Health Care Reforms in Chairman Paul Ryan's FY 2015 Budget

Budget Committee Chairman Paul Ryan’s (R-WI) FY 2015 budget achieves $3 trillion of its $5.1 trillion in deficit reduction over the next ten years from health care programs, predominantly from repealing the coverage expansions passed in the Affordable Care Act (ACA). Repealing those coverage expansions alone would reduce spending by $2.1 trillion through 2024. Notably, though, Ryan’s budget leaves the ACA’s Medicare reforms in place (although also creates a reserve fund to make it easier for Congress to replace those reforms with other cuts). Other illustrative policy changes include:

Medicaid Block Granting (2015-24 Savings: $732 billion)

In place of the current matching system, where the federal government pays an average of 57 cents out of every dollar of Medicaid benefits, Ryan’s budget resolution would provide a block grant to each state based on current spending for Medicaid (for the non-ACA expansion population), and which would increase each year to account for inflation and population growth. The theory behind such a proposal is that it would allow states more flexibility in administering the Medicaid program, and would better incentivize states to control costs by allowing them to keep any savings they achieve (rather than 57 percent, on average, accruing to the federal government today). However, opponents of the policy argue that a block grant would break the guaranteed benefit status of Medicaid today, and that the declining dollars relative to health care costs over time create too large a hole to fill through efficiencies alone, thereby effectively shifting costs to states and localities or necessitating cuts in coverage. They also argue that a block grant would not allow states to adequately respond to spikes in enrollment caused by recessions.

Increased Medicare Means-Testing (2015-24 Savings ≈ $75 billion)

The biggest savings from Medicare in Chairman Ryan’s budget come from recommending a proposal from the President’s FY 2014 budget to increase means-testing in Medicare. Specifically, that policy would freeze the current income thresholds above which beneficiaries pay higher premiums for Medicare Part B and Part D at $85,000/$170,000 (single/couple) until 25 percent of beneficiaries are subject (which would likely occur sometime in the 2030s). Additionally, instead of paying higher premiums above those thresholds ranging from 35 percent to 80 percent of program costs, the proposal would increase the lowest amount to 40 percent, the highest to 90 percent, with 7 brackets in between.

Premium Support (2015-24 Savings ≈ $1 billion)

Starting for new beneficiaries who become eligible in 2024 or later, the budget supports introducing a competitive bidding, or premium support, system between traditional Medicare and Medicare Advantage (MA) plans. In each region, the federal contribution would be based on the enrollment weighted-average of the costs of traditional Medicare and MA plans. Therefore, the federal contribution would provide all Medicare beneficiaries with the option to enroll in an average cost plan (that covers the full suite of guaranteed Medicare benefits) in their region (whether that is traditional Medicare or an MA plan) for the same premium they would pay today under current law. Beneficiaries who choose to enroll in a plan that is more expensive than the average plan – even if that plan is traditional Medicare – would be required to pay the incremental additional cost. Likewise, a beneficiary who enrolls in a plan that is less expensive than the average plan would be rebated the full difference in cost from the benchmark.

The main difference from current law (and criticism from opponents) is that beneficiaries could have to pay higher premiums to be in the public traditional Medicare program if enough MA plans in a region offer the same benefits for less money. Given that 2013 data shows that HMOs in MA, on average, cost 8 percent less than traditional Medicare, this would likely occur in many regions across the country.

This approach is similar to one proposed in a joint white paper from Chairman Ryan and Senate Finance Chairman Ron Wyden and from the Bipartisan Policy Center’s Domenici-Rivlin Debt Reduction Task Force.

However, this budget’s premium support proposal differs importantly from previous iterations in prior House GOP budgets in two key ways. First, the federal contribution in each region would now be based on the average bid rather than the 2nd-lowest bid before, which effectively shares the savings that accrue from competitive bidding with seniors. According to an analysis from the Congressional Budget Office (CBO), this approach would lower beneficiary costs by 6 percent and decrease federal spending on Medicare Parts A and B by 4 percent for the affected populations.

Second, Ryan’s FY2015 budget proposal no longer includes a cap on the growth of the federal contribution per beneficiary, whereas last year the contribution’s growth was capped at GDP growth plus 0.5 percentage points. While this change has little effect in the near-term given that Ryan’s proposal does not begin until 2024 and then only applies to new beneficiaries, over time the effects on the budget could be very large if Medicare cost growth remains elevated as it historically has. For instance, if the proposal without a cap applied to all beneficiaries in 2024, it could save the federal government around $250 billion from 2025-2034 based on extrapolations of CBO estimates, but the previous cap would have saved roughly an additional $300 billion on top of that, assuming CBO projections of Medicare cost growth.

Medical Malpractice Reform (2015-24 Savings ≈ $65 billion)

The budget endorses medical malpractice reform, although it does not specify which policies it would pursue. One version, which is a CBO option and has been proposed by House Republicans in the past, would make a number of changes, including:

• Capping awards for noneconomic damages at $250,000
• Capping awards for punitive damages at the greater of $500,000 or two times the value of economic damages
• Reducing the statute of limitations for discovery of injuries from three to one years
• Establishing a fair-share rule, where a defendant is only responsible for a portion of the award based on their share of the responsibility rather than the joint-and-several liability rule
• Allowing evidence of income from collateral sources

According to CBO’s analysis, enacting tort reform would impact health care spending by lowering health insurance premiums and by reducing utilization of health care. Spending in public programs would be reduced, and revenue would increase as the lower premiums resulted in employees taking more of their compensation in the form of taxable income rather than employer-paid premiums.

Cost-Sharing and Medigap Reform (2015-24 savings ≈ $18 billion)

Somewhat buried in the budget is an endorsement of Medicare cost-sharing reforms starting in 2024. The document says "the fee-for-service benefit would be modernized to have a single deductible and by reforming supplemental insurance policies."

Although the specific proposal is not clear, a similar CBO budget option would simplify Medicare cost-sharing and restrict the amount of cost-sharing that Medigap plans could cover. It would combine the current Part A and Part B deductibles into a single deductible of $550 with a uniform co-insurance rate of 20 percent up to an out-of-pocket cap of $5,500, which CBO estimates would hold the percentage of health care costs borne by the beneficiary constant. In addition, Medigap policies would be prohibited from covering the first $550 of cost-sharing and 50 percent of the next $4,950. These policies, particularly the Medigap reform, would discourage over-utilization of health care, therefore producing federal savings. An analysis from the Kaiser Family Foundation shows that such a proposal would also make beneficiaries, on average, better off.

CBO estimates this option would save $16 billion in 2023, so the 2024 savings would be expected to be in that range.

One issue with the Ryan budget overall is that it includes a deficit-neutral reserve fund to enact a permanent "doc fix." While the budget already includes enough Medicare savings to offset it, it does not assign these savings to the fund, instead relying on further unspecified offsets. Doing so may make it harder for the relevant committees to come up with the savings to offset the doc fix.