The Moment of Truth for Medicare

Traditionally this is the season when we look forward to the giving and receiving of gifts. But maybe we’ll look at things differently this year … because on Wednesday, according to The National Commission on Fiscal Responsibility and Reform we reached “The Moment of Truth.”

Eight months after being charged with meeting President Obama’s instruction to come up with a plan to balance the federal budget by 2015, the Presidential Commission delivered its report.

The report contains recommendations as to how the U.S. should address the budget deficit. And it’s not pretty. The recommendations require tough choices and challenged the commission to face its own “Moment of Truth.”

The preamble to the commission’s report starts:

“Throughout our nation’s history, Americans have found the courage to do right by our children’s future. Deep down, every American knows we face a moment of truth once again.

“We cannot play games or put off hard choices any longer. Without regard to party, we have a patriotic duty to keep the promise of America to give our children and grandchildren a better life.”

Today, I’d like to go over one of the most far-reaching areas of reform the committee addressed.

And that is …

The Sensitive Subject
of Medicare

Medicare, as a part of the overall federal health care expense, was targeted by the presidential commission as one of the six areas for reform required to balance the federal budget and reduce the deficit.

The report stated that the Federal government will spend $738 billion on health care in 2010. Of this an expected $519 billion will be spent on Medicare according to the independent Kaiser Foundation.

The commission’s projection is that, without any action, the cost of health care to the federal budget will be $11.1 trillion 2011-2020. That is a frightening 5.8 percent of GDP. In 2020 alone it is projected to represent 6.6 percent of GDP.

This is a crisis of national importance and threatens our national security as our debt continues to be bought by other countries, most notably China. In fact, as of September 30, China owned more than $1 trillion of U.S. debt, according to the Treasury. That represents 23.9 percent of the total foreign holdings of U.S. Treasury securities.*

The commission’s deficit reduction plan includes health care cost containment. It says the plan will address the “phantom savings from scheduled Medicare reimbursement cuts that will never materialize.”

It appears critical of the recent health care legislation and the August 2010 report of the Trustees of the Medicare Trust funds report. Additional doubt is cast on the CBO assumptions.

The plan proposes what it calls “real, common-sense reforms to physician payments, cost-sharing, malpractice law, prescription drug costs, government-subsidized medical education, and other sources.”

Additionally the plan includes long-term measures to address uncontrolled health care spending growth.

So what effect would the commission’s plan have on the deficit?

The total for health care reforms is a reduction of $341 billion between 2012 and 2020. This represents 8.3 percent of the total savings under the proposed deficit plan.

That might not appear to represent a significant amount. However, the commission sees Federal health care spending representing “the single largest fiscal challenge over the long-run.”

The commission also points out that the CBO projections for Federal health care spending (including the proposed health insurance exchange subsidies) will rise to 10 percent of GDP by 2035 with no sign of that rate dropping. Yet it sees this projection as CONSERVATIVE because of the “phantom savings” included.

The bottom line is that after implementation of the plan, the existing 5 percent of GDP being spent on health care will still rise to 6.3 percent by 2020 … an enormous $10.8 TRILLION DOLLARS over eight years!

The Six Parts of the Commission’s
Plan for Medicare Reform Through 2020

Part #1—
Reform the Medicare Sustainable
Growth Rate ($26 Billion Savings)

Freezing physician pay reductions through 2013 and a one percent cut in 2014. Additionally it recommends developing a new pay formula based on care coordination and quality instead of quantity of services.

Part #2—
Reform or Repeal the
CLASS Act ($76 Billion Cost)

The attempt as part of the health care overhaul to address the need for residential long-term care through a voluntary insurance program is criticized as financially unsustainable under its current format.

The recommendation is for complete overhaul or repeal (the preferred option) even with a price to be paid. This is because the collection of premiums over the first five years would have provided positive cash flow.

Part #3—
Medicare and Other Health Care Revisions
for 2012-2020 ($316 Billion Savings)

The commission proposes the following:

• $9 billion in waste, fraud and abuse will be saved by increasing the authority and resources of the Centers for Medicare & Medicaid Services (CMS).

• $110 billion by introducing a simple annual deductible of $550 for Part A and Part B and 20 percent Medicare co-pays, with a cap of $7,500.

• $38 billion through Medigap supplemental insurance reform. Eliminating coverage for the first $500 and restricting coverage to 50 percent of the next $5,000 in cost sharing. As a stretch into dangerous political territory the commission recommends the same treatment for Tricare (military version of Medicare) and federal retirees.

• $49 billion from treating Medicaid drug rebates in the same way as Medicare for those eligible for both programs.

• $60 billion by reducing excess payments to teaching hospitals to 120 percent of the national average salary for residents.

• $23 billion from ceasing payment for unpaid Medicare deductibles and co-pays.

• $9 billion by bringing forward, by two years, plans to change reimbursements for home health providers.

• $18 billion by introducing a change in the Federal Employee Health Benefit program and providing a fixed subsidy. The commission also recommends evaluation of the program to determine, based on the experience with FEHB reform, whether a voucher system could work for Medicare.

Part #4—
Aggressive Implementation and
Expansion of Payment Reform Pilots

The commission sees opportunities to expand programs aggressively where there is evidence of cost control, without need for additional Congressional approval. Note that this expansion will not be at the cost of providing quality care.

Part #5—
Eliminate Provider Carve-Outs from IPAB

This recommendation allows the Independent Payment Advisory Board (IPAB) to include provider groups, such as hospitals, within its authority to recommend changes in revised payment policies.

Part #6—
Establish a Long-Term Global Budget
for Total Health Care Spending

This requires establishing a total federal health care budget and limiting growth to GDP plus 1 percent with a process to review spending. It additionally requires structural reforms if the spending exceeds the targets.

The commission also said that if spending continues to grow, tax benefits for employer provided health insurance should be eliminated.

As a bi-partisan commission, its messages have appropriately stirred up both the right and the left. The commission recognizes that fact.

Now it’s time for hard decisions. As the saying goes “failure is not an option.” The report states:

“In the weeks and months to come, countless advocacy groups and special interests will try mightily through expensive, dramatic, and heart-wrenching media assaults to exempt themselves from shared sacrifice and common purpose.

“The national interest, not special interests, must prevail. We urge leaders and citizens with principled concerns about any of our recommendations to follow what we call the Becerra Rule: Don’t shoot down an idea without offering a better idea in its place.”

I think that pain shared by us all is preferable to the collapse of the U.S. economy. This is our chance to contribute to not only our future, but the future of our children and grandchildren.

Undoubtedly we, as individuals, would prefer to not have to see Medicare costs rise. But if reducing the budget deficit results in us having to make a larger contribution to Medicare, isn’t that a reasonable price to pay?

Whether Congress will put aside politics and seriously consider implementing the recommendations is another story — they’re not under any obligation to do so. But sooner or the later points brought up in the report will surface again. And they can’t kick the can down the road much longer.

Happy Holidays,

Gavin

P.S. This week on Money and Markets TV, Weiss Research analysts discussed a topic that’s on people’s minds this holiday season: Technology. Tech devices top many wish lists, and tech stocks are among the hottest buys in the market.

If you missed Thursday night’s episode of Money and Markets TV — or would like to see it again at your convenience — it’s now available at www.weissmoneynetwork.com.

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* Amended for clarity, 12-7-10