On Dec. 1, the National Commission on Fiscal Responsibility and Reform revealed their game plan for cutting the national debt. The commission’s co-chairs announced their draft of the plan, “The Moment of Truth,” and prepared for the 18-member commission to hold a vote on Dec. 3. Although the package failed to receive the 14 votes required to force a Congressional vote on its recommendations, 11 commission members back the plan – including key Congressional leaders and members of the Budget Committee – making it likely that certain elements will show up in next year’s budget package.

Here, then, is a look at the portions of the 66-page plan that deal with Medicare. Other parts of the document cover tax reform, deficit cutting, and Social Security – but it’s worth taking a look at the Medicare portions, if only to see what you may be up against in 2011.

From the bill

Federal health care spending represents our single largest fiscal challenge over the long run. As the baby boomers retire and overall health care costs continue to grow faster than the economy, federal health spending threatens to balloon. Under its extended-baseline scenario, [the Congressional Budget Office] projects that federal health care spending for Medicare, Medicaid, the Children’s Health Insurance Program (CHIP), and the health insurance exchange subsidies will grow from nearly 6 percent of GDP in 2010 to about 10 percent in 2035, and continue to grow thereafter.

These projections likely understate the true amount, because they count on large phantom savings – from a scheduled 23 percent cut in Medicare physician payments that will never occur and from long-term care premiums in an unsustainable program (the Community Living Assistance Services and Supports Act, or “CLASS Act”).

The Commission recommends first reforming both the formula for physician payments (known as the Sustainable Growth Rate or SGR) and the CLASS Act, and finding savings throughout the health care system to offset their costs. In addition, we recommend a number of other reforms to reduce federal health spending and slow the growth of health care costs more broadly.

Over the longer term (2020 and beyond), the Commission recommends setting targets for the total federal budgetary commitment to health care and requiring further structural reforms if federal health spending exceeds the program-specific and overall targets. We recognize that controlling federal health spending will be very difficult without reducing the growth of health care costs overall. To that end, the Commission’s recommendations on tax reform regarding reducing and potentially eliminating the exclusion for employer-provided health insurance will help decrease growth in health care spending, according to virtually all health economists.

Recommendation 3.1: Reform the Medicare sustainable growth rate

This recommendation would reform the SGR for physician payment and require the fix to be offset. The commission estimates that it would save $3 billion in 2015 and $26 billion through 2020, relative to a freeze.

Created in 1997, the SGR (or “doc fix“) was designed to control Medicare spending by setting payment ranges for physician services and reducing payment updates if spending exceeded the targets. It required reductions in physician payments every year since 2002, but in 2003, Congress began blocking the reductions on an annual basis – which required even larger reductions in subsequent years. Because of the accumulated shortfall, the commission estimates that the SGR formula would require a 23 percent reduction in 2012 payments, and would increase each year the problem continued without a fix.

“Freezing physician payments from 2012 through 2020, as we assume in our baseline, would cost $267 billion relative to current law,” the commission wrote in “The Moment of Truth.” “The Commission believes that this amount – or the cost of any ‘doc fix’ – must be fully offset, and recommends enforcing this principle by eliminating its exemption in statutory PAYGO. In the near term, we also recommend replacing the reductions scheduled under the current formula with a freeze through 2013 and a 1 percent cut in 2014.”

In the near term, the commission recommended a CMS-developed improved physician payment formula that would encourage care coordination across multiple providers and settings, and pay doctors based on quality, rather than quantity, of services. To put pressure on the CMS, the SGR formula would be reinstated in 2015, using 2014 spending as the base year, until such a revised physician payment system was created. The new payment system wouldn’t be able to cost more than what would have been allowed under the SGR formula, and a Medicare actuary would need to certify that this was the case.

Recommendation 3.2: Reform or repeal the CLASS Act

The commission estimated this would cost $11 billion in 2015 and $76 billion through 2020.

As part of PPACA, The Community Living Assistance Services and Supports (CLASS) Act established a voluntary long term care insurance program.

“The program attempts to address an important public policy concern – the need for non-institutional long-term care – but it is viewed by many experts as financially unsound,” the commission stated in its package. “The program’s earliest beneficiaries will pay modest premiums for only a few years and receive benefits many times larger, so that sustaining the system over time will require increasing premiums and reducing benefits to the point that the program is neither appealing to potential customers nor able to accomplish its stated function. Absent reform, the program is therefore likely to require large general revenue transfers or else collapse under its own weight.”

Given these findings, the commission recommended that the CLASS Act be reformed to make it sustainable over the long term. If this is not possible, the commission advised that it be repealed. Why? Because it found that the CLASS Act will increase the deficit over the next decade given that the program’s premiums are collected up front and benefits are not paid out for five years.

“To address this, we would replace the deficit reduction on paper from the CLASS Act with real options that truly save the federal government money and put it on a more sustainable path,” wrote the commission.

Recommendation 3.3: Pay for the Medicare ‘doc fix’ and CLASS Act reform

This would enact specific health savings to offset the costs of the Sustainable Growth Rate (SGR) fix and the lost receipts from repealing or reforming the CLASS Act.As such, the Commission proposed a set of specific options for health savings that, combined, total nearly $400 billion from 2012 to 2020.

  • 3.3.1: Increase government authority and funding to reduce Medicare fraud. By giving the CMS additional statutory authority and increased resources through a cap adjustment in the discretionary budget, the commission believes it can save $1 billion in 2015 and $9 billion through 2020.
  • 3.3.2: Reform Medicare cost-sharing rules. In place of the current system, the commission recommended a single combined annual deductible of $550 for Part A and Part B, plus a 20 percent uniform co-insurance on health spending above the deductible. In addition, it would provide catastrophic protection for seniors by reducing the co-insurance rate to 5 percent after $5,500, and capping total cost-sharing at $7,500. The savings are estimated at $10 billion in 2015 and $110 billion through 2020.
  • 3.3.3: Restrict first-dollar coverage in Medicare supplemental insurance. This option would prohibit Medigap plans from covering the first $500 of an enrollee’s cost-sharing liabilities and limit coverage to 50 percent of the next $5,000 in Medicare cost-sharing. It also recommended similar treatment of TRICARE for Life, the Medigap policy for military retirees, and similar treatment for federal and private employer-covered retirees. The commission predicts the Medigap savings would be included in those of 3.3.2, plus additional savings of $4 billion in 2015 and $38 billion through 2020.
  • 3.3.4: Extend Medicaid drug rebate to dual eligibles in Part D. Cost savings are estimated at $7 billion in 2015 and $49 billion through 2020.
  • 3.3.5: Reduce excess payments to hospitals for medical education. Medicare payments to hospitals that provide resident treatment programs in graduate medical education (GME) and indirect costs (IME) would be brought in line with the costs of medical education. This recommendation would limit hospitals’ direct GME payments to 120 percent of the national average salary paid to residents in 2010, and updated annually thereafter by chained CPI and by reducing the IME adjustment from 5.5 to 2.2 percent. The commission estimates this would save $6 billion in 2015 and $60 billion through 2020.
  • 3.3.6: Cut Medicare payments for bad debts. This would end Medicare reimbursements to hospitals and other providers for unpaid deductibles and copayments that beneficiaries owe. The commission estimates this would save $3 billion in 2015 and $23 billion through 2020.
  • 3.3.7: Accelerate home health savings in PPACA. This would incorporate productivity adjustment beginning in 2013, and direct the Secretary of Health and Human Services to phase in rebasing the home health prospecting payment system by 2015 rather than 2017. This would save $2 billion in 2015, according to the commission, and $9 billion through 2020.

Recommendation 3.4: Aggressively implement and expand payment reform pilots

Under this recommendation, CMS would be directed to design and begin implementing Medicare payment reform pilots, demonstrations, and programs as rapidly as possible. In addition, successful programs could be expanded without Congressional action. PPACA requires these pilot and demonstration pilots in order to test delivery system reforms, which may reduce costs without harming quality of care. These pilots include Accountable Care Organizations (ACOs), bundling for post-acute care services, and other programs to pay for performance.

“In addition to Medicare pilots, we recommend that CMS be required to fast-track state Medicaid waivers that offer demonstrable promise in improving care and returning savings, such as Rhode Island’s Global Consumer Choice Demonstration, which provides a capped federal allotment for Medicaid over five years; Vermont’s all-payer advanced primary care practice reform, called Blueprint for Health; and Community Care of North Carolina, a provider-led medical home reform that has increased access to primary care, decreased emergency department usage, and saved money.”

Recommendation 3.5: Eliminate provider carve-outs from IPAB

The PPACA-mandated Independent Payment Advisory Board would have the authority to make recommendations on hospitals and other exempted providers, if per-beneficiary Medicare spending were to grow too quickly. The law exempted certain provider groups, such as hospitals, from short-term changes from IPAB’s authority, yet the commission recommends eliminating such exceptions.

Recommendation 3.6: Establish a long-term global budget for total health care spending

This would also limit the growth to GDP plus 1 percent.

“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,” the commission wrote in its recommendation. “Some Commission members believe that the reforms enacted as part of ACA will ‘bend the curve’ of health spending and control long-term cost growth. Other Commission members believe that the coverage expansions in the bill will fuel more rapid spending growth and that the Medicare savings are not sustainable. The Commission as a whole does not take a position on which view is correct, but we agree that Congress and the President must be vigilant in keeping health care spending under control and should take further actions if the growth in spending continues at current rates.”

The commission backs a review process for total federal health care spending – including Medicare, Medicaid, the Children’s Health Insurance Program, FEHB, TRICARE, the exchange subsidies, and the cost of the tax exclusion for health care – starting in 2020. If growth exceeded the GDP plus 1 percent, the President and Congress would be required to intervene. The target would be adjusted to account for any changes in the health care exclusion enacted under tax reform, and would be measured on a per-beneficiary basis if it is applied only to certain federal health programs, rather than globally.

What do you think?

So how do you feel about these recommendations? We want to hear from you. Leave a comment below or email roniverson@guardingyourgold.com. In upcoming weeks, we’ll discuss certain items, as well as the latest on the “doc fix” issue.

Ron Iverson is president of the National Association of Medicare Supplement Advisors Inc. He can be reached at 406-442-4016. This article was adapted from a piece that ran in the Dec. 1 edition of the NAMSA newsletter.