Budget ax hovers over Washington

Put the president’s health care law aside, at least for now. Temporarily forget that the nation just went through the government shutdown ordeal. Get ready for the next crisis. It’s already on its way.

Democratic and Republican lawmakers on Capitol Hill have until December 13 to reach an agreement to fix the nation’s budget woes. Senate Budget Committee Chairman Patty Murray, D-Wash., and House Budget Committee Chairman Paul Ryan, R-Wis., are coordinating a 29-member panel to reach consensus by that time.

In short, the outlines of the problem remain the same as they have for the past years – any agreement will require a difficult tradeoff. Republicans must give in on higher tax revenues for wealthy individuals and corporations in exchange for Democrats giving in on reductions in Medicare, Medicaid and Social Security.

The facts are daunting – ten years from now, the U.S. government will be spending $4 on entitlements for every dollar it spends on all other domestic functions, such as scientific research and law enforcement, according to Congressional Budget Office (CBO) data. Yet the federal debt would still be about 70 percent of gross domestic product and poised to climb. In a nutshell, Americans getting older and the costs to keep them healthy will overwhelm all other financial considerations if some changes in direction are not made.

Medicare

Medicare currently accounts for 16 percent of the federal budget, according to the CBO. That currently covers about 50 million elderly and disabled beneficiaries. But that enrollment figure is expected to hit 80 million by 2030, which makes Medicare a key part of the budget deliberations.

Both Democrats and Republicans have agreed on some Medicare changes during previous budget discussions and several key areas involving Medicare seem to be in play as budget negotiators try to find middle ground. One political reality must be understood. Some entitlement reforms — such as higher Medicare premiums for upper-income recipients — can be cast as either spending cuts or revenue increases, depending on your partisan needs. So how things are resolved can depend on how you view things.

There is some agreement among both parties that wealthier beneficiaries should pay more for their Medicare. Current law already requires people with incomes over $85,000 ($170,000 for couples) to pay a larger share of Medicare Part B, the outpatient services including doctor visits and lab services, and also for Part D, prescription drug premiums. Most beneficiaries now pay 25 percent of Part B premiums while higher income folks pay between 35 percent to 80 percent depending on income.

In President Obama’s 2014 budget proposal, the administration suggests increasing the range of premiums for higher income beneficiaries to between 40 percent and 90 percent. His plan would also freeze the income thresholds for those higher premiums until a quarter of beneficiaries paid them as a result of inflation pushing more recipients into those income levels. Thus, people whose incomes are more modest would pay more for Medicare.

While this proposal comes from the Obama administration, a 2012 analysis of the plan by the Kaiser Family Foundation found that if it had gone into place that year, people with incomes at or about $47,000 ($94,000 for couples) would be paying higher premiums.

Medigap plans

Another area being discussed involves medigap plans – supplemental insurance policies sold by private companies, which help pay some of the health care costs that original Medicare doesn’t cover like copayments, coinsurance and deductibles. Seniors rely on these plans to shield them from unanticipated costs and both Republicans and Democrats agree to discourage the use of “first-dollar” Medicare supplemental policies.

Under Obama’s budget plan, beginning in 2017, new Medicare beneficiaries who purchase more generous medigap plans would face a surcharge of approximately 15 percent of the average medigap premium. Many Republicans support this idea and House Budget Chairman Ryan argues that medigap premiums could be overhauled to “encourage efficiency and reduce costs.”

Co-pays

Another discussion area involves higher co-pays for seniors. For new Medicare enrollees, starting in 2017, the Obama budget plan proposes making those folks pay a higher deductible and also cover a new copayment for home health services. The Obama folks suggest these changes would “strengthen program financing,” but advocates for the elderly counter that these would be additional costs to people already on fixed incomes. In 2012, almost half of Medicare beneficiaries had annual incomes below $22,500. Republicans also seem open to these ideas.

Eligibility age and premium support

Some of the sharpest disagreements are over Republican proposals for “premium support” and efforts to increase Medicare’s eligibility age. Ryan’s fiscal 2014 budget proposal includes both a gradual increase in the Medicare eligibility age from 65 to 67 as well as giving beneficiaries a set amount of money to select coverage from private plans featured in a Medicare “exchange” that would include traditional Medicare as well as private plans.

Ryan’s plan would apply only to individuals now 54 and younger, beginning when they enter Medicare 11 years from now. House Republicans have repeatedly supported this idea, but for Democrats it is simply a non-starter.

Drug rebates

Drug rebates is another area where there is strong support and even stronger opposition. The biggest amount of savings in President Obama’s proposed budget – $123 billion over a decade – comes from changing drug costs for about 11 million low-income Medicare beneficiaries. About 9 million of them are what are known as “dual eligible,” because they qualify for both Medicare and Medicaid.

These dual eligibles used to get drug coverage from Medicaid, the shared federal-state health program for the poor and disabled. Drug makers would return part of the costs of drugs for those folks to Medicaid as rebates, just as they do now for current Medicaid beneficiaries.

But when lawmakers created the Medicare Part D prescription drug program a few years ago, the drug coverage for duals shifted to Medicare. The rebates that Medicare Part D receives are not as generous as those paid to Medicaid. Medicare Part D also pays higher prices for drugs than Medicaid does. So the administration’s proposal would require drug makers to pay the difference between rebate levels they now provide to Part D plans and the Medicaid rebate levels.

But this idea is not likely to get very far, given the strong opposition from the powerful Pharmaceutical Research and Manufacturers of America drug lobby. They argue this rebate proposal would increase beneficiary premiums and copays. With Congress facing re-election in the next year, ticking off Big Pharma is not something many lawmakers, eager for campaign contributions, are likely to push for.

Provider cuts

Provider cuts is the other key idea being floated. When Congress moves to reduce Medicare spending, it usually starts by lowering reimbursement levels to the hospitals and other providers that care for Medicare beneficiaries.

Under the Affordable Care Act, providers are already facing more than $700 billion of cuts, plus an additional 2 percent as part of the automatic spending cuts known as sequestration. Lawmakers are expected to consider additional cuts but they also are looking for ways to avoid a scheduled 25 percent cut in Medicare physician payments scheduled for January 1 unless Congress intervenes. Known as the “doc fix,” this has come up annually since a 1997 budget agreement and has become a yearly ritual on Capitol Hill, leading to doctors’ frustration with the system and a growing budget problem because each deferral increases the size and price tag of the next fix.

Recently, in a rare spirit of bipartisan cooperation, lawmakers from the House Ways and Means and Senate Finance Committees came together with a proposal to replace the Medicare payment formula for physician reimbursement with one that would link that reimbursement to the quality of care provided.

While it’s only in the draft stages, it would make a historic shift in doctor payments, moving doctors from the traditional system in which they are paid for volume, and instead use financial incentives to encourage them to move to payment models that emphasize quality of care. These include accountable care organizations, in which doctors and hospitals work together to reduce the cost of care for patients and share in those savings.

Social Security

One major point of contention in the budget debate will be over the Obama administration’s proposal to change the cost-of-living allowance for Social Security recipients, which is calculated to what is called the chained consumer price index or chained CPI.

This idea was floated a few years ago when lawmakers were considering all kinds of different budget ideas. It also was discussed when the presidential commission chaired by former Wyoming Republican Sen. Alan Simpson and former Clinton White House Chief of Staff Erskine Bowles looked at options.

In his 2014 budget, President Obama proposed to change how Social Security benefits are adjusted for inflation, which would result in a reduction in anticipated cost of living increases. Social Security benefits, unlike virtually all annuities, are adjusted every year to keep pace with inflation as measured by the Consumer Price Index. As a result, benefits are always increasing – a great value to seniors, but also a big strain on the federal budget.

The chained CPI is a remodeled Consumer Price Index based on the idea that when prices rise, consumers will shop around and cut their spending. As a result, if the chained CPI is used to calculate Social Security cost-of-living adjustments, they won’t go up as much each year.

Lately, with inflation low, the annual cost of living adjustment (COLA) has been smaller. While switching to the chained CPI might not seem like a big deal to most seniors, it will have a big impact on people in their 40s and 50s. Their benefits will lag appreciably behind the real inflation rate by the time they are old enough to collect.

Not surprisingly, virtually all senior groups and senior advocates are opposed to the chained CPI. AARP, for example, says it inaccurately reflects the consumer behavior of seniors, and it would hurt older Americans who are already living on budgets stretched to the limit by the cost of prescriptions, utilities, health care and other necessities. Seniors, they argue, should not see their earned benefits as bargaining chips in a budget debate – especially when Social Security doesn’t contribute to the deficit.

Also contributing to this column were Kaiser Health News, the Washington Post, the New York Times and the Los Angeles Times.