What would Simpson-Bowles 2.0 do to Medicare?

Liberals are up in arms about the new Simpson-Bowles deficit reduction framework because, in brief, it calls for about $1.4 trillion less in revenue over ten years than Simpson-Bowles 1.0  (let's call it SB 1) along with roughly another $1.8 trillion in spending cuts, counting interest savings. That's more cuts than those mandated by the looming sequester, but more back-loaded, and with $600 billion coming from Medicare and Medicaid, which the sequester doesn't touch.

The shock comes from the reduction in proposed new revenue compared to the original plan, a change that simply reflects Obama's more limited revenue goals ($1.2 trillion over ten years at last ask, compared to $2.6 in SB 1). Spending cuts remain approximately the same, making the whole package proportionately more cut-heavy.

I want to look for a moment at the $600 billion in savings SB 2 proposes for "health care reforms" -- $200 billion more than SB 1 laid out, but  no more than Obama put forward in his last "grand bargain" offer to Boehner.  Simpson and Bowles envision bending the health care curve in ways that overlap with those envisioned by Obama -- though BS 1 cuts benefits in ways that Obama would not approve, and BS 2 would presumably cut benefits still more. Their rather sketchy new framework takes an "all of the above' approach to reducing healthcare costs -- hitting providers, beneficiaries, and drug companies:

Reduce Medicare and Medicaid spending by improving provider and beneficiary incentives throughout the health care system, reducing provider payments, reforming cost-sharing, increasing premiums for higher earners, adjusting benefits to account for population aging, reducing drug costs, and getting better value for our health care dollars (Feb-Dec 2013)

The apparent reference to raising the Medicare eligibility age, estimated elsewhere to save about $150 billion over ten years (costs that would be absorbed partly by seniors and partly by more federal spending in the ACA), accounts for most of the difference between BS 1 and BS 2 on the healthcare front.   The rest of the  the goals outlined in that little precis above are reflected in proposals in SB 1 --- and also, in different proportions, in Obama's 2013 budget, which proposes $350 billion/10 years in healthcare savings.

Simpson and Bowles, like Obama, envision phasing out fee-for-service payment, which rewards providers for performing unnecessary services. The ACA reduces provider payments and launches various pilot programs to, in the SB phrase,  "improve...provider incentives"  -- and BS 1 proposes to "aggressively implement and expand" these ACA pilots.  BS 1 also implicitly proposes a kind of super-IPAB -- a global effort to hold all federal healthcare spending to GDP + 1%, the IPAB target. But the real action on this front could be in the "doc fix" -- long-term reform to the "sustainable growth formula" (SGR) that was miscalibrated in the 1997 deficit reduction bill and has been patched every year since 2002.

A bipartisan (if Dem-centric) bill recently introduced in the House would, according to Modern Healthcare, "mostly unravel the fee-for-service system by requiring physicians to adopt one of several replacement models that the CMS would test and approve over five years." A weaker GOP bill preserves fee-for-service but would hedge it with various performance measures.  BS 1, in more general terms, "recommends directing the Centers for Medicare and Medicaid Services (CMS) to develop an improved physician payment formula that encourages care coordination across multiple providers and settings and pays doctors based on quality instead of quantity of services."  While it may be hard to imagine our gridlocked Congress getting a long-term fix done, and doing it in such as a way as to put fee-for-service on a glide path to extinction, that's what Simpson and Bowles envision.  Since finding viable substitutes for fee-for-service is a feel-your-way kind of thing, a truly effective doc fix could build on the various payment experiments launched by the ACA -- which, again, BS 1 proposes to "aggressively implement and expand."

BS 1 and Obama's 2013 budget share a variety of relatively small-bore cost-cutting measures: reducing hospital payments for medical education, cutting Medicare payment for bad debts, going after fraud, reducing home health care payments.They also share one big one: paying Medicaid drug rates for "dual eligibles", low income seniors who qualify for both Medicare and Medicaid but get their drugs under Medicare Part D, which pays higher reimbursement rates than does Medicaid. (For some reason, the Obama budget projects triple the savings that BS 1 does for this.) 

The biggest difference is in two big bites that BS 1 imposes on beneficiaries, imposing new deductibles and larger co-pays. These measures are proposed not just in the name of shifting costs to seniors, but to create incentives to avoid unnecessary care:

3.3.2 Reform Medicare cost-sharing rules.
(Saves $10 billion in 2015, $110 billion through 2020)

Currently, Medicare beneficiaries must navigate a hodge-podge of premiums, deductibles, and copays that offer neither spending predictability nor protection from catastrophic financial risk. Because cost-sharing for most medical services is low, the benefit structure encourages over-utilization of health care. In place of the current structure, the Commission recommends establishing a single combined annual deductible of $550 for Part A (hospital) and Part B (medical care), along with 20 percent uniform coinsurance on health spending above the deductible. We would also provide catastrophic protection for seniors by reducing the coinsurance rate to 5 percent after costs exceed $5,500 and capping total cost sharing at $7,500.

3.3.3 Restrict first-dollar coverage in Medicare supplemental insurance.
(Medigap savings included in previous option. Additional savings total $4 billion in 2015, $38 billion through 2020.)

The ability of Medicare cost-sharing to control costs – either under current law or as proposed above – is limited by the purchase of supplemental private insurance plans (Medigap plans) that piggyback on Medicare. Medigap plans cover much of the cost-sharing that could otherwise constrain over-utilization of care and reduce overall spending. 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. We also recommend similar treatment of TRICARE for Life, the Medigap policy for military retirees, which would save money both for that program and for Medicare, as well as similar treatment for federal retirees and for private employer-covered retirees.

Obama's 2013 budget actually takes a couple of tiny bites of the same sort, raising the Part B deductible by $25 in 2017, 2019 and 2021 (raising just $2 billion/10 years), and adding a surcharge on Medigap policies "that cover substantially all Medicare co-payments" --  as in Bowles-Simpson, "to encourage more efficient health care choices."  But this measure also raises a relative pittance -- $2.5 billion over 10 years -- in contrast to the large bites BS 1 takes out of Medigap policies. 

Obama, in short, primarily wants to change incentives for providers. Bowles-Simpson wants to change them for seniors too.  It's worth noting that while BS 1 raises seniors' costs, it also caps them in a salutary way.