Bloomberg News

Pressure for Entitlement Cuts Is on Medicare, Medicaid

November 28, 2012

Entitlement Programs on the Menu at Debt-Reduction Negotiations

Democrats willingness to change Medicare and Medicaid will determine how far Republicans can go to meet President Obama’s demand for $1.6 trillion in more revenue. Photo: Rich Clement/Bloomberg

Democrats say Social Security is off the table. So if Republicans are successful in pushing for changes to entitlement programs in U.S. budget talks, the pressure for cuts will be on Medicare and Medicaid.

Republicans propose raising the Medicare eligibility age. Other options for squeezing money out of the health care program for the elderly include additional co-payments and an increase in premiums paid by high-income recipients. In February, President Barack Obama proposed saving about $70 billion over 10 years by revising the formula for federal matching of state Medicaid expenditures, along with other changes.

“There are things that we can do with entitlements that don’t hurt beneficiaries,” Senate Majority Leader Harry Reid, a Nevada Democrat, told reporters in Washington yesterday without giving specifics.

Democrats, buoyed by victories in the Nov. 6 election, say they won’t touch Social Security during talks over averting the so-called fiscal cliff. Their willingness to make changes to Medicare and Medicaid -- which together cost $720 billion a year, about one-fifth of the U.S. budget -- may determine how far Republicans will go to meet Obama’s demand for $1.6 trillion in new revenue over the next decade.

Financial Structure

House Speaker John Boehner, an Ohio Republican, has said he wants “real changes to the financial structure” of entitlements before he’ll agree to more tax revenue.

Lawmakers are trying to avert $607 billion in tax increases and automatic spending cuts scheduled to begin in January. They are also aiming for a longer-term plan to reduce the U.S. budget deficit, which has topped $1 trillion for four consecutive years.

Today, Boehner said he was “optimistic” all sides will continue to work toward an agreement. A day earlier, Reid said the parties had made “little progress” in budget talks since a Nov. 16 meeting at the White House.

Stocks were little changed today. The Standard & Poor’s (SPX) 500 Index rose less than 0.1 percent to 1,399.03 at 11:27 a.m. in New York, erasing a decline of as much as 1 percent. The Dow Jones Industrial Average added 28.15 points, or 0.2 percent, to 12,906.28.

One alternative sought by Republicans is increasing the eligibility age for Medicare, now 65. Gradually raising that to 67 for future recipients would save $148 billion through 2021, the Congressional Budget Office has estimated.

Starting Point

The Democrats’ starting point for Medicare and Medicaid cuts is what Obama proposed to trim from the programs in his 2013 budget. CBO estimated those cuts would total $351 billion over 10 years.

Republican Representative Tom Cole of Oklahoma dismissed Obama’s proposals for entitlement cuts as “mostly nips and tucks around the edges.” To curb the projected long-term growth of entitlement spending “you’ve got to go deeper,” he told reporters. “I haven’t seen anything that suggests” that Obama “is willing to do real structural reform.”

Obama and his advisers “surely look at the same numbers we do and they know they can’t” cut deficits without dealing with entitlements, Cole said. After endorsing a plan to partially privatize Medicare, House Republicans survived the “fire of an election,” he said. “That tells me the American people are willing to accept some honest talk and some tough decisions.”

Drug Rebates

The biggest savings in Obama’s budget proposal would be $137 billion from requiring drugmakers to give Medicare the same rebates for medicines for low-income recipients that are allowed for Medicaid’s purchase of prescription drugs, according to the CBO estimate.

More than $45 billion in savings would come from cutting reimbursements for providers of some post-acute care, such as rehabilitation services and home-health care. Almost $24 billion would be saved by reducing the government’s coverage of bad debts that hospitals incur from patients who don’t pay their bills.

For Medicaid, the health-care system for low-income Americans, Obama’s budget would revise the formula for payments to states and make other changes for a 10-year savings of about $70 billion, according to CBO. Republicans have proposed making Medicaid a block grant-style program and turning it over to the states.

Some Democrats say they favor an increase in the payroll withholding tax for Medicare. It would hit lower-income wage earners harder because it’s based on a percentage of income.

‘Tiny Fraction’

Still, an increase of just “a tiny fraction would generate a fair amount of money,” said Democratic Representative Earl Blumenauer of Oregon.

These sorts of changes probably won’t provide enough savings for Republicans to accept in return for increasing taxes for high earners, said G. William Hoagland, a former Republican staff director for the Senate Budget Committee. He’s now a vice president at the Bipartisan Policy Center in Washington, which studies ways to cut the deficit.

Even if Democrats are willing to make fundamental changes to Medicare they “don’t generate savings very quickly,” Hoagland said. Republicans want to “see spending savings quickly,” he said.

The election effectively killed the Republican proposal to offer future Medicare recipients a chance to buy private health insurance with money provided by the government, Hoagland said.

A Democratic proposal to raise premiums paid by higher- income Medicare beneficiaries is potentially “the big one for real savings quickly,” Hoagland said.

Higher Premiums

Individuals with annual incomes of more than $85,000 and married couples with incomes of more than $170,000 already pay higher premiums. That amounts to 5 percent of all Medicare recipients.

As an alternative to raising taxes, “this is a back-door way, particularly for the elderly rich,” Hoagland said. Higher premiums for individuals with incomes of more than $200,000 or married couples with incomes of more than $250,000 would be “fair game” for “soaking the rich,” he said.

Obama’s plan would freeze the income thresholds until 25 percent of Medicare recipients pay premiums based on income testing. That provision would save $30 billion over the next decade, according to the CBO.

Means-testing is “much more controversial” among Democrats who don’t want Medicare and Social Security to be equated with welfare programs, said Paul Van de Water, a health- care economist at the Center for Budget and Policy Priorities, a Democratic-aligned budget policy research group.

‘A Stake’

“It’s important that everyone feel they have a stake,” Van de Water said. “Income-tested premiums represent a breach in that principle.”

With sluggish progress in budget negotiations, Democratic- aligned interest groups are starting a media and grassroots campaign to urge Obama not to accept benefit cuts. Congressional Republicans are seeking to rally public support for their positions on taxes and entitlements.

Goldman Sachs Group Inc. (GS:US) Chief Executive Officer Lloyd Blankfein is among executives scheduled to meet today with Obama, and later with Boehner, to press for a solution to the fiscal-cliff standoff.

About 200 local labor union members led by the AFL-CIO and the Service Employees International Union plan to visit Washington today to lobby lawmakers.

The disagreement over entitlements may be a bigger hurdle to a budget deal than Republicans’ opposition to higher taxes, said Steve Bell, a former Republican Senate Budget Committee aide.

“I do not believe that taxes will be the main stumbling block to these negotiations,” Bell said. “Any fundamental change in Medicare and Medicaid will be the stumbling block.”

To contact the reporters on this story: James Rowley in Washington at jarowley@bloomberg.net; Heidi Przybyla in Washington at hprzybyla@bloomberg.net

To contact the editor responsible for this story: Jodi Schneider at jschneider50@bloomberg.net


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