The Reckoning

“My own deficit plan would strengthen Medicare and Medicaid for the long haul by slowing the growth of health care costs—not shifting them to seniors and vulnerable families,” Obama said last week in a speech on the economy.

The law includes pilot and incentive programs to move Medicare payments away from the current model, where doctors and hospitals are paid for every service they offer, to one that rewards providers for keeping patients healthy at low cost. But it also includes some budget cuts and payment ceilings that will theoretically slow spending even if the experiments don’t work.

On the goodies side, the law expands certain benefits for seniors. Over time, it closes the so-called doughnut hole, the gap in coverage that obliges seniors to pay out of pocket for prescription drugs. It requires insurers to cover a set of preventive services without co-payments. And it creates a system of tax credits to help non-elderly middle-income Americans buy private plans.

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 gross domestic product 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.

In 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 will grow to cover all individuals earning up to 133 percent of the federal poverty line—about 16 million more people in total. 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 while negotiating with House Speaker John Boehner during debt-ceiling negotiations 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 pay out 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 gross domestic product 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.