Medicare and Medicaid Must Be Cut. Period

To get a deal, Obama could look to Paul Ryan’s ideas
Photo illustration by 731; Photographs by Oppenheim Bernhard/Digital Vision/Getty Images (pills); Ron Sachs/Getty Images (Obama)

President Obama campaigned for reelection as a defender—and improver—of Medicare. Yet for all that he’s done as a health-care reformer, he hasn’t curbed spending on the government health-insurance plan for the elderly and disabled. Medicare and Medicaid, its sister plan for the poor, are together the largest federal entitlement programs. In 2011 they consumed $769 billion, or 21 percent of the federal budget, according to the Center on Budget and Policy Priorities. To lower the deficit, the president must come up with new ways to contain the expense.

Obama must also shore up Social Security, which accounted for 20 percent of federal spending last year. That will probably involve hiking the eligibility age and taxing the benefits of the well-to-do. Otherwise, the program’s retirement and disability trust funds will likely run out in 2033. (Then Social Security will still have incoming revenue, but only enough to cover 75 percent of scheduled benefits.)

Fixing Medicare and Medicaid, however, is more pressing. Medicare spending is rapidly increasing, not only due to of an influx of retiring baby boomers but also because health-care costs are rising faster than the nation’s gross domestic product. Obama boasted during the campaign that his Affordable Care Act trimmed $716 billion in Medicare spending, mostly by lowering hospital reimbursements and payments to private insurers in the Medicare Advantage program. That extended the solvency of Medicare’s hospital trust fund—but only by eight years, to 2024. The Centers for Medicare and Medicaid Services predicts the cost of the two plans will rise to $1.8 trillion in 2020, in part because the health-reform law is extending Medicaid to 30 million more people. Obamacare “was more about expanding coverage than containing spending,” says John Gorman, a health-care industry consultant.

To curb Medicare spending, the ACA authorizes a 15-member panel, the Independent Payment Advisory Board, to propose cuts in 2015 if spending rises faster than inflation for health-care costs. Though conservatives have decried the power given to this so-called death panel, the board can’t modify eligibility rules or reduce benefits. Nor can it propose payment reductions for hospitals until 2020. And Congress can override the board’s decisions, so long as it recommends similar savings. “It all hinges on Congress letting [the board] work,” says David Koitz, a former Congressional Budget Office analyst and author of Entitlement Spending: Our Coming Fiscal Tsunami. “The problem is that Congress repeatedly bends to special interests.”

What should the president do? The Simpson-Bowles commission suggested letting the board start proposing cuts to hospitals well before 2020. Obama could also return to a proposal that came up in the failed debt-ceiling talks with House Speaker John Boehner, according to the Washington Post: increasing Medicare’s eligibility age to 67. The CBO estimates this would reduce Medicare spending by 5 percent before 2035. And the president could look into raising Medicare premiums for doctor visits, which the CBO says would save roughly $241 billion by 2021.

A more radical and realistic idea: Obama can try to craft a variation of Paul Ryan’s plan to give seniors vouchers for purchasing private insurance. That would enable Medicare to cap payments, which it can’t do under the current fee-for-service program. Gorman, the consultant, says any hope of a bipartisan fix has to include discussions of this option. Such a plan could be palatable to Obama if vouchers are tied to health-care costs, rather than GDP as Ryan has proposed. “It is a conversation that Obama wants to have and a number of senators in the middle would like to have,” Gorman says. Koitz sees another plus: “So far everything that Obama has done cost-cutting-wise has largely targeted the provider. If we don’t get the consumer involved, we won’t get the results we are looking for.”

None of Obama’s options would be popular. But they might appeal to a president who ran for office, at least the first time, on the promise of compromise.


    The bottom line: No federal program eats up more dollars than Medicare and Medicaid—21 percent of the budget, combined, in 2011.

    Before it's here, it's on the Bloomberg Terminal.