By John Reichard, CQ HealthBeat Editor
November 2, 2011 -- The leading budget gurus, to whom lawmakers are looking for advice on how to fashion a bold bipartisan plan to tame the debt crisis, made a forceful case for at least $4 trillion in deficit reduction. Their plan would restructure Medicare and raise revenues by ending tax breaks.
In an appearance at a hearing by the joint debt reduction panel, perhaps none of the analysts was more compelling than former Congressional Budget Office (CBO) Director Alice Rivlin in laying out a vision of how to protect vulnerable Americans while making a real dent in deficit spending.
The plan she developed late last year with former New Mexico Sen. Pete V. Domenici aims to keep the country from dipping back into recession and to overhaul Medicare without harming low-income beneficiaries, Rivlin said.
As appealing as that message might have seemed to deficit panel Democrats under pressure to preserve entitlements while reducing deficit spending, they greeted the Rivlin-Domenici proposal with a fair degree of skepticism. Among their questions were whether the plan would send traditional Medicare into a "death spiral," and how much money it would actually save.
Republicans are already pushing for fundamental changes in Medicare, particularly in the House where the GOP has embraced a plan written by Budget Chairman Paul D. Ryan, R-Wis., that would go even further than the Rivlin-Domenici proposal.
Joining Rivlin in testifying before the panel were Domenici, former Wyoming Sen. Alan K. Simpson, and former Clinton Chief of Staff Erskine Bowles. Simpson and Bowles headed President Obama's fiscal commission.
Four Trillion a 'Minimum'
The four witnesses agreed that a $4 trillion deficit reduction plan is needed—and that it must include both spending cuts and increased revenues. They suggested strongly that it's time for panel members to stop pretending otherwise.
"I have great respect for each of you individually," Bowles told panel members. "But collectively, I'm worried that you're going to fail—fail the country," he said.
"This is a problem we can't grow our way out of," Bowles added. "We could have double-digit growth for decades, and not solve this problem."
Bowles added that "$4 trillion is not the maximum amount we need to reduce the deficit. It's not the ideal amount. It is the minimum amount we need to reduce the deficit in order to stabilize the debt and get it on a downward path as a percent of GDP."
Simpson warned the panel against listening to voices on the right, like that of Americans for Tax Reform President Grover Norquist who has gotten pledges from many Republicans not to raise taxes. They also shouldn't heed, he said, calls from those on the left like AARP, which is running an ad campaign opposing any Medicare or Social Security cuts and warning that members who vote for such cuts could get voted out of office.
Simpson said he found the AARP ad "disgusting." And he said "we're just going to go around Grover and let Grover rant. Because I'll tell you one thing, if he and the AARP, if we are in thrall to those two groups, we haven't got a prayer, and neither have you."
Simpson told panel members that "you all know what you have to do in your gut. You know what you have to do."
Domenici delivered a similar message. "A plan that does not fundamentally restructure Medicare and other health entitlements will fail to adequately address the debt crisis that we face," he said. "Both sides, those who are against any fundamental health entitlement reform and those who oppose any revenue increases will be equally complicit in bringing the nation closer to the fiscal brink. I hope you heard that."
The panel faces a Nov. 23 deadline for producing a deficit reduction plan of at least $1.2 trillion over 10 years. If it misses the deadline or Congress doesn't enact its package, spending cuts totaling $1.2 trillion will occur automatically.
Rivlin said that "to achieve success, the committee will have to go well beyond the minimum charge of $1.2 trillion in savings over the next ten years, because even savings of this magnitude would leave the debt rising faster than the economy can grow."
Rivlin said that on the other hand "a grand bargain would reduce the chances of a devastating double-dip recession that could lead to a stagnant lost decade. It would also assure citizens and markets that our political process is functioning in the public interest, not stuck in partisan gridlock or overwhelmed by special interests."
Rivlin warned against further cuts in discretionary spending, saying they would "risk harming essential government functions. For the same reason, we urge you to avoid the sequester [automatic cuts]. Instead this committee should focus on reducing the growth of health care spending and reforming the tax code."
Overhauling Medicare
The Rivlin-Domenici plan would "preserve traditional Medicare for all seniors who prefer a fee-for-service system," Rivlin said. "It would also offer an array of comprehensive health plans competing with traditional Medicare to deliver the same benefits. Plans could not refuse any Medicare beneficiary" and would have payments adjusted to pay more for a particularly costly mix of enrollees.
Each beneficiary would receive a "federal contribution"—in other words, a sum of money the government would contribute towards premiums charged for the various plan options or for the traditional Medicare fee for service program.
Medicare would have a system of regional exchanges beneficiaries would go to pick either a new health plan or traditional Medicare. "The federal contribution would be determined by competitive bidding on a regional exchange," Rivlin said. "The federal contribution would be determined by competitive bidding on a regional exchange."
Competition "on a well-regulated exchange would lead providers and plans to deliver care more cost-effectively and reduce spending growth," she said. "As a fail safe, the federal contribution would be capped" so that it could rise by no more in a year than the growth in the gross domestic product plus 1 percent.
"Excess costs, if any, would result in an increased premium, but low and moderate income beneficiaries would be protected from these increase payments. This bipartisan proposal would preserve Medicare for our rapidly rising population of seniors," Rivlin asserted.
Plans would bid on the package of benefits to be delivered on exchanges and the federal contribution would be equal to the second lowest bid. If a beneficiary picked that plan or the plan with the lowest bid, he or she would have premium charges fully covered by the federal government. If the beneficiary picked a higher cost plan, he or she would pay the amount above the federal contribution. Thus beneficiaries would have an out-of-pocket incentive to pick a lower cost plan.
Sen. Jon Kyl, R-Ariz., a member of the deficit panel, asked Rivlin to explain why the contribution would be based on the second-lowest bid. "I think that's a very clever way to do this," he said.
Rivlin said the lowest bid "might well be flukishly low for some reason. "But people who . . . wanted to go to the even lower bid, the one that wasn't selected, could do so. And could get some money back," she said.
But Sen. Max Baucus, D-Mont., said some analysts worry that traditional Medicare could go into a "death spiral" under the Rivlin-Domenici plan. The worry is that insurance companies will offer coverage that is attractive to the most healthy beneficiary, leaving the less healthy in Medicare, he said. The more that happens, the more sicker people there are in traditional Medicare, and eventually that part of the program becomes unaffordable, Baucus suggested.
"We think we have avoided that possibility," Rivlin replied. "By the rules that we put in, any plan on the exchange would have to accept anybody. And they would be compensated on a risk-adjusted basis."
Sen. John Kerry, D-Mass, wondered whether Rivlin would classify changes to Medicare other than the "defined support" plan she outlined as structural reform of Medicare.
"Oh certainly," Rivlin said. "There are several approaches."
Kerry wondered whether things like raising the eligibility age would be considered structural reform, and whether moving Medicare away from fee-for-service medicine and into "value-based payment" where possible would fall into that category. Rivlin said no to the former but yes to the latter. "That's actually what we're proposing," she said.
Bowles listed other things he considered to be structural reform, such as ending first-dollar coverage for Medicare beneficiaries and letting Medicare using its purchasing clout to negotiate lower prices for drugs. He added that "we've got to have some kind of real tort reform."
Other panel members also seemed interested in types of Medicare changes that would be considered structural reform other than the defined support plan, perhaps reflecting a sense of how time consuming and complex it would be to make such a change.
But the budget analysts who appeared as witnesses emphasized that basic changes in taxation and entitlements don't necessarily have to occur instantly. What what is needed, they said, is legislation that includes a plan to make such changes.
Rep. Chris Van Hollen, D-Md., had an even more fundamental concern about the Rivlin-Domenici defined support plan: Would it save money?
He wondered, for example, if competition among plans would save money, why did Rivlin and Domenici include the "fail-safe" mechanism limiting the federal contribution to GDP plus 1 percent?
Rivlin said "I'm not absolutely certain . . . how the markets will work. We have seen even in the limited market that is Medicare Advantage, that in some places they work well and come in under fee for service and in other places they don't. We think this is a . . . much more robust plan than Medicare Advantage."
But she added that "the reason you want the fail-safe is so the Congress will absolutely know what they're going to spend going forward on Medicare. It's not going to be more," she said.
Van Hollen said the debt panel asked the CBO to take a look "at some of these ideas" including competition among managed care plans and an approach that involved a fixed government contribution. Van Hollen said it wasn't exactly the same as the Rivlin-Domenici plan, and it wasn't clear from his comments how dramatically it differed. But CBO's saving estimate was no more than $25 billion he said. "It's pretty clear, at least from these numbers, and we can take a look at them, that we're going to need to do other things that this is not a panacea," he said.