Overview of Health Care Changes in the FY2013 Budget Proposal Offered by House Budget Committee Chairman Ryan 
Released: 2012-03-29T00:00:00

Introduction

On March 20, 2012, Representative Paul Ryan, the Chairman of the House Budget Committee, released the Chairman's mark of the FY2013 House budget resolution. Additional detail on budgetary objectives and justifications was provided in Chairman Ryan's report entitled "The Path to Prosperity: A Blueprint for American Renewal," issued the same day. The House Budget Committee considered the Chairman's mark on March 21, 2012, and voted 19-18 to report the budget resolution to the full House. H.Con.Res. 112 was introduced in the House March 23, 2012, and was accompanied by the House Budget Committee report ( H.Rept. 112-421 ). The House agreed to H.Con.Res. 112 on March 29, 2012, by a vote of 228 to 191.

The House budget resolution sets general budgetary parameters. Among other things, it expresses the desired levels of spending for government health programs over 10 years (FY2013-FY2022), creates two health care-related reserve funds, and presents a policy statement regarding assumptions about future Medicare reforms. The budget resolution includes instructions for reconciliation to six committees, which are instructed to identify specified dollar amounts of deficit reduction. A budget resolution is not intended to establish details of spending or revenue policy and does not provide levels of spending for specific agencies or programs; it is not a law and is not signed by the President. Rather, the budget resolution provides the framework for the consideration of other legislation. While the House budget resolution suggests and assumes certain health care-related policy changes, separate legislation would need to be developed (by the committees of jurisdiction) and passed to actually modify federally funded health care programs.

The Congressional Budget Office (CBO) was asked to provide an analysis of the long-term budgetary impact of Chairman Ryan's budget proposal, and issued its report on March 21, 2012. CBO was provided additional detail by the staff of the House Budget Committee regarding assumptions that should be made while conducting the analysis that were not included in the budget resolution language or the accompanying report. CBO's analysis, however, does not provide an official cost estimate for legislation that might implement the proposal, as it did not conduct its analysis using actual legislative language and was asked to provide an impact analysis beyond the 10-year budgetary window. To conduct its analysis, CBO used its most recent long-term projections, which are based on an extension of CBO's baseline forecasts issued in March 2012.

In general, the budget proposal, as outlined in Chairman Ryan's "Path to Prosperity" report, in the committee report, and in CBO's analysis, suggests a change in the structure of the Medicare and Medicaid programs; the repeal of many of the provisions in the Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act of 2010 (ACA, P.L. 111-148 , P.L. 111-152 ), including those that establish insurance exchanges; and changes to tort law governing medical malpractice.

This report provides a synopsis of the health care-related changes in Chairman Ryan's FY2013 budget proposal. This summary is based on the text of the Concurrent Resolution, the committee report, the FY2013 "Path to Prosperity" report, and the CBO analysis of the proposal. The collective details are referred to in this report as the "budget proposal" or Chairman Ryan's proposal. CRS provided a similar summary of the proposed health care changes included in the FY2012 House Budget in CRS Report R41767, Overview of Health Care Changes in the FY2012 Budget Offered by House Budget Committee Chairman Ryan .

Medicare

Medicare is the nation's federal insurance program that pays for covered health services for most persons 65 years old and older and for most permanently disabled individuals under the age of 65. Generally, individuals are eligible for Medicare if they or their spouse worked for at least 40 quarters in Medicare-covered employment, are 65 years old, and are a citizen or permanent resident of the United States. Individuals under the age of 65 may also qualify for coverage if they have a permanent disability, have End-Stage Renal disease, or have amyotrophic lateral sclerosis (ALS).

In FY2012, the program will cover an estimated 50 million persons at an estimated total cost of $576 billion, accounting for approximately 3.6% of GDP. CBO estimates that federal Medicare spending (after deduction of beneficiary premiums and other offsetting receipts) will be about $492 billion in FY2012, accounting for about 13.7% of total federal spending. Medicare is an entitlement program, which means that it is required to pay for covered services provided to eligible persons so long as specific criteria are met. Spending under the program (except for a portion of the administrative costs) is considered mandatory spending and is not subject to the appropriations process.

The Medicare program has four parts, each responsible for paying for different benefits, subject to different eligibility criteria and financing mechanisms.

Part A (Hospital Insurance, or HI) covers inpatient hospital services, skilled nursing care, and home health and hospice care. The HI trust fund is mainly funded by a dedicated payroll tax of 2.9% of earnings, with employers and workers each paying 1.45%. (The self-employed pay 2.9%.) ACA added an additional 0.9% hospital insurance tax on high-income taxpayers beginning in 2013. Part B (Supplementary Medical Insurance, or SMI) covers physician services, outpatient services, and some home health and preventive services. The SMI trust fund is funded through beneficiary premiums (set at 25% of estimated program costs for the aged) and general revenues (the remaining amount, approximately 75%). High-income enrollees pay higher premiums, and certain low-income enrollees receive assistance with their premiums from Medicaid. Enrollment in Part B is voluntary, with over 90% of Medicare beneficiaries choosing this option. Part C (Medicare Advantage, or MA) is a private plan option for beneficiaries that covers all Part A and B services, except hospice. Individuals choosing to enroll in Part C must also enroll in Part B. Part C is funded through both the HI and SMI trust funds. About 12 million (25%) of Medicare beneficiaries are enrolled in MA. Part D covers outpatient prescription drug benefits. Funding is included in the SMI trust fund and is financed through beneficiary premiums (set to cover 25.5% of costs), with the rest paid for out of general revenues and state transfer payments. High-income enrollees pay higher premiums, and low-income enrollees may receive assistance from Medicare with premiums and cost sharing. This portion of the program is also voluntary; about 60% of eligible Medicare beneficiaries are enrolled in a Part D plan, while another 13% are enrolled in an employer plan subsidized by Medicare.

Under traditional Medicare, Parts A and B, services are generally paid directly by the government on a "fee-for-service" basis, using different prospective payment systems or fee schedules. Under Parts C and D, private insurers are paid a monthly "capitated" amount to provide enrollees with at least a minimum standard benefit. Premium amounts may vary depending on which plan the enrollee selects. The capitated payment is adjusted to reflect the higher relative cost of older or sicker beneficiaries.

Since its establishment in 1965, the Medicare program has undergone considerable change. Most recently, ACA made numerous changes to the Medicare program that modify provider reimbursements, provide incentives to improve the quality and efficiency of care, and enhance certain Medicare benefits.

Short-Term Medicare Changes (FY2013-FY2022)

Under CBO's Medicare baseline, net Medicare outlays are expected to total approximately $6.6 trillion over the next 10 years (FY2013-FY2022). The House budget resolution suggests total Medicare outlays of about 2% less than CBO's baseline over the same period. Because CBO's spending baseline is based on current law, its figures are based on the assumption that physician payment reductions and the 2% reduction in Medicare spending under Budget Control Act of 2011 sequestration requirements will both occur starting in 2013. Therefore, any reductions that are assumed under the proposed budget would be in addition to spending reductions already scheduled to occur (or to equivalent alternative spending reductions). The proposal did not suggest specific program changes that would reduce Medicare spending to this level over the 10-year period.

The budget proposal also assumes a repeal of the Independent Payment Advisory Board (IPAB) created by the ACA (Section 3403, as modified by 10320). Under current law, beginning in 2014, the IPAB is required to develop proposals to reduce the Medicare per capita expenditure growth rate if Medicare spending is projected to exceed a certain target. CBO estimates that the repeal of IPAB would cost $3.1 billion over 10 years. No other ACA Medicare provisions were explicitly mentioned.

In addition, the committee report ( H.Rept. 112-421 ) notes that the budget accommodates legislation that fixes the Medicare physician payment formula for the next 10 years. Specifically, Section 403 of H.Con.Res. 112 would provide procedural flexibility to allow for the consideration within the framework of the budget resolution of legislation that would reform the sustainable growth rate system (SGR), as long as the legislation did not increase the deficit for the period FY2013-FY2022.

As a result of these reductions (and changes that begin in FY2023), CBO estimates that Medicare spending as a portion of GDP in 2023 would decrease from 3.75% under CBO's baseline to 3.50% under the budget proposal.

Long-Term Medicare Changes (FY2023 and Beyond)

Starting in 2023, the Ryan budget proposal would phase in an increase in the age of eligibility for Medicare and would convert the current Medicare defined benefits program to a fixed federal contribution. Assumptions regarding the broad parameters of the new system are outlined in Section 601, the "Policy Statement on Medicare," of H.Con.Res. 112 . The "Path to Prosperity" document and the House report offer more specificity on suggested changes. However, as previously noted, while a budget resolution may suggest broad policy changes, separate legislation would need to be developed by the committees of jurisdiction and enacted into law to effect such changes.

Age of Medicare Eligibility

The budget proposal would gradually increase the Medicare eligibility age to 67. Beginning in 2023, the age of eligibility for Medicare would increase by two months each year until it reached 67 in 2034. Younger individuals could still qualify on the basis of disability.

Conversion of Medicare to a Premium Support System

Under the Ryan budget proposal, current Medicare beneficiaries and individuals who become eligible for Medicare prior to 2023 (i.e., those who turn 55 in 2012), would remain in the current Medicare program (described earlier). Individuals who become eligible (based either on age or disability) for Medicare beginning in 2023 would be given the option of enrolling in a private insurance plan or a traditional fee-for-service option through a newly established Medicare exchange. These plans would be required to offer standard benefits that are at least actuarially equivalent to traditional fee-for-service benefits, and to accept all people eligible for Medicare who apply regardless of age or health status.

All of the plans, including the traditional fee-for-service option, would engage in an annual competitive bidding process. The lower of the second-lowest approved plan bid or fee-for-service Medicare would be used to establish the amount of the subsidy (premium support) provided by Medicare and the base premium paid by Medicare beneficiaries. The amount of the subsidy would generally be the same regardless of the cost of the plan; so, for instance, if a beneficiary selects a plan whose bid is higher than the second lowest bid, the beneficiary would pay a higher premium to make up the difference between the subsidy and the base premium. Similarly, if the beneficiary enrolls in a plan that bid lower than the second-lowest approved bid, the beneficiary would be provided a rebate in the amount of the difference. The payments to plans would be geography-rated and risk-adjusted for health status. Additionally, based on annual risk reviews conducted by the Centers for Medicare and Medicaid Services (CMS), fees would be imposed on plans that enrolled a higher-than-average number of low-risk beneficiaries; those that enrolled a higher-than-average number of high-risk (expensive) enrollees would receive incentive payments funded by the fees from the low-risk plans.

In 2023, the premium subsidy would be set at $7,500, on average. The amount of premium support provided to high-income individuals would be reduced. Low-income beneficiaries would be provided a dedicated savings account to be used to pay premiums, co-pays, and other out-of-pocket costs. The proposal suggests that program cost growth would be mitigated through the competitive bidding process; however, should that not occur, the proposal would limit annual per capita premium support increases to nominal GDP growth plus 0.5%. Should actual costs exceed this amount, Medicare beneficiaries would pay increased premiums to make up the difference. The proposal would limit the impact of these increases for low-income enrollees, with Medicaid continuing to pay for the out-of-pocket expenses for dual-eligibles (those who qualify for both Medicare and Medicaid), and additional funding would be provided in savings accounts for those who meet certain low-income limits but do not qualify for Medicaid.

Under this premium support model, CBO estimates that by 2030, 39% of Medicare beneficiaries would be enrolled in this new system and thus subject to these new spending constraints, and by 2050, this number would increase to 91%. While average spending per Medicare beneficiary is still expected to increase through time, it would do so at a slower rate. For example, in 2050, under the new system, spending for new enrollees (67 years old) would be $11,100 per year (in 2011 dollars) compared with $17,000 under CBO's baseline scenario. Under this proposal, net federal Medicare spending as a share of GDP would be expected to grow from 3.25% in 2011 to 4.75% in 2050, compared with 6.50% in 2050 under CBO's baseline scenario (see Table 1 ).

Those who support converting the current system to a premium support model note that it sets a limit for the federal portion of Medicare spending and that an overhaul of the Medicare program is needed in order to avoid a debt crisis. Supporters also suggest that the new system would add price incentives at the consumer level and plans would be incentivized to control costs in order to be competitive. Those who oppose the model express concerns over the potential for increased out-of-pocket spending for health care for the elderly, the potential for the erosion of benefit coverage, and reduced access to health care services. Some also maintain that the proposal does not address the main reason for the growth in Medicare spending (i.e., excessive costs in the health care delivery system).

The impact of the proposed Medicare changes on the federal government, beneficiaries, and health care plans and providers would ultimately depend on how such a premium support system is designed and implemented. Numerous decisions, ranging from fundamental social policy decisions about the appropriate nature and level of federal financial support of the elderly to detailed administrative decisions, would need to be made before such a model could become operational. For example, decisions would need to be made regarding which parts of Medicare would be financed through premium subsidies, for example, would Parts A and B (and possibly D) and their trust funds be combined; would changes be made to the voluntary nature of Parts B and D (or could one opt out of Medicare entirely); and would beneficiary premiums be based on expected per capita Part B and D costs, or would they include the costs of Part A (which is now premium free for most enrollees). Decisions would also need to be made regarding whether Medicare Advantage would still be an option after 2023 for those currently age 55 and older or whether private plans would only be available through the exchanges, and whether the financial risk to private plans participating in the exchanges would be mitigated to encourage participation (e.g., Part D provides reinsurance for catastrophic costs and has risk corridors to limit losses). Additionally, as a final example, an administrative structure, including appropriate information technology systems, would need to be designed and established to support both traditional Medicare options and new options under the exchanges.

Medicaid

Medicaid is a means-tested entitlement program that finances the delivery of primary and acute medical services as well as long-term care. Medicaid is jointly funded by the federal government and the states. In FY2012, the Medicaid program will cover an estimated 67 million people at any point during the fiscal year, and federal Medicaid payments to states are estimated to reach $275 billion in FY2012. In a typical year, the federal government covers roughly 57% of the total cost for Medicaid. Federal Medicaid spending is expected to reach about 1.7% of GDP in FY2012.

Each state designs and administers its own version of Medicaid under broad federal rules. While states that choose to participate in Medicaid must comply with all federal mandated requirements, state variability is the rule rather than the exception in terms of eligibility levels, covered services, and how those services are reimbursed and delivered. ACA makes changes along these dimensions for the Medicaid program. Some of the changes are mandatory for states, and others may be implemented at state option. Most notable of these provisions is the expansion of Medicaid eligibility for individuals under the age of 65 with income up to 133% of the federal poverty level.

The unofficial estimate provided in Chairman Ryan's "Path to Prosperity" report states that the proposed budget would reduce federal outlays for Medicaid by about $810 billion over 10 years. When compared to CBO's baseline projection for federal Medicaid spending, the proposal would reduce federal Medicaid outlays by 17.6% from FY2013 to FY2022.

According to CBO's long-term analysis of the proposal, when compared with long-term estimates of current law, combined federal spending for Medicaid, the State Children's Health Insurance Program (CHIP), and the exchange subsidies will be 76% to 78% lower in FY2050. Since spending on CHIP and exchange subsidies is expected to be small relative to federal spending on Medicaid over this time period, most of the reduction will come from the Medicaid program.

Table 2 shows a comparison of projected federal spending on Medicaid, CHIP, and exchange subsidies as a percentage of GDP under CBO's extended baseline scenario, CBO's extended alternative fiscal scenario, and Chairman Ryan's proposal. By 2023, under Chairman Ryan's proposal, Medicaid and CHIP spending would comprise 1.25% of GDP, while under both CBO scenarios federal spending on Medicaid, CHIP, and exchange subsidies would total 3.00% of GDP.

Repeal of Certain Medicaid Provisions in ACA

The Medicaid provisions of ACA represent the most significant reform to the Medicaid program since its establishment in 1965. In general, ACA (1) raises Medicaid income eligibility levels for nonelderly individuals up to 133% of the federal poverty level, (2) adds both mandatory and optional benefits to Medicaid, (3) increases the federal matching payments for certain groups of beneficiaries and for particular services provided, (4) provides new requirements and incentives for states to improve quality of care and encourage more use of preventive services, and (5) makes a number of other Medicaid program changes. The major expansion and reform provisions in ACA are slated to take effect in 2014.

One of the "illustrative policy options" offered in the House Budget Committee report ( H.Rept. 112-421 ) includes repealing the Medicaid expansion included in ACA.

Conversion of Medicaid to a Block Grant System

Another "illustrative policy option" included in the House Budget Committee report ( H.Rept. 112-421 ) is restructuring Medicaid from an individual entitlement program to a block grant program. Few details are available regarding the specific design of the proposed block grant. The proposal indicates that (1) federal funding to states would increase annually according to inflation (CPI-U) and population growth, and (2) states would be provided additional flexibility to design and administer their Medicaid programs.

Proponents of the block grant model suggest that this design would make federal Medicaid spending more predictable and provide states with stronger incentives to control the cost of their Medicaid programs. Additionally, this design could relieve some of the cost burden to states by removing certain federal Medicaid requirements.

According to CBO, the implications of converting Medicaid to a block grant program would depend on how states respond to the change. With the added flexibility provided under Chairman Ryan's proposal, states could improve the efficiency of their Medicaid programs. However, even with significant efficiency gains, the magnitude of the federal Medicaid spending reductions under this proposal would make it difficult for states to maintain their current Medicaid programs. As a result, states would have to weigh the impact of maintaining current Medicaid service levels against other state priorities for spending. They could choose to constrain Medicaid expenditures by reducing provider reimbursement rates, limiting benefit packages, and/or restricting eligibility. These types of programmatic changes could also affect the access to and the quality of medical care for Medicaid enrollees. For example, if states reduce the Medicaid reimbursement rates to providers, such as hospitals, physician, and nursing homes, these providers may be less willing to participate in Medicaid at all or accept new Medicaid patients.

Private Health Insurance

Private health insurance covers over 195 million people in the United States. Workers and their families often receive health insurance as a fringe benefit from their employers. Some individuals and families purchase private insurance on their own, where premiums and benefits may be based on health status and may be more limited than in the employer market.

Reflecting the attributes of these different "customers" for insurance (larger firms, smaller firms, and individuals), the private health insurance market is made up of three different segments: the large group market, the small group market, and the nongroup (individual) market. Each of these market segments offer distinct insurance products, and each is subject to different regulatory standards. Traditionally, the primary regulators of private insurance have been the states. However, overlapping federal requirements complicate the regulation of this industry and enforcement of insurance standards.

ACA's private market provisions were designed to expand federal standards applicable to the private health insurance market, and increase access to coverage, such as establishment grants for the creation of state-based exchanges to offer private health insurance options to individuals and small employers. The law also increases access to health insurance coverage by subsidizing private insurance premiums and cost-sharing for certain lower-income individuals enrolled in exchange plans, among other provisions. These costs are projected to be offset by reduced spending for public coverage, and by increased taxes and other revenues.

ACA creates several programs to increase access and funding for targeted groups, including establishment of temporary high-risk pools for uninsured individuals with preexisting conditions, and funding for non-profit organizations offering coverage to small businesses and individuals. Other private insurance provisions include those that build on the state-based regulatory system, such as the review of proposed increases of health insurance premiums, and programs to mitigate risk across health plans (such as risk adjustment and reinsurance).

Repeal of Certain Private Health Insurance Provisions in ACA

H.Con.Res. 112 contains a reserve fund (Section 401) that would provide procedural flexibility to allow for the consideration of legislation that would repeal ACA as amended. Moreover, one of the "illustrative policy options" included in the House Budget Committee report is repeal of the "exchange subsidies created by the new health care law."

The unofficial estimate provided in the "Path to Prosperity" report states that more than $800 billion would be saved over 10 years (beginning FY2013) due to the repeal of the exchange subsidies and other implementation-related funding. More specifically, the repeal of funding would extend beyond the premium tax credits and cost-sharing subsidies established under ACA for certain exchange enrollees. The savings estimate also includes the grants to states for the establishment of exchanges and review of proposed premium increases, temporary high risk pools, funding program for non-profit health organizations, and payments for risk adjustment and reinsurance.

Other Health Care Proposals

Medical Malpractice

Medical malpractice has attracted congressional attention numerous times over the past few decades, particularly in the midst of three "crisis" periods for medical malpractice liability insurance in the mid-1970s, the mid-1980s, and the early 2000s. These periods were marked by sharp increases in medical liability insurance premiums, difficulties in finding any liability insurance in some regions and among some specialties as insurers withdrew from providing coverage, reports of providers leaving areas or retiring following insurance difficulties, and a variety of public policy measures at both the state and federal levels to address the market disruptions. In each case, attention receded to some degree after a few years as premium increases moderated and market conditions calmed.

The overall medical liability insurance market is not currently exhibiting the same level of crisis as in previous time periods. Nonetheless, problems with the affordability and availability of malpractice insurance persist, especially in particular regions and physician specialties (e.g., obstetricians). In addition, concern about claims for medical malpractice may affect individual provider decisions, particularly through increased use of tests and procedures to protect against future lawsuits ("defensive medicine"), which may affect health care costs. The malpractice system also experiences issues with equity and access. For example, some observers have criticized the current system's performance with respect to compensating patients who have been harmed by malpractice, deterring substandard medical care, and promoting patient safety.

According to the Ryan "Path to Prosperity" report, the budget proposal assumes reforms to tort law governing medical malpractice, including a cap on awards for noneconomic damages and deterrents to frivolous lawsuits.

Other Health Reforms

The "Path to Prosperity" report also suggests that the budget proposal assumes the following changes: individuals would be allowed to buy health insurance across state lines, the availability of consumer-directed health plans would be expanded, and employees would be provided with the option to use their employer's health coverage contribution toward other coverage options.