Health Spending and the “Supercommittee”: Seven Items from President Obama that Republicans And Democrats Should Embrace

Key Points:

  • Congress has a unique opportunity to make a clean cut in government health spending by Christmas.
  • President Obama’s deficit-reducing proposal contains seven items that shift Medicare and Medicaid spending closer to the people.
  • Although these items represent a small fraction of President Obama’s deficit-reducing proposal, they offer the first opportunity for both parties to agree on introducing consumer-direction into Medicare and (indirectly) to Medicaid.

Less than a month remains before the Joint Select Committee on Deficit Reduction, popularly known as the Supercommittee, must submit a bill to Congress that will cut the deficit by at least $1.2 trillion in ten years. By design, everything is on the table—which might explain why the process appears to be tipping over, like a Christmas tree weighed down with too many ornaments.

The Supercommittee was formed by the Budget Control Act signed on August 2, 2011. It comprises twelve members: three each of Democratic Senators, Republican Senators, Democratic Congressmen, and Republican Congressmen. The Supercommittee only has one chance: It can bring forth only one bill, and must do so by November 23.

Although details are murky, it was reported (at time of writing) that the Supercommittee’s Democrats have proposed $600 billion in savings from Medicare, Medicaid, and other health spending, while Republicans have proposed $800 billion of cuts to health spending, as well as increased revenue of $640, some of which is scheduled to come from higher health-care premiums. Each side rejects the other’s proposal.1

And the Supercommittee is not just about health spending. It’s about everything, including the hot-button issue of national defense. Plus, Congress then has to vote the bill up or down by December 23! What are the chances that a comprehensive bill will be read and understood by the legislators who vote on it? Recall Obamacare, which was signed in March 2010 and still riddled with unexploded munitions.

Nevertheless, there is some hope if they keep it simple. Although the Supercommittee can report only one bill, it does not have to cut the entire $1.2 trillion. If the bill cuts only $500 billion, for example, the remaining $700 billion will be cut through automatic “sequestration”. If the Supercommittee fails to report any bill, or the Congress votes it down, the entire $1.2 trillion will be sequestered.

However, when it comes to health care, sequestration will not be too painful. Medicaid, the joint federal-state program for low-income residents, is exempt; and most of Medicare, the federal program for seniors, is limited to cuts of two percent annually.2 Table 1 shows estimated Medicare spending over the period, before and after sequestration.

However, it is highly unlikely that a failed Supercommittee will lead to sequestration of even two percent of Medicare. Instead, it will lead to yet another midnight panic, as Congress rushes through a bill to “fix” payments to hospitals, which are already spreading stories about how they will deny care to Medicare patients if their reimbursements are cut. Congress has never allowed scheduled cuts to physicians’ fees to take place, and always panicked at the last minute to kick the can of Medicare physician-payment down the road for a few months.3

Eliminating—once again—the scheduled cuts to Medicare’s physicians’ fees will cost $12 billion in 2012, $19 billion in 2013, and gradually increase to $59 billion in 2021 (including related interest costs).4 The new Medicare sequestration is estimated to be just $11 billion in 2013, and grow to $17 billion in 2021.5 That is, the sequestration is just over half the size of the “doc fix” in 2013, and less than one third of it in 2021. Given the relative amounts, it is highly likely that Congress will “fix” (that is, eliminate) the sequestration alongside the physicians’ fees. So, allowing the Supercommittee to fail is unlikely to result in any health reform at all.

Only President Obama has publicly disclosed a deficit-reducing proposal that has been scored. The President’s proposal cuts a total of $328 billion from federal health spending (on civilians) over the period, of which $224 billion are further cuts to Medicare providers, $24 billion are structural reforms to Medicare, and $81 billion are cuts to Medicaid and public health.6

Unfortunately, most of the President’s proposals are based on the same flawed thinking that got us into this mess: Faith in the federal government’s ability to determine how much to pay for each medical item or service consumed by Medicare or Medicaid dependents. For example, the president proposes to re-jig the formulas for adjusting payments to rural hospitals, skilled nursing facilities (SNFs), long-term-care hospitals (LTCHs), and inpatient-rehabilitation facilities (IRFs). He also wants to impose more government control over prices for medicines prescribed to so-called “dual eligibles” (individuals enrolled in both Medicare and Medicaid), and increase bureaucratic interference in patients’ access to advanced imaging services.

A core fallacy of central planning is that the government has the information and incentives to correctly determine the prices and volumes of goods and services available to the people. For the Supercommittee and Congress to vote on this grab-bag in a straight up or down vote before Christmas would be irresponsible. Furthermore, when the almost certain “doc fix” is added to the mix, the amount of money saved dwindles to near insignificance (as shown in Table 1).

Nevertheless, the President’s proposal also contains something entirely new to his thinking on health policy: The idea that if patients control more of their own health spending, they will consume more prudently. Table 2 lays out these proposals, as well as the President’s score for each of them.

The President has proposed seven reforms which can be described as “consumer-driven”:

1. Reducing Medicare’s coverage of bad debts. Medicare generally reimburses 70 percent of providers’ bad debts. Reducing this to 25 percent will motivate providers to know their patients’ financial situations better, because they will be at greater risk. This is likely to improve price transparency.

2. Increase income-related premiums under Medicare Parts B and D. Medicare beneficiaries currently pay higher premiums for Medicare Parts B and D. The President proposes to increase these. This is little more than an increase in marginal income taxes. However, a slight transformation would achieve consumer-direction by increasing deductibles and co-pays, instead of premiums, for higher-income beneficiaries. An earlier Health Policy Prescription describes how to achieve equivalence with this alternative reform.7

3. Modify Part B deductibles for new beneficiaries. To ensure patients make better choices, the President proposes to increase the Part B deductible by $25 in 2017, 2019 and 2021.

4. Introduce home health co-payments for new beneficiaries. The President proposes to levy a co-pay of $100 on beneficiaries who use five (or more) home-health visits, unless preceded by hospitalization or similar inpatient stay.

5. Introduce a Part B premium surcharge for new beneficiaries that purchase near first-dollar Medigap coverage. The President proposes to levy a surcharge of about 30 percent on the Part B premium for patients who buy Medigap coverage that covers Medicare spending from the first dollar. Such policies reduce patients’ sensitivity to health costs.

6. Apply a single matching rate to Medicaid and CHIP. Currently, federal matching funds for CHIP (Children’s Health Insurance Programs) are higher than for Medicaid. The President proposes to meld these rates. Although not strictly a “consumer-driven” reform, this will motivate states to be more creative in using limited funds.

7. Reduce the Medicaid provider tax threshold. Hospitals and other providers collaborate with states to artificially increase federal matching funds by levying a provider tax that flows right back into Medicaid while grabbing federal funds en route. The President proposes to limit this abuse. As above, reducing this threshold will motivate states to be more creative in using limited funds.

As described in Table 2, these reforms will not save much money initially. One way to increase savings would be to accelerate the reforms: Start them in 2013, not 2017, as many do. However, it is also likely that the President’s own “score” does not adequately account for consumers’ response to higher out-of-pocket costs: Overall Medicare costs will drop.

Something is better than nothing, which is the likely result of allowing the Supercommittee to fail. Most important, by voting for President Obama’s seven proposals to increase consumer-direction in Medicare, both parties will have collaborated in a very important development: For the first time, Democrats and Republicans will have agreed that giving patients more control of health dollars is good reform.


1 Andrew Stiles, “The Supercommittee’s Dueling Budgets,” National Review Online (October 27, 2011). Available at

2 Estimated Impact of Automatic Budget Enforcement Procedures Specified in the Budget Control Act (Washington, DC: Congressional Budget Office, September 12, 2011), p. 6.

3 John R. Graham, “Mission Impossible: Medicare’s Independent Payment Advisory Board,” Health Policy Prescriptions, Volume 9, Number 5 (San Francisco, CA: Pacific Research Institute, May 2011), p. 3.

4 The Budget and Economic Outlook: An Update, (Washington, DC: Congressional Budget Office, August 2011), p. 26.

5 Estimated Impact of Automatic Enforcement Procedures Specified in the Budget Control Act (Congressional Budget Office, September 12, 2011), p. 8.

6 Living Within Our Means and Investing in the Future (Washington, DC: Office of Management and Budget, September 2011), p. 61-62. There appears to be an arithmetic (or typographic) error in the President’s calculations. Table S-5 reports savings of $320 billion, but my recalculation of the line items results in a sum of $328 billion. Specifically, there is a $2 billion error for 2014, a $4 billion error for 2015, and another $2 billion error for 2016. The calculations are available at

7 John R. Graham, “Medicare Means Testing: Test the Deductible, Not the Premium,” Health Policy Prescriptions, Volume 6, Number 6 (San Francisco, CA: Pacific Research Institute, June 2008).

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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