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How Obama would cut Medicare spending in a deficit deal

Republican aides circulated last week what they said was the White House's opening bid on the "fiscal cliff" (Suzy Khimm has a copy here). On the spending cuts front, it included "entitlement policies from President’s FY13 budget that could total $400 billion in savings."

What are those savings? ThinkProgress has helpfully put together this chart, detailing all the health care cuts in that proposed budget. Together, they total $360 billion in reduced spending.

The two cuts that generate the biggest savings are applying Medicaid drug rebates to the Medicare Part D program and reducing the reimbursement rate to post-acute care providers, like nursing homes and assisted living facilities. Let's dig into those a bit more since together they account for more than half of the White House's proposed savings. 

Right now, Medicaid gets a really good deal on prescription drugs: Manufacturers have to sell their prescriptions to the entitlement program at the very best price they offer private insurance plans or 23.1 percent lower than the average price. This has lead to big discounts for the program: The Office of the Inspector General at Health and Human Services estimates that this provision has reduced Medicaid spending on drugs by 45 percent.

Medicare added its prescription coverage option in 2006, Medicare Part D. Their drug procurement processes work differently: Each private Part D plan negotiates with a drug manufacturer to obtain their own, lower rates. There's no set discount, however, like there is in Medicaid. The HHS Office of the Inspector General estimates that the Medicare Part D program gets a 19 percent discount on drugs, compared to the 45 percent discount that Medicaid negotiates. 

This is most important in how it applies to the dual eligibles, the low-income seniors who qualify for both Medicaid and Medicare. In the early 2000s, these 6 million or so patients got their drugs through the Medicaid program. That all changed with Medicare added Part D and their drug purchasing moved over into that new program.

The dual eligibles tend to be some of the heaviest users of prescription drugs, with upwards of $6,100 in medication costs annually. Now, their drugs are coming in at a higher price to the federal government. So what the White House is proposing here is essentially moving Medicare into a system where they purchase drugs at a specified, lower price. They estimate this would save $156 billion over 10 years. 

That's the biggest cut that the White House has proposed. The second one would mean reducing what Medicare pays post-acute care providers, places like nursing homes and home health companies. These kinds of providers have been under scrutiny for awhile now for potential overpayments. One 2009 report from HHS found that skilled nursing facilities billed $1.5 billion in error over the course of a single year. The majority of those claims were "upcoded," where providers would bill for a service that was a bit more complicated - and paid at a higher rate -than what they actually performed. 

The White House has proposed cutting $63 billion over a decade in payments to these kinds of facilities. It has not, however, specified what exactly it would change about the reimbursement rates that these providers receive.

The rest of the spending cuts are relatively small in comparison. Increasing the Medicare premiums that high-income seniors pay -- and also increasing the number of seniors who count as high-income for that provision -- would save $28 billion. Allowing states to tax their Medicaid providers at a higher rate would bring in $21.8 billion. Taken together, these are some of the changes that you could see President Obama bring to the table in coming weeks.



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Dylan Matthews · December 3, 2012

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