President Obama Outlines Plans for Deficit Reduction/Entitlement Reform

On April 13, 2011, President Obama delivered a speech outlining his plan for reducing the federal budget deficit by $4 trillion within 12 years, in part through Medicare and Medicaid reforms. Specifically, the President is calling for $480 billion in Medicare and Medicaid cuts by 2023 and at least an additional $1 trillion in cuts over the subsequent decade. One mechanism the President proposes to control Medicare spending is directing the Affordable Care Act’s (ACA) Independent Payment Advisory Board (IPAB) to hold Medicare cost growth per beneficiary to the gross domestic product per capita plus 0.5 percent (rather than 1.0 percent under the ACA) beginning in 2018. If spending growth exceeds the target, the IPAB's proposals go into effect automatically unless Congress enacts alternative legislation to achieve required savings. The President proposes additional budget enforcement measures to ensure savings targets are met. The President also calls for $200 billion in cuts in Medicare prescription drug spending (including by "leveraging Medicare’s purchasing power," speeding the availability of generic biologics, and prohibiting brand-name companies from entering into “pay for delay” agreements with generic companies). With regard to Medicaid, the plan calls for savings of at least $100 billion over 10 years. According to the summary, the President’s plan would replace the current federal matching formulas with a single matching rate that rewards states for efficiency and automatically increases if a recession increases enrollment and associated state costs. Additional Medicare and Medicaid "accountability" proposals include, among others: restricting states’ use of provider taxes to lower their state spending without providing additional health services; recovering "erroneous" payments from Medicare Advantage plans; capping Medicaid payments for durable medical equipment (DME); and implementing Medicaid management of high prescribers and users of prescription drugs, among other things.  President Obama also announced that he has asked Majority Leader Reid, Speaker Boehner, Minority Leader Pelosi and Minority Leader McConnell to each designate four members to participate in bipartisan, bicameral negotiations led by the Vice President, beginning in early May to develop a legislative framework for comprehensive deficit reduction.

President Obama’s deficit reduction proposal comes at a time when the House of Representatives is considering a budget proposal for FY 2012 (H. Con. Res. 34) drafted by House Budget Chairman Paul Ryan (R-WI) that calls for $6.2 trillion in spending cuts over the next 10 years, although estimates of savings vary (see http://budget.house.gov/fy2012budget/). Among other things, the budget resolution includes significant structural reforms of the Medicare and Medicaid program and repeal of the ACA. With regard to Medicare, the plan would convert the Medicare program to a premium support model for individuals becoming eligible for Medicare beginning in 2022. Under this policy, traditional Medicare eventually would be replaced with a system whereby beneficiaries would choose among competing health plans meeting coverage standards (similar to current Medicare Part C plans), and a premium-support payment would be made to the plan, subsidizing its cost, with increased assistance provided to lower-income beneficiaries and those with greater health risks. The resolution also would convert federal Medicaid spending into a block grant program. In addition, the measure generally calls for repeal of the ACA, although presumably such efforts would focus on ACA insurance-related provisions rather than, for example, the extensive Medicare provider reimbursement or fraud enforcement provisions. The House Budget Committee approved the measure on a party-line vote, and it is scheduled to be considered by the full House this week. Note that the budget resolution simply provides the spending and revenue instructions for the Congressional committees; enacting legislation would need to be adopted to implement any of the proposed policy changes. Democratic leaders have widely criticized the Ryan plan. Nevertheless, particularly in light of today’s proposal by the President, it appears increasingly likely that some form of entitlement reform may advance this year.

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