The Impact of the President’s Budget on People Who Depend on Medicare and Social Security

Yesterday, President Obama unveiled his Fiscal Year 2014 Budget.[1]   It contains significant changes to the Medicare program – including some that would strengthen the program's fiscal stability, and some that would weaken the program and shift costs to beneficiaries.  On the one hand, it offers serious improvements to strengthen Medicare's financial footing: proposals that allow Medicare to pay lower prices for prescription drugs would help ensure Medicare's solvency; proposals that reduce reimbursement to Medicare Advantage plans so they are not paid more than traditional Medicare are also smart cost-saving measures. These commonsense proposals take the right approach to saving taxpayer dollars while protecting older adults, people with disabilities and their families.  On the other hand, we are deeply concerned by provisions in the Budget that cut Medicare and Social Security benefits, shift costs to vulnerable families, and add to overall health care costs. 

The Budget Preserves Medicare as a Community Program

Similar to the President's 2013 budget, the 2014 version preserves the Medicare program's promise to our nation's seniors and individuals with disabilities.  The President has demonstrated a commitment to preserve and strengthen the Medicare program, including preventing this public benefit from being turned into a private voucher (or "premium support") program.  In addition, the President's Budget does not seek to raise the age of Medicare eligibility, nor does it unwisely seek to alter the Medicare benefit structure in an attempt to obtain savings through redistributing beneficiary cost-sharing.

There are a number of provisions in the budget that would achieve savings without harming beneficiaries and/or strengthen existing protections for beneficiaries, including the following:

• Provides Prescription Drug Rebates:  The Budget would allow Medicare to benefit from the same rebates that Medicaid receives for brand name and generic drugs provided to beneficiaries who receive the Part D Low-Income Subsidy (LIS).   Drug manufacturers would pay the difference between rebate levels already provided to Medicare Part D programs.  Just this proposal, which would largely restore the law to what it was before Medicare Part D, would save the government more than $123 billion over 10 years,[2] savings that could lead to lower premiums and out-of-pocket costs for beneficiaries.[3]  
• Includes Other Drug Savings: In addition to drug rebates paid to Medicare for LIS enrollees, the Administration's budget includes a number of other proposals to lower the cost of prescription drugs, including:
  • Increasing the availability of generics and biologics by authorizing the Federal Trade Commission to stop companies from entering into anti-competitive "pay for delay" deals; and
  • Accelerating access to affordable generic biologics by modifying the length of exclusivity on brand name biologics.[4]   
• Closes the Part D Donut Hole Coverage Gap More Quickly: The President's budget would close the Donut Hole in 2015 – five years sooner than under current law – by accelerating manufacturer drug rebates and increasing brand-name drug discounts in the Donut Hole from 50 to 75% in 2015.[5]   
• Protects Medicaid: In an effort to encourage expansion of Medicaid through the Affordable Care Act, the Medicaid program is left largely untouched in the President's budget.
• Extends Qualified Individual (QI) Program: The QI program, which pays the Part B premium for individuals with income between 120% and 135% of the federal poverty level (FLP), is currently authorized through 2013.  The President's budget would extend the QI program through 2014.[6]
• Replaces Sequestration Cuts: Mandatory cuts to federal spending pursuant to the Budget Control Act of 2011 include a 2% across the board reduction in provider payments in Medicare, which have already had an impact on access to services by some beneficiaries.[7]  The President's budget would replace these cuts.[8]   
• Improves Payment Accuracy for Medicare Advantage: This is achieved by addressing overpayments resulting from the differences in the coding of medical conditions (risk scores) by providers in Medicare Advantage and those in Traditional Medicare.[9]

Also of note, the budget would provide "payment stability" for physicians for a number of years, rather than allowing a scheduled reduction in payment to go into effect in 2014, to give the Administration time to work with Congress to replace the Sustainable Growth Rate (SGR) and adopt new physician payment models.[10]

The Center has long supported advancing the goals of the Affordable Care Act (ACA) to achieve further savings from the Medicare program, including "improving Medicare's sustainability by encouraging high-quality, efficient care."[11]   As discussed below, however, we are concerned  that some of the savings proposed in the Budget conflict with the spirit and aims of ACA and would result in further shifting costs to people who rely on Medicare.

Proposals that Cause Concern

Of the roughly $400 billion in health care savings, the President's budget seeks to save the Medicare program $371 billion over 10 years.[12]   Of this amount, over $67.7 billion in savings are targeted through proposed "structural changes."[13]

As outlined below, the proposed structural changes are identical to some of the proposals contained in both the President's FY 2013 Budget and his September 2011 Plan for Economic Growth and Deficit Reduction (the Administration's recommendations to Congress's Joint Select Committee on Deficit Reduction, otherwise known as the "Super Committee ").[14]

The Center has opposed many of these proposals over the last two years, and we continue to do so.  As the current proposals are largely the same as those proposed in the FY 2013 budget and during the Super Committee process, our objections remain largely the same.[15]

• Implementing a Co-Payment for Home-Health Care:[16]  Starting in 2017, this proposal would create a home health co-payment of $100 per 60-day home health episode, applicable for episodes with five or more visits not preceded by a hospital or other inpatient post-acute care stay.  Imposing such co-pays would have a staggering impact on individuals with long-term and chronic conditions, who would essentially incur $600 in new out-of-pocket costs annually.  Additionally, it could lead to higher hospitalizations (and thus higher costs) as a result of beneficiaries forgoing needed care when they cannot afford the co-payments. Moreover, eliminating the co-pay requirement from situations where there has been a hospital or nursing home stay creates an unwise incentive toward hospitalization or nursing home care, and will harm people with long-term or chronic conditions.[17]   
• Increasing the Part B Deductible for New Beneficiaries:[18]  The President's plan would increase the Part B deductible for newly eligible beneficiaries by $25 dollars in the years 2017, 2019 and 2021 (for a total $75 increase). This proposal would have a significant impact on Medicare beneficiaries, nearly half of whom had annual incomes below $22,500 in 2012.[19]   The proposal shifts costs to beneficiaries and could result in increased costs when needed care is postponed until an illness is more complicated and more costly to treat.  Further, this proposal draws an arbitrary line between current beneficiaries and near retirees who would be unaffected and those who will join Medicare in the future and will permanently pay more.
• Expanding Means-Testing of Medicare Part B and D Premiums:[20]  Medicare is already a means-tested program, with higher-income beneficiaries paying more for Part B and Part D premiums. While most beneficiaries pay 25% of the cost of Part B services in the form of premiums, those subject to the income-related premium pay a greater share of Part B expenses.  The current requirements affect only about 5% of beneficiaries – those with incomes at or above $85,000 a year. The President's proposal would increase the share of Part B expenses paid in premiums by higher income beneficiaries to between 40% and 90% of such expense, depending upon an individual's income bracket.  This proposal would also freeze the income level for higher payments at $85,000, not adjusting for inflation, cost of living, or any other such factors, until 25% of beneficiaries were paying the higher premiums.  According to the Kaiser Family Foundation, the income thresholds for the higher-income Part B and Part D premiums in 2035 would thus be the equivalent of $47,000 for individuals and $94,000 for couples in today's dollars[21] – substantially lower than the thresholds often used to define higher-income individuals in other policy discussions.  In the future, Medicare beneficiaries in the top 25% who are far from wealthy would find themselves paying disproportionately for their healthcare costs.  Not only would this proposal shift more costs to people who have incomes well below the highest levels, it might lead to more people choosing not to participate in Medicare.  Fewer participants in parts B and D would result in increased costs for the remaining participants.
• Increasing the Cost of Key Medigap Policies:[22] In another effort to discourage people from using health care, the Plan proposes a surcharge on Part B premiums for people who purchase Medigap policies with low cost-sharing.  This surcharge would be equivalent to about 15% of the average Medigap premium (or roughly 30% of the Part B premium). Eliminating or discouraging first-dollar coverage in Medigap only shifts those costs to beneficiaries, who may go without needed medical care prescribed by their doctors.  In fact, since Medigap policies only cover care that Medicare deems "medically necessary," such changes should not be needed to deter unnecessary utilization and would instead inhibit use of necessary care.[23]   This proposal would penalize future beneficiaries who rationally seek to fill in Medicare's gaps in coverage for care they need.
• Encouraging the Use of Generic Drugs by Low-Income Beneficiaries:[24]   This proposal, which was not in the Administration's earlier budgets or debt reduction packages, would seek to increase the use of generic drugs by Part D Low-Income Subsidy (LIS) enrollees by increasing specified copayments for brand drugs from their current law level, while lowering specified copayments for generic drugs by more than 15%.[25]  If a generic substitute is not appropriate or available, or a beneficiary successfully appealed a coverage determination, beneficiaries would continue to be charged current law amounts.   While we support efforts to encourage greater utilization of generic drugs, we believe that this should be done by lowering or eliminating copayments for generics alone – not by also increasing the cost of brand name drugs.
• Adjusting Skilled Nursing Facilities' Payments to Reduce Hospital Readmissions: Reducing SNF payments for rehospitalizations is poor policy for two reasons.  First, "rehospitalization" is avoided by a hospital instead labeling a patient an outpatient receiving observation services.  Even though the patient is in a hospital bed, hospitals and SNFs can avoid payment reductions just by calling patients "outpatients."  This semantic gimmick does not mean patients are not actually in the hospital receiving care and treatment.[26]  Second, penalizing the rehospitalization of patients may discourage SNFs from sending residents who need hospital care to the hospital. Requiring better staffing in SNFs is a better way to avoid unnecessary rehospitalization.[27]   
• Equalizing Payments for Certain Conditions Treated in Inpatient Rehabilitation Facilities and Skilled Nursing Facilities: Equalizing payments between IRFs and SNFs is poor policy.  Rate equalization will result in Medicare beneficiaries being denied medically necessary care and is unlikely to achieve the cost savings anticipated.  Although IRFs and SNFs may treat some patients with similar conditions, the care that they provide, and their patient outcomes, are different.  Compared to patients in SNFs, patients in IRFs have shorter lengths of stay and better outcomes at discharge and are more likely to be discharged to home (rather than to another health care setting).[28]  Recent reports by the Inspector General[29] and the Department of Justice's intervention in litigation against SNFs for fraudulent billing of therapy[30] underscore SNFs' overbilling Medicare and the frequent inadequacy of therapy in the SNF setting.

Finally, although it is not a Medicare-specific proposal, we have grave concerns about the President's proposal to alter the way the federal government measures inflation for purposes of administering federal benefits by implementing a "chained-CPI."  The impact of this change on Medicare beneficiaries receiving Social Security payments will be devastating over the long-term.  Use of a chained-CPI will exacerbate the impact of proposed Medicare cost-shifting outlined above.  In short, it is an unfair, unnecessary, and unwise cut to Social Security benefits which will harm millions of older Americans and people with disabilities who live on limited means.

Conclusion

Overall, the President has demonstrated a commitment to preserve and strengthen Medicare. His FY 2014 Budget contains proposals that improve the program and keep it healthy for current and future enrollees.  However, as outlined above, other provisions would increase out-of-pocket costs for beneficiaries, and would not achieve the stated goal of creating incentives for beneficiaries to seek high-value services.  Instead, these misguided provisions would cause people to go without necessary care and add to overall health care costs. These cuts to Medicare and the changes to Social Security target people who can least afford them and programs that did not cause the deficit. We urge the President and Congress to reject these provisions.