Debt Deal: What Changes Are in Store for Medicare?
Medicare will be scrutinized by the bi-partisan committee that will be appointed to make recommendations to Congress for reducing entitlements, as a result of the recent debt compromise. Medicare will be protected, however, from the automatic reductions in entitlements that will go into effect if the bi-partisan committee doesn't come to any agreement, or if Congress doesn't adopt their recommendations.
What could this mean for your retirement planning? To see what this bi-partisan committee might recommend, let's take a look at the following recent proposals to change Medicare:
- Proposals by Rep. Paul Ryan (R-Wisconsin)
- The report of the National Commission on Fiscal Responsibility and Reform, the bi-partisan panel headed by former Senator Alan Simpson (R-Wyoming) and Erskine Bowles, known as the Simpson-Bowles recommendations.
- Public remarks by President Obama
Next: A review of Obamacare
Obamacare
The new health care reform law is quite complex and covers all aspects of our health care delivery systems. Here's a brief summary of some of the provisions regarding Medicare:
- The hated 'donut hole' in Part D's prescription drug program will be gradually phased out by 2020.
- Subsidies for Medicare Advantage Plans will be phased out, putting them on equal footing with traditional Medicare.
- The Center for Medicare and Medicaid Innovation will review testing of alternative payment and delivery models; an important goal is to reduce fraud and waste.
- Medicare will receive a funding boost through higher taxes on earned income and investment income for on high-income individuals (singles earning $200,000 or more, married couples earning $250,000 or more). In addition, high-income retirees will pay additional amounts for Part D prescription drug coverage.
- The Independent Payment Advisory Board will have the power to slow Medicare's cost increases if the program's spending rises more than the growth in the U.S. gross domestic product, plus one percentage point. So if the U.S. economy grows at three percent in a year, growth in Medicare expenditures will be limited to four percent.
- There are a number of provisions that will limit payments to hospitals and physicians and provide incentives for delivering efficient care.
Note that if Obamacare is simply repealed, none of the above would happen. Presumably we'll go back to the donut hole, and certain agencies will stop investigating how to contain Medicare's costs, improve efficiencies, and reduce fraud and waste. High-income individuals will welcome elimination of the additional taxes and the surcharge for Part D coverage, although this loss of revenue will only further worsen Medicare's financing. If a repeal is accompanied by a new law, most likely it will contain provisions to contain rising medical costs.
Next: A review of Ryancare
Ryancare
Earlier this year, Rep. Paul Ryan proposed the following changes to Medicare:
- Obamacare would be repealed, including provisions to close the donut hole and establish the Independent Payment Advisory Board that was intended to limit the growth of Medicare spending.
- People age 55 or older would participate in traditional Medicare.
- People below age 55 would receive premium subsidies, commonly called vouchers, and be able to buy private, for-profit medical insurance on the open market.
- The eligibility age would be gradually raised from 65 to 67.
Over time, the federal government would reduce its financial commitment to meaningless levels as the cost of health care outpaces increases in the premium subsidies. Seniors would be on their own, dealing with for-profit insurance companies. If you've ever had to argue with an insurance company over a medical claim, you'll know what would happen. People will be denied care, and many seniors won't be able to fight for their claims.
A better name for his proposals might be Ryan-no-care, not Ryancare.
Next: The Simpson-Bowles plan
Simpson-Bowles Recommendations
The bi-partisan deficit commission would keep Medicare as a medical insurance program (i.e. no vouchers), but would make the following changes:
- It would dramatically simplify Medicare by combining deductibles and copayments for Part A (hospital and in-patient expenses) and Part B (physician and outpatient expenses). In total, this would most likely increase cost-sharing by patients, thereby motivating them to find ways to use less medical services.
- Similarly, Medigap plans would be prevented from offering first dollar coverage, where you have no copayments and aren't incented to reduce your medical spending.
- A "doc fix" would reform the charade where every year Congress suspends scheduled cuts in physician reimbursements. The reform would freeze physician reimbursements at current levels, and would require offsetting savings elsewhere to pay for the elimination of previously scheduled reductions.
- Other incentives and penalties would encourage physicians, lawyers, and health care providers to take responsibility for slowing growth in health care costs.
- The Independent Payment Advisory Board would be strengthened, not discontinued as under Ryan's proposals.
- Catastrophic protection for seniors would reduce the copayment percentage from 20 to 5 percent after out-of-pocket costs exceed $5,500, and would cap the maximum out-of-pocket expenses at $7,500 per year.
Next: Obamacare revisited, and what you should do
Obamacare revisited
President Obama has recently suggested or publicly supported the following changes to improve Medicare's financing and reduce the federal deficit:
- Additional means-testing of Medicare benefits (Part B and D premium surcharges for high income individuals are a current form of means-testing).
- Gradually increase the eligibility age to 67 over 25 years.
- Double down on the power of the Independent Payment Advisory Board, giving it the power to slow Medicare's growth if it exceeds the growth rate of the U.S. gross domestic product by 0.5 percentage point instead of one point.
My take on these proposals, and what you should do
Given the runaway cost of medical spending, reining in the growth of Medicare's costs should be a priority of the bi-partisan committee. Unfortunately, that's a hard goal to achieve, as the government will need to influence patient health and spending habits, as well as the entire medical delivery system. There are only four ways to quickly reduce spending on Medicare, and none of them are easy:
- Charge patients more through higher deductibles, copayments, and premiums
- Freeze or reduce reimbursements to physicians, hospitals, and care providers
- Reward more efficient health care providers and penalize less efficient providers
- Encourage us to be more healthy and need fewer medical services
I'd count on continued scrutiny of the medical system through the Center for Medicare and Medicaid Innovation and/or the Independent Payment Advisory Board, or a successor institution.
I give raising Medicare's eligibility age from age 65 to 67 a low chance of passing the bi-partisan committee. Like potential changes to Social Security's retirement ages, there's no short-term deficit reduction resulting from increasing Medicare's eligibility age, due to exemptions for people who are 10 years away from eligibility. But don't breathe a sigh of relief -- such changes are inevitable as a separate effort to strengthen Medicare.
Ryan's voucher plan has received tremendous resistance by senior groups, and even some Republicans won't touch it. The voucher idea should be dead for the foreseeable future.
You should, however, plan on reduced spending from Medicare for your medical bills. This could be achieved by:
- Increasing deductibles and copayments, as in the Simpson-Bowles plan.
- Restrictions on your choice of physicians, hospitals, and other health care providers, through the authority of the Independent Payment Advisory Board. You might be limited to those providers who meet certain efficiency standards.
As with potential changes to Social Security, this isn't good news, but it's the reality we face.
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