State of the Union 101: How much in Medicare cuts did Obama put on table?

Obama didn't offer as much in savings from Medicare cuts as did the Simpson-Bowles deficit reduction commission. But his State of the Union message outlined ways to shave a good chunk of change from Medicare costs. Here's how.

Gene J. Puskar/AP/File
Healthcare workers and retirees protest proposed cuts to Medicaid, Medicare, and Social Security in Aliquippa, Pa., July 2011. In his State of the Union address Tuesday night, President Obama said senior citizens shouldn't have to shoulder the burden of reducing the US deficit. But he did suggest at least three potential Medicare cuts.

President Obama in his 2013 State of the Union address said senior citizens shouldn’t have to shoulder the burden of reducing the US deficit. But that does not mean he proposed to leave the giant health entitlement program of Medicare untouched. In his speech Mr. Obama suggested at least three potential Medicare cuts, though he didn’t provide a lot of details. Would these changes save substantial amounts of taxpayer money?

Well, that depends on how you define “substantial.” It’s likely that they would not match the health-care savings suggested by the bipartisan Simpson-Bowles commission, as Obama claimed they would. But the ideas Obama mentioned form the well of the House on Tuesday night would save at least $160 billion by 2013, according to the Congressional Budget Office. Roll in administration Medicare proposals that he didn’t bring up and the dollar figure rolls even higher.

That’s not chump change, even in Washington.

Obama’s Medicare mention occurred in a single paragraph. “We’ll reduce taxpayer subsidies to prescription-drug companies and ask more from the wealthiest seniors,” he said. “We’ll bring down costs by changing the way our government pays for Medicare, because our medical bills shouldn’t be based on the number of tests ordered or days spent in the hospital – they should be based on the quality of care that our seniors receive.”

He added that he was open to additional reforms so long as they didn’t “violate the guarantee of a secure retirement.”

1. Cut drug subsidies

Obama’s first suggestion, reducing drug subsidies, might produce a fairly large return, if implemented. Though he did not say so precisely, the president here was referring to something he’s talked about before: requiring pharmaceutical manufacturers to offer rebates on drugs for the 10 million people who are eligible for both Medicare and Medicaid, yet get their medications only through Medicare’s Part D prescription program.

Yes, we’ve jumped right into policy hyperspace there, haven’t we? We’ll try to explain: Medicaid, the big state-federal health program for low-income Americans, gets a really good deal on drug prices. It has used its negotiating muscle to reduce these costs by about 45 percent. Medicare’s relatively new Part D does things differently. It relies on private insurers to actually provide this benefit, and overall they can’t cut as good a deal as Uncle Sam can, in part because each insurer by itself is smaller. Their negotiations produce an average discount of 19 percent on prescriptions, according to an analysis of these costs from the Center on Budget and Policy Priorities.

What Obama is talking about is getting that 45 percent drug discount for people who are enrolled in Medicare but have low incomes, or otherwise are eligible for Medicaid, if they wanted to enroll.

This would not be popular with drug firms, because a lot of money is involved. If this change were implemented right away, it would save a total of $137.4 billion between now and 2022, According to a Congressional Budget Office estimate. In 2022 alone, the savings would be $20.5 billion, according to CBO.

2. Charge wealthy seniors more

Obama’s second idea was the second half of the sentence in which he mentioned his first. We’ll “ask more from the wealthiest seniors,” he said. What does this mean?

It means means-testing. All of Medicare is not free: Right now seniors pay an average of about 25 percent of the costs of both their Part B doctor coverage and Part D drug coverage. Under the terms of the Affordable Care Act (ACA), higher-income seniors already will be required to pay more, on a sliding scale beginning at $85,000 annual individual income.

In Obama’s fiscal year 2013 budget submission to Congress, the administration proposed steeping this scale a bit more to make seniors who can afford it pay an even greater percentage of their Medicare. According to CBO, this would save a total of $30.2 billion between 2013 and 2022 – $9.7 billion in 2022 alone.

3. Reward quality of care, not quantity of care

The president’s third Medicare suggestion was the most sweeping. Changing the way fee-for-service insurance such as Medicare pays for doctors, hospital stays, and drugs to reward quality instead of quantity is a holy grail of health-care reform.

Within this overall idea are lots of smaller changes Medicare might make to begin moving in this direction. The ACA, for instance, contains a provision that levies a small penalty on hospitals that have a high number of patients who return via preventable readmissions. That’s meant to prod these institutions to try to provide better care in the first place.

Nor is the push for quality care particularly partisan. Liberals see that the current Medicare system provides too much uncoordinated care for a segment of the population that often faces significant health challenges. Conservatives see duplication and waste in the status quo approach.

“The need to reform care delivery in Medicare may be the area of greatest agreement across the political spectrum,” wrote health economist Gail Wilensky, former administrator of the Health Care Financing Administration, in a New England Journal of Medicine perspective piece last year.

But that doesn’t mean it will be easy. The current system is entrenched. A widespread move toward different methods of payment would meet substantial resistance from those parts of the health-care system that would stand to lose money. Nor is it clear exactly what the design of any new pay-for-quality system would look like. A 2012 Congressional Budget Office study found mixed results from Medicare value-based demonstration projects.

“Demonstrations aimed at reducing spending and increasing quality of care face significant challenges in overcoming the incentives inherent in Medicare’s fee-for-service payment system, which reward providers for delivering more care but does not pay them for coordinating with other providers,” concluded CBO.

In his State of the Union speech Tuesday, Obama added that he is “prepared” to enact Medicare reforms that would save the same amount of money “by the beginning of the next decade” as changes called for by the Simpson-Bowles deficit reduction commission.

Rightly or wrongly, Simpson-Bowles is seen as sort of a gold standard of deficit seriousness in D.C. It laid out a plan that included some $483 billion in Medicare savings in the 2013 to 2022 period.

As noted above, the two most specific reforms Obama mentioned in Tuesday's speech add up to about $167 billion in those years. But those aren’t the only Medicare savings he has proposed. There are other things he didn’t mention in the State of the Union message. His 2013 budget, for example, penciled in $35.8 billion over 10 years as the estimated savings from reducing Medicare’s coverage of patient bad debts.

In total, Obama has put on the table some $337 billion in possible Medicare savings from 2013 to 2022, according to Washington Post fact checker Glenn Kessler. That’s a lot less than the Bowles-Simpson figure.

However, the Medicare plans from both Bowles-Simpson and the White House would save the same amount in the specific year 2022. So if you parse Obama’s statement that his plan would be as good as the commission's “by the beginning of the next decade” in a narrow sense, he’d be right, according to the Post’s Mr. Kessler.

You’ll notice we didn’t roll in the rewarding-quality-of-care stuff in our cost calculations. That’s because the administration does not have specific ideas on paper in this area whose budget effects are easy to estimate.

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