Obama's prescription: $320 billion in cuts to Medicare, Medicaid

Kaiser Health NewsSeptember 19, 2011 

WASHINGTON — In his plan to trim the federal deficit, President Barack Obama on Monday proposed $320 billion in cuts to Medicare and Medicaid, largely by changing how the federal government pays health providers, by slashing payments to drug companies and by dramatically changing the way the government splits the costs of Medicaid with the states.

The biggest cut to Medicare would require pharmaceutical companies to lower their rates to some beneficiaries. The proposal would save Medicare an estimated $135 billion over 10 years starting in 2013. The change would allow the federal government to receive the same brand-name and generic rebates for low-income Medicare patients as are provided to Medicaid beneficiaries.

The cuts to the major health entitlement programs are part of a White House plan that also includes tax increases for millionaires to reduce the federal deficit by more than $3 trillion over the next 10 years. The plan is the administration's opening move in negotiations on deficit reduction to be taken up by the joint 12-member House-Senate "supercommittee." If a deal is not enacted by Dec. 23, cuts could take effect automatically across government agencies.

Senate Republican leader Mitch McConnell said in a statement Monday: "A massive tax hike, phantom savings and punting on entitlement reform is not a recipe for economic or job growth — or even meaningful deficit reduction."

Many stakeholder groups representing seniors, drug companies and health providers denounced the plan.

Nancy LeaMond, executive vice president of AARP, said she opposes any plan to make Medicare beneficiaries pay more for health care.

"AARP reiterates its strong opposition to any proposals that would raise costs or cut the hard-earned Medicare benefits that millions of seniors depend upon every day for their health and retirement security," she said. AARP did credit the president for not cutting Social Security.

The administration also is proposing cutting $3.5 billion from a fund created by the 2010 health care law to improve disease prevention and to promote public health, while keeping $13.8 billion.

Some Medicare beneficiaries would see costs go up under the president's plan. For the first time, beneficiaries receiving home health services would pay $100 co-payments starting in 2017, which would raise $400 million over 10 years.

The deductible for Medicare Part B, which covers physician costs, would increase by $25 in 2017, 2019 and 2021 for new beneficiaries, raising $1 billion over the next decade.

Starting in 2017, new beneficiaries who buy a Medigap policy that leaves them with little out-of-pocket costs would pay a 15 percent surcharge on that policy. Critics have argued that such Medigap plans lead to excess use of health services and raise health spending. The change would bring in $2.5 billion over 10 years.

Higher-income Medicare beneficiaries would pay higher premiums for Medicare Part B and Medicare prescription drug plans, raising $20 billion over 10 years.

One of the biggest changes proposed by Obama is how the federal government splits Medicaid spending with states, at a proposed savings of $14.9 billion over 10 years.

Currently, states and the federal government share the cost of Medicaid, with the federal government paying about two-thirds and the states one-third of the total. The percentage varies by state based on the wealth of each state, with poorer states getting a higher match rate. The state match rate also varies for both Medicaid and the Children's Health Insurance Program, which covers children from low-income households.

Obama is proposing that beginning in 2017, the matching rates from the two programs would be blended into a single rate, but from 2014 through 2016, states with a higher enrollment would get a higher federal match rate.

The idea is to give states incentives to enroll more people starting in 2014 when the health care law expands Medicaid. An additional 16 million people will be eligible for Medicaid starting in 2014. The federal government still will pay all the costs for the expansion of Medicaid coverage from 2014 through 2016, as promised in the health care law.

Among the hardest hit providers in the Obama plan would be so-called post-acute health providers: nursing homes, long-term care hospitals, rehabilitation facilities and home health facilities, which would see $42 billion in cuts over 10 years.

Obama administration officials said the deficit reduction plan would extend the life of the Medicare Trust Fund from 2024 to 2027. The trust fund covers only Medicare Part A, the portion of the program that covers hospital costs.

Matt Salo, executive director of the National Association of Medicaid Directors, said that simplifying the federal Medicaid rate is a good idea, "but not in the context of deficit reduction because it can mean only one thing: cost shifts to states who simply cannot shoulder any more burden in this area."

Even Families USA, the consumer advocacy group that's been a consistently strong supporter of Obama's health care platform, was critical of the deficit plan.

"The cuts to the Medicaid program in the president's proposal — which shifts the burden to states and ultimately onto the shoulders of seniors, people with disabilities, and low-income families who depend on the program as their lifeline — would be harmful," said Ron Pollack, executive director of Families USA. "Most of the cuts are not real cost efficiencies; instead they are merely cost shifts to the states. Since the overwhelming majority of states can't or won't bear that extra burden, it will ultimately be a cost shift to low-income families who will experience tragic cutbacks in coverage."

An industry group, Pharmaceutical Research and Manufacturers of America, lashed out at the Obama administration proposal for adding what it calls "price controls" to the Medicare prescription drug plan, or Medicare Part D.

"PhRMA opposes implementing Medicaid's failed price controls in Medicare Part D," said senior vice president Matt Bennett. "Such policies would fundamentally alter the competitive nature of the program, undermine its success and potentially cost hundreds of thousands of American jobs."

The American Hospital Association also blasted the Obama proposal to cut Medicaid and Medicare provider rates, saying they would lead to 200,000 job cuts to hospitals and businesses they support by 2012.

"This is the wrong prescription to create a healthier America and sustain job growth in a sector of the economy that is actually adding jobs," said Rich Umbdenstock, president and CEO of the American Hospital Association.

(Kaiser Health News is an editorially independent news service of the Kaiser Family Foundation, a nonpartisan health care policy organization that isn't affiliated with Kaiser Permanente.)

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