The federal government’s unsustainable long-run fiscal picture has been outlined in successive versions of the Congressional Budget Office’s Long-Term Budget Outlook.  The policy problem is that spending rises above any reasonable level of taxation for the indefinite future.  As it currently stands, committed federal expenditures are expected to grow from 20 percent of gross domestic product (GDP) to 30-40 percent of GDP in the coming decades. This diagnosis leads to the prescription for action.  Over the long-term, the budget problem is primarily a spending problem and correcting it requires reductions in the growth of large mandatory spending programs – especially health programs – and the appetite for federal outlays.

Last week’s release of the Fiscal Commissions Co-Chairs Proposal by Erskine Bowles and Senator Alan Simpson was their attempt to provide a plan for such action.  The proposal can be best described as a laundry list of potential spending cuts to eventually bring federal expenditures down to 21 percent of GDP. 

While we applaud the Chairs’ initiative and efforts to reduce future federal outlays, we feel their proposals ultimately fail to provide an adequate plan for the fiscal future, especially for the unsustainable rise in federal health care costs.  We believe that the proposals can contribute to the ongoing budget debate, but are not a roadmap.  To help inform the healthcare budget discussion, we outline below the good, the bad, and the ugly policy prescriptions in the co-chairs proposal. 

The Good

  • Enact Comprehensive Tort Reform – Tort reform was arguably the greatest omission in the healthcare reform law.  It should be an immediate starting point for any concerted effort to address the rise in healthcare costs.  A recent study in Health Affairs concluded that medical liability costs contribute $56 billion annually toward total healthcare spending.  The savings from tort reform may be greater given the difficulty in measuring the true cost of defensive medicine.
  • Expand Cost-Sharing in Government Healthcare Programs – Expanding cost sharing in the Medicare, Medicaid, Tricare, and Federal Employee Health Benefits Plans (FEHBP) through increased deductibles and co-pays can save the federal government upwards of $217 billion over the next ten years.  By implementing cost sharing, the Federal government will be introducing better economic incentives for government beneficiaries that would induce them to be better, more informed healthcare consumers.  Cost sharing has expanded dramatically in the private sector, and it is time for government beneficiaries to shoulder a similar burden. 
  • Convert the Federal Share of Medicaid Payments for Long-Term Care Into a Capped Allotment – Long-term care is the ticking time-bomb of the American healthcare system.  This co-chair proposal should be swiftly adopted as retiring baby boomers threaten to dramatically expand the federal cost liability for long-term care.  This recommendation improves incentives by putting the money and accountability in the hands of the states.  It also runs counter to the intent of the health care reform law which established a new, underfunded entitlement program, the Community Living Assistance Services and Supports Act (CLASS Act).  Serious attempts at addressing the future liability of long-term care services should pair a capped allotment on federal Medicaid payments with the full repeal of the CLASS Act.

 The Bad

  • Require Drug Rebate Payments – The competitiveness of America’s pharmaceutical and biotechnology industries is already under siege as a result of the heavy regulatory hand and $27 billion in excise taxes in the Patient Protection and Affordable Care Act (PPACA).  By further soaking these companies for $59 billion in drug rebate payments, the co-chairs proposal threatens to further reduce private sector investment in the research and development of new life-saving drugs.  Furthermore, the penalties imposed by these rebate payments are likely to be directly passed on to consumers through higher drug prices. 
  • Accelerate Phase-in of Disproportionate Share Hospital (DSH) Payment Cuts and Medicare Advantage Cuts in PPACA – Accelerating these payment reductions only expands some of the negative policy outcomes of the healthcare reform law.  
    1. Eliminating the $36 billion in DSH payments at a faster interval will place tremendous stress on the country’s safety-net hospitals, which have been crucial at time of 9.6 percent unemployment.  Many DSH-eligible hospitals are state or municipally owned and already face budget cuts stemming from historic state and municipal budget shortfalls. Furthermore, safety-net hospitals must also prepare for the challenging financial future of operating on a larger share of Medicaid reimbursement after 2014.
    2. Expediting the $136 billion in Medicare Advantage cuts will dramatically impact coverage options for seniors.  The debate over the efficiency and quality of Medicare Advantage remains unsettled among healthcare economists.  Recent analysis shows that the pending Medicare Advantage cuts may disproportionately impact lower-income beneficiaries, Hispanics, and African-Americans.  In addition, they threaten to impose higher Medicaid costs on state and federal governments and may lead to increased spending on prescription drugs by shifting costs to Medicare Part D.  Simply put further research is needed before the Medicare Advantage program is irrevocably harmed.
  • Establish National Standards for Regulating and Administering Health Insurance – This co-chairs’ provision threatens to prevent innovation in health plan design and will likely increase healthcare premiums for consumers.  PPACA took substantial steps toward centralizing national insurance standards with unexpected and costly results.  In an October 2010 survey of 250 Chief Human Resource (HR) Officers, 96 percent of respondents indicated that the new national standards will increase private company healthcare costs.  Furthermore, 79 percent of HR executives expect the new standards to somewhat, or very likely, cause fundamental changes to plan designs.  These design changes have substantial administrative costs and may lead to dropped coverage putting additional financial strain on public insurance programs. 

The Ugly

  • Reform the Sustainable Growth Rate (SGR) – The co-chairs are correct to target the broken SGR for physician reimbursement.  But their proposed fix and estimate of $24 billion in associated savings is overwhelmingly unrealistic.  Unfortunately, the SGR could have been fixed using the $332 billion in Medicare payment reductions from the healthcare reform law.  Instead, the best likely outcome is a permanent fix that secures physician access for Medicare beneficiaries over the long-term.  To do this the federal government is going to need to do more than just reset the SGR, which is estimated to cost $157.3 billion.  Furthermore with an expanding Medicare population and a potential physician shortage, it is extremely unlikely that the SGR will be “fixed” with the proposed 0 percent update through 2020. 
  • Expand Accountable Care Organizations, Payment Bundling, and Other Payment Reforms. Require the Independent Payment Advisory Board (IPAB) to recommend cuts if savings are not realized
    1. Banking on the healthcare reform law’s pilot demonstration programs to deliver cost savings and meaningful debt reduction is unacceptable and fiscally reckless.  At best these programs should be viewed as an added bonus and not the lynch pin of medium to long-term healthcare savings.  The co-chairs estimate $38 billion in ten year savings from these pilot programs, which is based on hopeful academic projections and not Congressional Budget Office (CBO) estimates.  The CBO did not score these projects as budget reduction because they are unproven and difficult to implement across the delivery system.  David Cutler, an Obama healthcare adviser, admitted as much in his June 2010 Health Affairs paper when acknowledged that currently “It takes five to ten years from concept to results”.  While we hope bundled payment and other pilot projects bring about a more efficient payment system with better quality care, the federal government should not pin its hopes on these undemonstrated savings.
    2. Relying on the IPAB to deliver savings is again uncertain and politically dubious.  In the most recent election and in countless public opinion surveys, the American public has clearly demonstrated its concern with centralized oversight of health care delivery. 
  • Add a robust public option and/or single-payer system in the exchange – Often lost in the debate over the public option/single-payer system is the fact that the federal government does not currently possess the administrative or actuarial expertise needed to process healthcare claims.  For instance, claims in the Medicare program are currently processed by outside firms called Medicare Administrative Contractors (MACs).  To run a public option and/or all-payer system, the federal government would need to substantially increase the workforce and technology investment at CMS.  It seems almost hypocritical for the co-chairs to include any reference to a government plan for healthcare when in every other section of their proposal they call for reductions in the federal workforce and private contractors.

Replacing the Healthcare Reform Law is Required to Reach Fiscal Goals

Restoring fiscal balance to the nation’s budget will ultimately require substantial changes to PPACA.  As we noted in our alternative budget analysis for the June 2010 issue of Health Affairs, the health care reform law is likely to generate substantial deficits instead of savings.  Our analysis shows that if even minor budgetary assumptions fail to materialize or prove politically infeasible, the nation will likely be on the hook for budget deficits totaling $562 billion in the first ten years and $1.5 trillion dollars in the second ten years.

The co-chairs proposal essentially endorses the healthcare reform law and doubles down on the law’s uncertain cost cutting provisions.  This is exactly the opposite of what’s needed, which is cost discipline through consumer choice in a functioning healthcare marketplace.

Many of the good provisions in the co-chairs proposal move the country toward a better functioning marketplace.  Unfortunately, the bad and downright ugly provisions in the proposal hold the potential to unravel any progress toward higher quality and lower cost medical care.