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March 21, 2014

Three Better Bipartisan Health Policies To Pay For Repealing Medicare’s SGR

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After months of House and Senate negotiations on legislation to replace the Medicare Sustainable Growth Rate (SGR) formula for updating Medicare physician payment, members of Congress are relieved to finally have an agreement. It is perfectly understandable that they, as well as professional medical organizations, want to act quickly. The danger is that even normally staid and stern budget hawks are prepared to move quickly to get this unworkable payment system permanently off the national agenda.

Of course, the Sustainable Growth Rate (SGR) should be repealed and replaced. Congressional leaders point out that since 2003, the routine cycle of emergency “doc fixes” have cost taxpayers $150 billion. The compromise legislation, which is barely better than the deplorable status quo, falls far short of what should be done. In fact, the House bill (H.R. 4015), which passed the House of Representatives on March 14, and the Senate bill (S. 2000), which was reported out of the Finance Committee, would worsen the nation’s deficits.

It is not only critical for lawmakers to responsibly finance the $138 billion in new spending over the next 10 years that eliminating and replacing SGR will incur, but also do so without creating future budget deficits.

As John Rother, Joel White, and David Kendall recently argued in their February 20 Health Affairs Blog post, “To Pay For Medicare SGR Repeal, Build On Bipartisan Health Care Policy,” there are bipartisan reforms like “bundled payments” for services, reduced hospital readmissions, and competitive bidding for medical equipment and supplies that can yield some savings. Indeed, the exotic menagerie of short-term funding “fixes” range from tightening up Medicare’s price controls and manipulating its complex administrative payment systems to gimmicky transfers from the Overseas Contingency Operations (OCO) fund. It is worth noting that the Congressional Budget Office (CBO) recently dismissed caps on discretionary spending to offset the costs of mandatory spending.

Lawmakers should instead create lasting changes in Medicare that would provide major funding for SGR repeal, while modernizing the program and guaranteeing permanent savings to enhance the program’s solvency. Here are just three:

Combine Medicare Part A and Part B, add catastrophic protection and rationalize the cost sharing. Modernizing the Medicare benefit structure into a single plan with a single deductible and uniform coinsurance would end the confusing, crazy quilt of cost sharing for Medicare beneficiaries. Providing a catastrophic benefit would give seniors peace of mind, and protect them from the financial devastation of a major health issue. Realigning the Medicare-Medigap relationship to eliminate first-dollar coverage would reduce excessive utilization and the attendant costs to taxpayers while also seriously restraining seniors’ Part B premium increases. CBO estimates that this set of changes alone would save $114 billion from 2015 through 2023 (if enacted by January 1, 2015).

Gradually increase Medicare’s eligibility age. While Social Security’s normal retirement age has been gradually increased to 67, Medicare’s eligibility age remains fixed at 65. There are a variety of demographic reasons to increase the Medicare eligibility age, reflecting the increased longevity of the population, a rapidly aging population with a slower birth rate, and the eroding ratio of workers to retirees, projected to be about 2.3 workers for each Medicare beneficiary by 2030. My colleagues at the Heritage Foundation propose increasing the age of Medicare eligibility to 68. The Business Roundtable suggests a target age of 70, though anyone 55 years or older would not be affected by the change. Even if the age of eligibility were gradually raised to 67, tracking current law for Social Security, CBO estimates the initial savings through 2023 at $63.5 billion.

Increase means-testing for wealthier recipients. Since 2003, Congress decided to require Medicare’s wealthiest recipients to pay more for their benefits, reducing the taxpayers’ burdens. Heritage has proposed requiring almost 10 percent of upper-income seniors to pay more for their benefits, by lowering the current annual income thresholds for an individual from $85,000 to $55,000, and for a couple from $170,000 to $110,000. In his Fiscal Year 2014 budget proposal, President Obama proposed expanding means-testing to include eventually 25 percent of all seniors. Different thresholds will yield different levels of permanent savings, but savings in all cases would be substantial over time.

All three of these policy changes have a history of bipartisan support. They would not only improve Medicare’s efficiency, but they would also benefit federal taxpayers who provide almost $9 out of every $10 spent on the program. The SGR debate offers yet another opportunity to achieve lasting and positive impact on the Medicare program. Congress should not miss it—again.

 - Robert Moffit is a is a senior fellow in The Heritage Foundation's Center for Health Policy Studies.

Originally appeared in Health Affairs

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