US Politics: Beyond the Budget Dispute, A Crisis in Health Care

Politicians have returned to action in Washington after a week-long recess. Their consuming interest is still some compromise that will finally pass a budget for the current Financial Year passed. With the concurring resolutionon Government spending --- the sixth this financial year --- due to end on 8 April and Congress's spring break starting on April 15, time is growing short for an agreement.

So averting a government shutdown is again the primary topic. Adding to the usually fractious tone of these deliberations are signs that the effect of the deadlock is more than symbolic. For example, the uncertainty has led the Social Security Agency to delay the opening of offices designed to cut the backlog in appeals against the refusal of disability claims. This has held up as many as 700,000 applications for Social Security payments. Military leaders are asserting that the current stopgap nature of funding is affecting their ability to implement their plans.

Meanwhile, the broader debates continue. Next Monday, Rep. Paul Ryan (R-Wisconsin) will publish the Republican-proposed budget for 2012. Leaks from anonymous sources in the media indicate that Ryan has managed to include his ideas, put forth in the conservative "Road Map", for reform of government spending on health care. With Democrats opposing Ryan's suggestions, which they claim resemble a 'voucher' system of paying for Medicare and Medicaid, the recommendations of the President's Deficit Reduction Commission (the Bowles-Simpson Commission) may become, by default, the Democratic alternative to Ryan's plans.

The starting point for the debate is that the US spent nearly $2.2 trillion, or $7,400 per person, on health care in 2007. To put that in context, $2.2 trillion is double the total of discretionary spending, which includes defense, in 2010, and itrepresents 16% of America's annual GDP.

Those numbers and percentages have been been rapidly rising in real terms over the last 40 years. The US spent $714 billion on health care in 1990 and $253 billion in 1980; as a share of GDP, health care has increased from 7.2% in 1970 to a projected 20.3% in 2018.

Medicare, Medicaid, and support for children's health care through CHIP account for just under half of that spending --- which means it equals the annual amount for discretionary programs –-- but these are expected to outpace private spending by 2018 as the retiring "baby boomer" generation join the Medicare rolls. Hence Ryan's emphasis on the role of Medicare/Medicaid beneficiaries in becoming individual customers and, through competition for their dollars, helping reverse the historical trend and bring health care costs.

Why are healthcare costs increasing so rapidly? Despite the greed of some pharmaceutical companies, it is not the result of growing costs for prescription drugs. The primary reason is that the US has the wealth to develop, and pay for, new and more expensive hospital- and physician-supplied treatments. Ally this with an ageing population that has more need of those services, and you have the foundation of expanding healthcare costs.

These ever-increasing costs are not just a concern for taxpayers financing Medicare and Medicaid. They have resulted in increases in the cost of private insurance premiums and the level of deductible exemptions, to the extent that families are sacrificing basic health care services as they cannot afford them. A Kaiser Health Tracking Poll found that 35% of respondents had relied on home remedies or over-the-counter drugs rather than visit a doctor for financial reasons. More alarmingly, “one in five (19%) said they experienced serious financial problems due to family medical bills, with 13% using up all or most of their savings, 12% saying they have been contacted by a collection agency, and 7%t reporting being unable to pay for basic necessities like food, heat, or housing.”

But, paradoxically, a reason for the increase in costs of health care provision is that Americans are using more and more health services. Those shielded from the cost by Medicare, Medicaid, or private insurance plans (including employer-provided schemes) are visiting the hospital or physician more than they may need. That is part of the rationale for Ryan's voucher programme: if people are charged on their debit card for receiving a treatment rather than simply getting it for "free", they may be loathe to access that service unless absolutely necessary. As the Bowles-Simpson report explains it, Medicare beneficiaries might not "over-utilise" services if a more uniform and understandable cost-sharing scheme was implemented. Thus, Bowles-Simpson recommends establishing a single “combined annual deductible of $550 for Part A (hospital) and Part B (medical care), along with 20 percent uniform coinsurance on health spending above the deductible. We would also provide catastrophic protection for seniors by reducing the coinsurance rate to 5 percent after costs exceed $5,500 and capping total cost sharing at $7,500.”

To ensure that this disincentive to over-utilise services through cost-sharing is achieved, Bowles-Simpson would prohibit Medicare supplemental insurance, or Medigap, from offering plans that covered the first $500 of an enrollee's cost-sharing liabilities and would limit them to 50% of the individual's next $5,000 part of funding their treatment. This option would not affect those who also qualify for Medicaid, but it would apply to members of TRICARE for Life (Medigap for military retirees)as well as to federal and private employer-covered retirees.

The Bowles-Simpson report also suggests that the drug rebate currently offered to those on Medicaid should be extended to dual-eligibles who receive their coverage through the Medicare Part D program. This last measure would save the government $7 billion in 2015, and $49 billion by 2020. These are not inconsequential numbers when you realise that similar figures are the subject of the dispute threatening to shut the government down this year.

The Bowles-Simpson report contains a host of comparable suggestions that tinker with the costs of government-provided health care, but three deserve mention as the basis for how opponents of Ryan's voucher system might suggest reform.

Two easy-to-understand changes first: Bowles-Simpson recommends either reform or repeal of the CLASS (Community Living Assistance Services and Support) Act, a voluntary insurance program to pay for long-term non-institutional care.

The brainchild of the late Senator Edward Kennedy, the CLASS Act is intended to help beneficiaries live a more dignified life than they would if relying solely on Medicaid. It was initially predicted to cut the deficit by removing those who qualified for it from Medicaid and putting them in a deficit-neutral program. Unfortunately, despite its laudable intentions “to address an important public policy concern”, the CLASS Act is “financially unsound", according to Bowles-Simspson. Costs of the act, they argue, are never likely to be met by benefit payments, especially as the first recipients will be receiving substantially more than they paid in, even after a five-year qualifying period for the CLASS Act payment.

Bowles-Simpson also proposes another straightforward measure by recommending that from 2020 Congress establishes a budget for total federal health care costs limited to a rise in GDP plus one percent. This rather vague statement of intent resulted from disagreements on the Commission as to how much the President's health care reform bill will actually save. The report recognises that “Commission members, and virtually all budget experts, agree that the rapid growth of federal health care spending is the primary driver of long-term deficits”, but it then advocates a "wait-and-see" approach to long-term changes in federal health care provision because if health care costs continue to grow as fast or even faster than projected, this process will require Congress and the President to consider further actions that make more substantial structural reforms. On the other hand, if reforms are more successful in controlling costs than estimates suggest, spending growth should be within the targets and this process would not be triggered.

The third, more complicated reform suggested by the Commission is a change in the formula used by the Medicare Sustainable Growth Rate (SGR) for physician payments. These "Doc Fix" payments have been scheduled under law to be reduced every year since 2002, with Congress blocking every annual decrease in payments to physicians from the fear they would stop offering services to Medicare patients. In 2012, because those reductions have been deferred, physicians are due to receive a 23% cut in payments for services they provide Medicare patients. Bowles-Simpson suggests that the current level of payments continue but are frozen until 2013, and then cut by 1%. At that point, the Centers for Medicare and Medicaid Services (CMS) would develop a new physician payment formula, designed to pay “doctors based on quality instead of quantity of services".

One last note on the Bowles-Simpson reforms. Recommendation 3.3.13, "Pilot Premium Support Through FEHB Program", suggests that the Federal Employees Health Benefits plan, to which members of Congress belong, be turned into “a defined contribution premium support plan that offers federal employees a fixed subsidy that grows by no more than GDP plus 1% each year. For federal retirees, this subsidy could be used to pay a portion of the Medicare premium. In addition to saving money, this has the added benefit of providing real-world experience with premium support.”

So, yes, even Congressmen might have to live with the outcome of these health care debates.