last year, although he has never endorsed that policy publicly.

ROMNEY’S VISION

Romney’s reforms are rooted in the philosophy that competition will do more to lower health care costs than government oversight and price controls. Instead of squeezing Medicare from within, he proposes to remake it as a private voucher program where seniors shop around for coverage that best suits their needs. The Romney plan would preserve the traditional fee-for-service system as one of the options and would use its benefits package as the benchmark for competing plans. But Romney would not guarantee that the government program would remain affordable for all seniors. His campaign has said that the size of the voucher would be determined through competitive bidding.

The most recent Medicare proposal from Ryan and Sen. Ron Wyden, D-Ore., would set a fixed growth target for the voucher, one quite similar to the rate sought by the independent board that is part of Obama’s health care law. The Romney camp, however, has been vague about whether it would follow this approach or use yearly bidding to set the voucher’s value. Because health care inflation is typically much higher than growth in the overall economy, annual bidding would mean a more generous benefit over time; a fixed target could shift more costs to seniors. The latter would reduce the budget more, but the former is likely to play better, politically.

Romney would slowly raise the eligibility age by indexing it to increasing longevity in the population. He would also subject Medicare benefits to a means test, so that wealthier seniors might get a skimpier voucher and have to spend more of their own money for their coverage.

For Medicaid, too, he would promote big changes. Instead of the current system, where the federal government and states split the cost of each medical claim and the federal government sets many of the rules for eligibility and benefits, Romney would convert the program into a block grant. States would get a lump sum and permission to organize their program as they wish. The grant would increase by a fixed target of GDP growth plus 1 percent.

That would be a strict diet for Medicaid, which has grown rapidly—especially in recent years, when the economic downturn has thrown more people into poverty. A recent report from the National Governors Association found that state Medicaid spending had risen at twice the rate of education spending in the past 10 years—and by 20 percent in the last year alone.

Romney has said that a block-grant system would give states more flexibility to innovate and more incentive to design efficient, fraud-free programs. “Let states care for their own people in the way they think best,” he said in a speech in June. Some states have welcomed the idea of reduced federal control. But critics say that Romney’s program couldn’t keep pace with the increased enrollment that comes as the result of demographic changes or recession and could result in slashed benefits.

POLITICAL CALCULATIONS

On Social Security, both candidates are rather vague, but they appear to be fairly close in their thinking. Unlike President George W. Bush, Romney has not endorsed a privatized approach to the pension program. Obama and Romney have said they would be open to raising the retirement age, which is already on a slow climb to 67. Both also say that richer beneficiaries should get less from the system, although they differ slightly in how they would accomplish that: Romney has said that wealthier seniors should get smaller benefits; Obama has indicated that he might like higher earners to pay more into the system. Neither has spelled out specifics.

Entitlement reform, whether it involves Social Security or Medicare, poses political challenges for any candidate. On one hand, neither Obama nor Romney wants to appear cavalier about the prospect of entitlement programs consuming an ever-larger share of the federal budget, driving up deficits, and crowding out spending on other programs. On the other hand, specific plans can scare seniors and offer targets of opportunity for opponents.

 Entitlement reform is likely to be an issue where each candidate will try to score points by accusing his rival of advocating a cure that is worse than the disease—particularly for older Americans. 

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