The Fiscal Cliff, the Deficit and the Future of Medicare

Are We Heading for the Fiscal Cliff?

If we are speaking about the expiration of tax cuts and the implementation of automatic spending cuts scheduled to take effect on January 1st, it’s anyone’s guess.  But the real “fiscal cliff” is the growing Federal deficit.

We don’t know if or when we will reach this cliff.  However, if we do, the consequences could be serious both to our economy and the Federal programs many Americans rely on.

Today, the Federal debt held by the public represents 73% of the Gross National Product (GDP). By 2022, the Congressional Budget Office (CBO) estimates it could reach 90%.

As we have seen with other countries, it often takes a financial crisis before a government will act.

Unfortunately, the longer we wait to deal with the deficit the more painful the remedy becomes.

There are many factors contributing to the Federal deficit and any solution will require a broad set of actions.

This article focuses on only one aspect of the problem- the impact the Medicare program will have on the deficit.

The growth in Medicare expenditures is and will continue to be a major reason for our growing deficit.

There are two factors that will drive up the cost of Medicare going forward.

The first is the aging of the baby boomer generation.  According to the Congressional Budget Office (CBO), Medicare enrollment will increase from 45 million in 2010 to 60 million in 2021.

The second factor is the amount we spend on each Medicare beneficiary.  Today, the growth in Medicare expenditures is rising faster than the growth in the overall economy.  According the CBO, over the past 25 years, Medicare costs per person have grown one and a half percent faster each year than the per-person GDP.

If we don’t find a way to reduce Medicare expenditures and other entitlement programs, they will continue to take a greater share of the national budget.  This, in turn, will reduce our ability to fund other critical Federal programs.

The options are not great.

One part of a possible solution presented by the CBO would be to eliminate the Federal subsidies provided under the Affordable Care Act to help people obtain insurance, while keeping in place other provisions of the Act.

This would reduce health care spending by nearly 15% in 2020.  But it would also increase the number of people without insurance by 29 million.

Congress could also allow pending cuts in the Medicare fee schedule to go through on January 1, 2013 as required under the Sustainable Growth Rate.  However, such cuts would significantly impact Medicare beneficiaries’ access to medical care (see the article, Medicare Payments to Physicians and The Sustainable Growth Rate).

To address the rising cost of the Medicare program, the Affordable Care Act (ACA) established the Independent Payment Advisory Board (IPAB).  The board will have 15 members appointed by the President and confirmed by the Senate.

If Medicare spending exceeds specific targets, the Board must make recommendations to reduce costs.  The Department of Health and Human Services, in turn, must implement the recommendations.  Congress can reject the Board’s recommendations.  However, if it does, it must come up with equivalent savings.

The CBO estimates the IPAB will reduce Medicare outlays by $14 billion between 2017 and 2021.

However, the Board’s ability to make recommendations is limited.  It can not make recommendations that ration care, raise premiums, increase cost-sharing, restrict benefits or modify eligibility.

This leaves payments to providers as the major source of savings.

For that reason, the American Medical Association, as well as, a number of members of Congress oppose the implementation of the IPAB.

Given the opposition to the IPAB, there is no certainty the Board will ever become reality.

So where does this leave us?

A sustainable Medicare program will probably require a number of structural reforms.

But we will also need to address the fundamental drivers of health care costs.

Changing the way (not the amount) physicians are reimbursed, improving the coordination of patient care, avoid duplicative and unnecessary services, adopting electronic medical records, reducing fraud and abuse, having more Americans embrace healthy lifestyles and making sure everyone gets access to primary care are all actions that can help to reduce the growth in health care costs.

The long and short of it is nothing will be easy.  But then, what are the alternatives?

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