As 'Super Committee' Ponders Medicare Cuts, Actuaries Weigh In

The Joint Select Committee on Deficit Reduction has begun holding hearings to identify $1.2 billion in budget cuts. Everything is supposedly on the table, including Medicare, which along with Medicaid accounts for about 23% of the U.S. budget.

Medicare has been on the express train to insolvency for years. According to the latest Medicare trustee's report, the Medicare's Hospital Insurance Trust Fund – better known as Medicare Part A ?  is projected to remain solvent until only 2024.

Congress has been kicking around this political hot potato for years without enacting meaningful changes that will put the program, which serves more than 47 million Americans, on firm financial footing.

Now the buck has been passed to this so-called “super committee” a bi-partisan panel of six senators and six House members.

The American Academy of Actuaries put together in May 2011 a policy brief that takes a look at the various proposals that have been developed by Congress and policy wonks to improve Medicare's finances. While there's no silver bullet in the seven-page report, the debit committee still might want to take a look at it.

The takeaway message is that “achieving long-term sustainability for Medicare will require slowing the growth in overall healthcare spending, not simply shifting costs from one payer to another,” explained Cori Uccello, the senior health fellow for the American Academy of Actuaries.

Here's a look at how some proposals could affect Medicare costs and access to quality care for beneficiaries:

1.Limit the Growth in Medicare Spending
The Obama administration's proposed budget and the budget plan developed by Rep. Paul Ryan (R-WI) set spending targets, either for Medicare in particular, or for overall federal health spending. Exceeding those targets could trigger specific actions, such as automatically reducing benefits or increasing revenues.

Medicare savings would depend on how aggressively the spending targets are set. Uccello cautions that “unless system wide spending is addressed, implementing options to control Medicare spending will have limited long-term effectiveness.”

The worry with this approach is that reducing benefits could limit access to care.

2.Transition to a Premium Support or Voucher Program
The government would limit the amount it contributes toward Medicare coverage with beneficiaries picking up the difference. Shifting Medicare from a defined benefit to a defined contribution plan would mean beneficiaries would have some skin in the game and that could be an incentive for them to be more cost conscious in making their healthcare decisions.

Premium support would be indexed by inflation or other factors. The voucher would be adjusted by beneficiary characteristics such as age, health status, geographic location, and/or income, would be indexed by inflation or some other factor. Depending on how the government contribution is set, federal Medicare spending could be lower than currently projected.

The concern with this approach, explained Uccello is that it will amount to nothing more than a cost shift from the government to beneficiaries and will do little to address why healthcare costs are increasing.

3.Expand the Authority of the Independent Payment Advisory Board
IPAB is the controversial board created as part of the Affordable Care Act and charged with recommending ways to control Medicare costs if spending exceeds a targeted growth rate. The targets are based on inflation until 2019, and then on the GDP plus 1%. Its recommendations will be implemented automatically unless Congress passes legislation that produces comparable reductions.

Opinions about IPAB are divided more or less along party lines. Republicans believe the board will ration healthcare, leave seniors out in the cold, and needs to be repealed. Democrats see the IPAB as a backstop or fail safe for controlling Medicare costs and preserving the program for generations to come.

Supporters would like to see IPAB given more power. As it stands right now the board is somewhat restricted in its recommendations—it can't propose to ration health care, raise revenues, increase beneficiary premiums or in any way restrict benefits or modify eligibility criteria. In addition, until 2020 most hospital services are excluded from the scope of payment changes that can be recommended.

Provisions included in various fiscal proposals would expand the scope of the IPAB by eliminating the temporary carve-outs for hospital services, allowing options for cost sharing and benefit design, and giving it authority over all federal healthcare spending. The expansion of scope could be tied to directing IPAB to meet more ambitious spending growth targets.

The added authority could allow IPAB to really explore the healthcare delivery system and help move Medicare toward a more sustainable financial model.

4.Reform the Sustainable Growth Rate System
The SGR system was enacted as part of the Balanced Budget Act of 1997 to limit the growth in spending for Medicare physician services. The system compares actual cumulative spending for Medicare physician services to a specified spending target. In theory if actual spending exceeds the target, then physician payments are reduced. The reality is that Congress usually overrides any cuts. As a result of the cumulative shortfall, physician payment rates are scheduled to be reduced by about 30% in 2012, barring another override from Congress.

One approach would eliminate the SGR, temporarily freeze physician payments, and develop a new physician payment system. The proposal would pay for the elimination of the SGR by other reductions in Medicare and Medicaid spending.

Uccello said that while eliminating the SGR would make providers more willing to see Medicare patients, it would also increase Medicare provider spending, which would need to be offset by other spending reductions. Still, going back to the drawing board would mean a new physician payment system that better aligns payments with the provision of high value care could be developed.

5.Reduce Spending for Prescription Drugs
There are several ways this could be accomplished. Medicare could be required to use its bargaining power to negotiate drug prices under the Part D program or drug rebates could extended to Medicare and Medicaid beneficiaries.

Another approach would establish a government-run Part D option that would be offered alongside Part D private plans. The Centers for Medicare & Medicaid Services would negotiate prices with prescription drug companies. The concern is that this could lead to CMS setting prescription drug prices. Also, introducing a government-run Part D option could mean some current Part D providers might leave the market and reduce the choices available for enrollees.

Still, reducing drug prices would lower Part D spending and reduce its growth rate. Lowering Part D spending would also reduce beneficiary premiums for Part D plans and some copayments.

6.Raise the Medicare Eligibility Age
A study by the nonpartisan Kaiser Family Foundation found that raising the Medicare eligibility age from 65 to 67 in 2014 would generate about $7.6 billion in net savings to the federal government, but it would add $5.6 billion in out-of-pocket costs for 65- and 66-year-olds, and $4.5 billion in employer retiree healthcare costs

But some of that savings would be at the expense of employers, states, and beneficiaries. People between age 65 and 67 would need to find another source of health insurance. They might stay on employer-sponsored insurance plans, qualify for other public coverage such as Medicaid or seek coverage in the individual market or through health insurance exchanges.

As everyone knows, there are no simple options and difficult decisions will need to be made to preserve Medicare. But the focus shouldn't just be improving Medicare's immediate financial woes but rather improving the long-term sustainability of the program.