Budget options will reshape healthcare

While the struggle continues in 2014 to provide effective and affordable coverage, administration and Congressional leaders will weigh a host of spending options important to coverage and delivery. 

Federal outlays for healthcare and health-related federal tax benefits exceed $1 trillion a year, according to the Congressional Budget Office (CBO). These and related spending on discretionary public health and biomedical research programs add another $115 billion to federal spending. All outlays are slated to increase in 2014 as more people become eligible for Medicaid, and new federal tax subsidies kick in under the Affordable Care Act.

Policymakers are combing budget plans for opportunities to reduce payments to providers and insurers, revise incentives for employer coverage and discourage consumer spending on health services. As insurers play an ever-expanding role in serving Medicare and Medicaid populations, these decisions stand to shape industry revenues and finances significantly. 

Key budget-cutting proposals

Restrict Medigap insurance and impose cost-sharing. Cost-sharing for all Medicare beneficiaries would make individuals more sensitive to healthcare costs. Proposed changes would lower Medigap premiums, but also erode purchases as Medigap plans lose value for seniors. This would reduce federal outlays by more than $100 billion over 10 years (2014 to 2023), according to CBO projections.

Convert Medicare to a premium support system. Advocated by Republican conservatives who believe that a defined-contribution approach is necessary to prevent bankruptcy, the change could save up to $275 billion-depending on the generosity of federal contributions, the range of beneficiary choices and whether traditional Medicare would continue as an option.

Integrate Medicare reforms. Reforms would increase premiums for Medicare Parts B and D (saves almost $300 billion); bundle payments to providers (cuts nearly $50 billion); raise the age of eligibility to 67 (saves $20 billion); and require drug companies to pay rebates on Part D coverage for low-income Medicare beneficiaries (reduces outlays by more than $120 billion).

Cap federal contributions to state Medicaid programs. This will limit open-ended federal financing to encourage states to be more efficient. The cap saves $100 billion to $600 billion, but also leads states to scale back programs.

Limit medical malpractice suits against doctors. A number of reforms would save $64 billion by reducing physician outlays for malpractice insurance and curbing “defensive medicine.”

Cut tax preferences for employment-based coverage. This highly controversial move could lower federal spending by more than $500 million. It also would decrease employment-based coverage and leave more people without health insurance.

Add a “public plan” to exchanges. Set to begin in 2016, this coverage option would attract some 2 million people, CBO estimates, and save more than $150 billion. By paying lower rates to providers, it could offer premiums 7% to 8% lower than private insurance, pressuring insurers to lower their own premiums to compete. This would translate into a reduction in exchange subsidies for beneficiaries, and access to lower-cost plans would spur more employers to offer coverage through the exchanges. 

Another way to save more than $100 billion is to end exchange subsidies for people with incomes over 300 percent of poverty, instead of the 400 percent level now authorized. This would affect some 1 million people, many who would find insurance unaffordable.