After the super committee

Things are much like they were before: the U.S. needs to ensure economic growth in the short term, while developing a path to a long range sustainable budget. During 2011, we have achieved neither, and I see no reason for optimism that legislative action on either front will occur before the 2012 election.

The only way to achieve a long range sustainable budget is for taxes as a percent of GDP to rise over current levels, and spending to decline, also as compared to current levels. The Simpson-Bowles plan proposed achieving balance at 21% of GDP in 2035, which would be the highest level of taxation observed (20.6% in 2000 is previous max), but we routinely spent more than 21% of GDP in the 1970s and 1980s.

If we adopted 21% of GDP as a future target for balancing the budget, we would be saying government spending will be less while the baby boomers are eligible for Medicare and Social Security than it commonly was when they were paying taxes to support these same programs. This will be very hard. Plans seeking balance at lower levels seem implausible.

Now that the Super Committee has not agreed to anything to replace the sequester, the next step toward a long range sustainable budget will either be some clarity from the next election with the knowledge of what the Supreme Court has ruled about the ACA, or some economic calamity that will spur action. The former is possible. The latter is a near certainty, eventually, the question is when and what the crisis looks like?

The only source of optimism I can find is the similarity of the grand bargain deals that include both substantial tax increases and spending cuts (without both, it is not a plan, but a fantasy). If we have to act fast, we really know a great deal about what the last step looks like. We just don’t know what it will take to get us to act.

Super Committee is super exhausting

The commentary about whether the Super Committee will reach a deal by November 23 is exhausting. Of course they waited until the last minute and yes there is time for a deal, because the outline of what one would look like has been fairly obvious for some time.

Taxes must increase and spending must decrease over current levels (as a percent of GDP) if we are to ever have anything near a balanced budget again.

Historical tax receipts since I have been alive have been around 18% of GDP, and historical spending has been around 20.5% of GDP. Of course, the baby boomers will move into Medicare and Social Security eligibility en masse over the next few decades, making the Simpson-Bowles commission suggestion of seeking balance at 21% of GDP plausible, but hard.

Health care costs are the central long term problem, and any successful plan will have to include the next steps on health reform that we will actually try. Achieving balance in the future at less than 21% of GDP is mathematically possible, but unrealistic, especially without a credible health policy strategy to get there.

In policy terms, it should be possible to agree on some next health reform steps, and there are options that could replace the individual mandate, possibly making the Supreme Court case moot. For example, both parties have suggested setting up exchanges in which persons would purchase private health insurance; they are central to both the ACA and Rep. Ryan’s ideas put forward in the House budget in April, 2011. The big differences are who will be shopping in exchanges, how much subsidy they will receive to do so, and how the subsidy will be updated.

  • The ACA would allow the uninsured and persons working for small businesses to purchase insurance in exchanges.
  • Ryan’s Medicare proposal would allow those 65 and older, beginning 10 years from now, to do so. Ryan’s Patients’ Choice Act envisions exchanges for those who are younger.

The details are important, and the key question for any exchange is how the subsidy provided by the government will be set and updated? Austin has written lots on competitive bidding and if we are going to try markets, we should try them broadly, evaluate the results and move ahead (in Medicare and for younger persons). The Bipartisan Policy Center has done good work seeking a compromise.

While both parties are quick with their talking points, on health reform (and therefore the long term deficit) the Republicans are more culpable in producing the current gridlock: they are only unified by what they are against, their plans are vague, and they have no track record of using their political capital to drive health reform (remember 218 votes in the House and 60 in the Senate will be needed for replace plans, if President Obama is defeated; 292 and 67 to override his veto). The Republican’s best chance to influence health policy would seem to be through a vehicle like the Super Committee, as part of a larger deal. Both sides should fear what the Supreme Court may rule in the middle of an election.

The only question is whether they can muster the courage to act now, and only they know the answer. Wake me when it is over.

Update: Kaiser Health News with Super Committee wish list from ~ 30 groups.

Medicare Home Health Co-Pays & LTC

One detail of President Obama’s proposal released yesterday is the creation of a Medicare Home Health co-pay of $100 per episode if it includes more than 5 visits (p. 39).

This would apply to new beneficiaries beginning in 2017. This proposal is consistent with a MedPAC recommendation to establish a per episode copayment. MedPAC noted that “beneficiaries without a prior hospitalization account for a rising share of episodes” and that “adding beneficiary cost sharing for home health care could be an additional measure to encourage appropriate use of home health services.”

This is a tiny aspect of the overall package, and would reduce Medicare spending by $400 million over 10 years. However, it caught my eye because I think it is consistent with something that a Medicare official told me at a meeting a few years back: there is a strong institutional fear (at CMS) of any aspect of its benefit package becoming a “back door” long term care benefit.

After expansion of Medicare home health in the early the 1990s, there has been a general move to medicalize the benefit and reduce its use for personal long term care. McCall et al. (2001) noted the changes to the home health benefit brought about by the Balanced Budget Act of 1997

Eligibility for Medicare home health is limited to beneficiaries who are “homebound,” need “intermittent” skilled nursing or therapy services, and are under the care of a physician who prescribes their plan of care. A beneficiary needing only personal care does not qualify (emphasis mine)

These changes greatly reduced the use of home health; according to MEDPAC, total Medicare home health spending in 1997 was $17.7 billion, fell to $8.5 billion in 2000, and was $18.9 billion in 2009 (p. 177 of March 2011 report).

Further, I think that at least some of the discussion by MEDPAC of changes to the Medicare hospice benefit per diem payment and increased efforts to address very long lengths of hospice use for patients with non cancer diagnoses could be viewed in a similar light (such policies are not a part of the President’s proposal but remain a MEDPAC priority). From the MEDPAC March 2011 report (p. 267):

…between 1998 and 2008, the number of hospice users with debility increased from just over 8,500 to nearly 107,000, and the number with either Alzheimer’s disease or non-Alzheimer’s dementia grew from about 28,000 to 174,000…

It should be noted that outreach to patients with diagnoses other than cancer had been an earlier priority, but this success may feed worries that hospice is being inappropriately used for long term care.

Long term care represents a tremendous burden to Medicare beneficiaries, and under our current system the responsibility for such care falls initially on individuals and families. The cost of informal caregiving (family members caring for loved ones) is enormous, and could be understood as individuals self insuring against needed long term care, but many choose this by default due to lack of options. Private long term care insurance is rare, and Medicaid stands as the default payer of nursing home care–the most expensive care setting we have.

The question remains how will we insure long term care? Certainly not by repealing the CLASS provisions of the ACA and replacing them with nothing. As Howard Gleckman says

Aging Baby Boomers and their families would all be far better off if congressional critics of CLASS sat down with the White House to design a national long-term care insurance program that does work.

We could reduce the pressure for a “back door” LTC benefit by developing a coherent strategy for insuring the LTC needs of our aging population.

Update: for clarity, the type of care CMS has tried to decrease in the Medicare home health benefit over time is custodial care (help bathing, dressing, cooking, shopping), based on the argument the benefit is for skilled care, such as wound care.

CBO on Budget Control Act

The CBO today released an analysis of the estimated impact of the automatic enforcement procedures of the Budget Control Act of 2011 that will occur if Congress does not enact sufficient deficit reduction as specified by the Act before January 15, 2012. Several highlights:

  • The Super Committee is to propose deficit reduction of at least $1.5 Trillion by December 23, 2011
  • If legislation resulting in at least $1.2 Trillion in deficit reduction is not passed by January 15, 2012, then automatic cuts are to take place
  • The magnitude of the automatic cuts depend upon what has passed by Jan 15, 2012 (if nothing passes, automatic cuts equal $1.2 Trillion; if deficit reduction equal to $1 Trillion passes, then automatic cuts equal $200 Billion, for example.)
  • If automatic cuts are triggered, they occur equally (in dollar terms) in defense and non defense spending beginning in FY 2013
  • Total savings include reduced debt service resulting from budget cuts
  • ASSUMING no deficit reduction is passed by January 15, 2012, the following is true
  • The act requires that 18% of the total deficit reduction come from reduced debt service costs ($216 Billion; then $984 Billion would come from programmatic budget cuts from 2013-2021, split into 9 annual amounts of $109 Billion per year).
  • The $109 Billion annual cuts would come from Defense spending ($54.5 Billion) and all other budget functions ($54.5 Billion)
  • Defense spending is defined as being from budget account 050, most of which is Department of Defense, but which includes other spending as well
  • There are a variety of detailed budgetary rules that would allocate these cuts to specific programs
  • Most notably, Social Security and Medicaid would be exempt from automatic budget cuts
  • From 2013-2021 CBO estimates that there is approximately $24 Trillion in planned mandatory spending, and that around 70% of this is exempt from automatic cuts specified in the Act

A few health policy highlights that I did not understand until I read this report

  • The majority of the mandatory spending that is available for automatic cuts is Medicare, but the Budget Control Act specifies that most Medicare spending for individual benefits cannot be cut by more than 2% annually (individual services payments under parts A and B, Medicare Advantage, and Part D); once this 2% cap is reached, then needed savings are obtained from all other non defense discretionary and mandatory programs to achieve the required deficit reduction (see Footnote 10, p. 6)
  • Reductions in parts of Medicare will be partially offset by increases in other parts of the program, reducing the net deficit reduction that would be achieved by the full automatic cuts taking place. For example, Part B premiums are set to cover a percentage of Part B program costs, which if reduced by automatic cuts will result in a lower Part B premiums. The net effect of such offsets is estimated to be $31 Billion over 2013-2021.

Total deficit reduction projected by CBO if no legislation is passed is $1.1 Trillion, slightly less than the $1.2 Trillion noted in the legislation due to Medicare provisions noted immediately above, some savings occurring after 2021, and CBO estimating less savings in interest costs.


Tax Based Fail Safe

Washington appears ready to attempt walking (jump start jobs/economy) and chewing gum (developing a long range plan for a sustainable budget) at the same time. Both are needed.

The Super Committee must identify $1.5 Trillion in deficit reduction over 10 years to avoid automatic budget cuts. Any plan addressing the long range deficit must focus on health policy since health care costs are the biggest long term budget problem.

Last week I suggested is a tax-based health care “fail safe” as one of several policy options to move toward a sustainable system. A fail safe is a mechanism that is triggered if expected savings from policy changes do not emerge. The President’s Fiscal Commission proposed a health care fail safe that required Congress to enact additional programmatic cuts if growth in total federal health spending was not constrained to GDP growth + 1 percentage point by 2020. Total federal spending included Medicare, Medicaid, ACA exchange subsidies, VA, and tax expenditures related to private health insurance. Everything.

A study by the University of Maryland School of Public Policy provides evidence that the public has more trouble making cuts and trade offs in health care as compared to other budgetary items. This is borne out in this table on Medicare options, showing nothing (tax increases, benefit cuts, pay docs less) had majority support as as acceptable way of addressing the deficit that is due to the Medicare program.

There was more consensus on how to address the budget deficit due to Social Security and the discretionary budget (incl. Defense), suggesting that the public views health care as different from other budget items. It is legitimate in a democracy for people to express such preferences. We can devise all sorts of policy efforts to slow health care inflation that could work. However, the biggest barrier to their doing so is cultural acceptability and not actually trying. For example, a recent RWJ brief outlines many ways to slow Medicare cost inflation via coverage decisions while potentially improving the quality of care, but they will of course all be controversial, and much easier to demagogue than to enact.

Instead of a fail safe that calls on Congress to enact unspecified cuts if health care cost inflation does not slow, I suggest a payroll tax imposed on the top half of the income distribution if total federal health care spending remains above GDP growth plus 1 percentage point at some future point. If policy changes designed to slow cost inflation are not tried or are insufficient, then a tax based fail safe would provide us with a clear choice. We can devise more/stronger policy approaches, or we can decide we don’t like any of them and pay higher taxes for the federal government’s share of health care.

update: this is one of several policy ideas from my book seeking a political compromise to move ahead on health reform. By “suggestion” I mean to signify this is not the only way to do it. The Fiscal Commission had some bipartisan support and has a fail safe. There is some evidence people have a harder time with trade offs in health care (though the table above is only for Medicare; the fail safe suggested by Fiscal Commission is all federal spending; the Univ. of Maryland study didn’t even discuss Medicaid). Hence, a tax based fail safe provides a choice: seek to reduce spending growth via a tax based fail safe or pay more. There are many types of tax that could provide such a choice.