Health Care

The signature health care provision in the Bush budget is the administration’s proposal to tax employer-provided health benefits beginning in 2009 to help pay for a new standard deduction. The proposed health insurance deduction of $15,000 for family coverage ($7,500 for individual coverage) would be available to everyone, other than those covered by Medicare, regardless of whether health insurance is provided by an employer or purchased in the marketplace. The proposal only pretends to address our nation’s health care crisis. The reality is it could just make things worse.

• Those workers with good or more costly coverage will end up paying more in taxes while everyone without coverage gets no real benefit from the proposal. Many have too little income to buy health coverage while others do not gain anything from a deduction because they owe little or no income tax. In addition, by providing a standard deduction, regardless of the actual cost of the health care coverage, a family, the proposal gives bigger tax breaks for buying high-deductible plans in the deeply flawed individual market.

• Even the administration recognizes the minimal impact of its proposal on the nearly 45 million uninsured Americans. The U.S. Treasury Department estimates only 3 million to 5 million people would gain coverage, leaving virtually all those without health care today out in the cold. Even more troubling is the likelihood that some employers will drop coverage since employees may get tax-favored treatment by buying coverage in the individual market.

• Not only does the proposal do nothing for those without health care coverage, it also threatens those who do have employer coverage—
  • The proposed deduction applies to income and payroll taxes and is likely to lower Social Security benefits for millions of middle-class workers.
  • The value of the proposed deduction actually decreases over time because it will grow with the Consumer Price Index (CPI). Health care costs, on the other hand, have grown two or three times faster than the CPI over the last several years. As a result, when the value of employer-provided health coverage exceeds the standard deduction amount, workers will be forced to recognize that excess amount as income and pay more in taxes.
  • The administration estimates that 20 percent to 25 percent of health care plans or policies will have premiums for family coverage above the standard deduction amount at its introduction in 2009 with that number increasing to about 40 percent by the tenth year. All of the families covered by these plans will pay higher income taxes under the proposal.

Medicare—the federal health insurance program for seniors and people with disabilities—currently provides benefits to nearly 43 million Americans. Medicare Part A covers inpatient care, skilled nursing facility care, some home health care and hospice care. Part B (traditional fee-for-service Medicare) covers outpatient care. Part C (Medicare Advantage) gives beneficiaries the option of using managed care plans, such as health maintenance organizations (HMOs) and preferred provider organizations (PPOs) as well as private fee-for-service plans. Part D, the prescription drug benefit added by the Medicare Modernization Act of 2003 (MMA), began in January 2006 with seniors enrolling in private plans that contracted with Medicare to provide coverage.

The FY 2008 budget includes legislative and administrative proposals seeking more than $5 billion in Medicare savings for FY 2008 and nearly $76 billion over the five-year period from 2008 through 2012. These 2008 proposals represent more than twice the savings sought by the Bush administration in last year’s budget, cuts rejected by a Republican Congress.

Premium Increases for Medicare Beneficiaries

Included within the savings are two premium increases for Medicare beneficiaries:

• Beginning this year, Medicare beneficiaries pay an additional Part B premium based on income (the income thresholds are $80,000 for single beneficiaries and $160,000 for couples). Under current law, the income threshold rises with the Consumer Price Index. The Bush budget proposes to eliminate this indexing so more seniors would pay higher Part B premiums.
• In addition, the administration proposes to introduce the same income-based premium for prescription drugs under Part D.

Taken together these new Medicare premium increases will cost older Americans a total of $10 billion in 2008 through 2012 as well as erode the social insurance underpinnings of Medicare.

Reductions in Payments to Medicare Providers

To be sure, the vast majority of the proposed Medicare reductions—$3.9 billion in FY 2008 and more than $50 billion in the five years ending in 2012—come from reductions in payments to Medicare providers. But, these cuts merely shift costs to other health care payers, including employer-provided health care plans, and like the administration’s standard health insurance deduction proposal, the proposed Medicare reductions do not address the real problem—the continued growth of health care costs.

The budget also seeks to automatically trigger 0.4 percent reductions in all Medicare provider reimbursements when 45 percent of Medicare funding comes from general revenues. This proposal, like the elimination of Part B premium indexing and the introduction of an income-based Part D premium, seeks to change provisions agreed upon in the MMA only three years ago. Under the MMA, if the Medicare trustees report that the portion of Medicare funded by general revenues is projected to exceed 45 percent within seven years in two consecutive annual reports, the President must submit legislation to address the shortfall and Congress is to consider the proposal on an expedited basis. Instead of allowing the legislative process to work, the administration now just wants to make its designated cuts automatic without consulting Congress.

President’s Budget Ignores Overpayments to Private managed Care Plans Under Part C

While the administration wants seniors to pay more and providers participating in the traditional Medicare program to receive less, the proposed budget ignores the biggest special interest subsidy Medicare provides—overpayments to private managed care plans under Part C. These overpayments, which total nearly $65 billion over the next five years, cost taxpayers and beneficiaries more while forcing traditional Medicare—the plan overwhelmingly chosen by Medicare beneficiaries—to compete on an uneven playing field with private plans.

The administration proposes cuts to Medicaid amounting to $24.7 billion during the five fiscal years 2008 through 2012 and $60.9 billion over the 10-year budget window. Of these amounts, legislative changes account for $12 billion and regulatory changes account for $12.7 billion over the five-year period. For the 10-year period, legislative changes total $29.5 billion while regulatory changes would be $31.4 billion over 10 years.

Medicaid is administered and financed jointly by the federal government and states, with the federal government matching from 50 percent to 76 percent (depending on the state) of the costs states incur in purchasing health and long-term care services for eligible low-income people. There are two ways for the federal government to reduce its Medicaid spending. One approach is to achieve efficiencies in purchasing services for beneficiaries, for example, by increasing the rebate that drug manufacturers are required to pay for prescriptions Medicaid covers, which would reduce both federal and state costs. Another approach is to limit the matching of state Medicaid expenditures, thereby shifting costs to states. More than four-fifths of the administration’s proposed budget savings would be achieved by simply shifting Medicaid costs to the states.

The single largest Medicaid cut proposed is to lower the federal matching rate for all administrative costs to 50 percent, which would reduce spending by $5.3 billion over five years. This proposed cut comes at a time when state workloads have been increased by recent federal mandates, including some responsibility for administration of the low-income subsidies under the Medicare drug benefit, documentation of citizenship for most Medicaid applicants and enrollees, and implementation of new program integrity initiatives.

The administration’s “Affordable Choices” initiative, part of the health care program that includes introducing a new standard health insurance deduction, would only divert federal funds that currently support safety net providers serving large numbers of uninsured and low-income citizens to pay for “basic private health insurance” for those who not insured.

Taken together, these proposals shift more costs to states and divert funds from providers that serve the uninsured even as the number of uninsured is rising. And they would undermine state efforts to expand coverage by building on public programs and providing subsidies to low income individuals.

The administration’s budget proposes a net increase of $4.2 billion over five years and $9.7 billion over 10 years for reauthorization of the State Children’s Health Insurance Program (SCHIP). However, the proposed funding level does not keep pace with rising health care costs and the anticipated shortfalls facing the program. Experts estimate that $12 billion to $15 billion will be needed over the next five years to maintain coverage for children currently enrolled in SCHIP. Rather than maintain current coverage, or even expand coverage to the two-thirds of nearly 9 million uninsured children who are eligible for SCHIP or Medicaid coverage but are not enrolled, the administration’s budget would “refocus” SCHP on children and pregnant women at or below 200 percent of poverty.

Like Medicaid, SCHIP is financed by both states and the federal government, with the federal government paying an “enhanced matching rate” of between 65 percent and 84 percent on costs states incur. Sixteen states currently have SCHIP income eligibility thresholds above 200 percent of poverty and an additional 19 states effectively cover children in families with income eligibility levels above 200 percent of poverty because they allow certain income disregards or deductions (for example, work-related expenses). These states would receive SCHIP funds at the regular Medicaid matching rate of 57 percent for all enrollees with incomes above 200 percent of poverty as well as any covered non-pregnant adults.