WealthTrust-Arizona - Deficit In Healthcare

Deficit Reduction and Healthcare

Bob Smoldt• Associate Director, ASU Healthcare

Delivery and Policy Program• Emeritus CAO, Mayo Clinic

Smoldt poll• Question 1: Do you believe the

federal budget deficit is a very serious problem?

–U.S. = 68%

Source: Blendon and Benson, “The Public’s View About Medicare and Budget Deficits,” NEJM 10.1056.

Smoldt poll• Question 2: Do you believe it is

possible to balance the budget without cutting Medicare spending in one way or the other?

–U.S. = 54%


Smoldt poll• Question 3: Do you agree with

the following methods of reducing the deficit?

A. Reduce military commitmentsU.S. = 46%B. Raise taxes on people with an annual income >$250KU.S. = 69%C. Limit tax deductions for corporationsU.S. = 62%D. Reduce Medicare spending in some wayU.S. = 22%


Today: • Will analyze the Medicare issue

in depth• But need to understand the

broader U.S. deficit and debt problem

Growth of governmentTotal Federal Spending

(as percentage of U.S. Economy)

Total federal spending

Source: Walker, D. “Comeback America: The Nation’s Fiscal Challenge and the Way Forward”, January 20, 2011

“You remember 1800, right?”

Growth of governmentTotal Federal Spending

(as percentage of U.S. Economy)

Total federal spending


Federal government spending has increased dramatically since the 1930s

Federal government outlays as % of GDP (1791-2010)

Source: http://www.whitehouse.gov/omb/budget/Historicals; http://www.measuringworth.com/usgdp/; Federal spending 1791-1900 based on “Historical Statistics of the United States, Colonial Times to 1970, Part II”; data not adjusted for inflation

179118011811182118311841185118611871188118911901191119211931194119511961197119811991200120110.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

http://www.whitehouse.gov/omb/budget/Historicals

http://www.measuringworth.com/usgdp/

Changes in spending

Composition of Federal Spending (as percentage of Total Spending)


The cost of debt may have been held artificially

lowUS net debt outstanding vs. effective interest rates (1980-2010)

Net

deb

t ($

bil

lion

s) Inte

rest ra

tes (%

)

Source: http://www.whitehouse.gov/omb/budget/Historicals

$-

$2,000

$4,000

$6,000

$8,000

$10,000

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

Net debt outstandingEffective interest rate


• As US federal spending has grown, so has the federal deficit as a percent of GDP

• European Monetary Union’s“Stability and Growth Pact” guidelines

• Annual deficit as a % of GDP should be equal to or less than 3%

• EU 27 average = 2.3% in 2009

Source: The Reform of the Stability and Growth Pact; speech by Jose Manuel Gonzalez-Paramo; European Central Bank; October 13, 2005. www.ecb.int/press/key/date/2005/html/sp051013.en.html.

Federal Deficit as percent of GDP

With sustained deficits the US debt grows…

Three measures of Federal debt/ financial obligations

1. Debt held by the public2. Total debt = debt held by the public

+ debt held by government agencies, e.g., Social Security Trust Fund, etc.

3. Total liabilities = Total debt + future pension, Social Security, payments, and healthcare payments that are promised under current legislation (the unfunded liabilities)

Source: “A Short Primer on the National Debt”, WSJ, 8/29/11

Are there economic guidelines for the maximum debt a country should

tolerate?

• European Monetary Union’s “Stability & Growth Pact: 60% of GDP *

• Reinhart and Rogoff: 90% **

* The European Monetary Union states guideline for EU countries. It came from recommendations contained in a report entitled “The Critical Mission of the European Stability and Growth Pact”, Occasional Paper No. 70 by the Group of Thirty in 2004. The Group of Thirty is a group of thirty of the most prominent economists in world. It included such U.S. economists as Paul Volker, Martin Feldstein, and Paul Krugman.** Authors of a study titled “Growth in a Time of Debt.”

Economic growth can be impacted by a country’s debt

• “(Debt) burdens above 90% are associated with 1 percent lower median growth. Our results are based on a data set covering 44 countries for up to 200 years…. (and) incorporates more than 3,700 observations.”

• “Our 90 % threshold is largely based on earlier periods when old-age pensions and healthcare costs hadn’t grown to anything near the size they are today. Surely this makes the burden of debt greater.”

Source: Op-Ed Bloomberg News, July 14, 2011 by Dr. Carmen Reinhart, senior fellow at the Peterson Institute for International Economics and Dr. Kenneth Rogoff, Professor of Economics at Harvard University

Historical debt burden – Debt held by public

Since 1800, US Debt Held by the Public has exceeded 60% of GDP (the maximum

debt ceiling used by the European Monetary Union) only during WWII


Historical debt burden – Gross Federal debt

US gross Federal debt (FY1900-2010)% GDP

1900 1908 1916 1924 1932 1940 1948 1956 1964 1972 1980 1988 1996 20040

20

40

60

80

100

120

140

WW I

Great Depression

WW II

TARP and Recession

Total Federal Debt = 100% GDP in 2011

90%

60%

Source: http://www.usgovernmentspending.com/ accessed September 8, 2011; http://www.politifact.com/ohio/statements/2011/aug/18/rob-portman/sen-rob-portman-says-us-debt-now-matches-size-gros/

http://www.usgovernmentspending.com/

Comparative debt burdensTotal government debt in the U.S. is higher

than someof the most financially troubled countries in

Europe


“Sign of the Apocalypse: The struggling Spanish banking

groupBankia is seeking a loan from the

EuropeanCentral Bank and has put the two

(RealMadrid soccer players) up as

collateral.”

August 8th, 2011

“Sovereign fiscal responsibility index”

• Measures:A. DebtB. Projection of future debtC. Fiscal rules, transparency and

enforceability• Country rank:

1.5.

12.23.

27.28.34.

Source: True State of Our Federal Finances, Comeback America Initiative, www.tcaii.org and David Walker, former Comptroller General of the U.S. 1988-2008

AustraliaChina

India

France

Italy

United StatesGreece

Future debt burdens

Future U.S. Debt Held by the Public is projected to

soar if current policies remain unchanged


Our fiscal future

Without reforms, by 2055, revenues will just cover

interest costs


Growing foreign dependency

U.S. dependency on foreign lenders to finance public

debt has risen sharply

The wishful thinking U.S. debt solutions

• Increase taxes on well-to-do Americans: Would raise top 2 tax brackets to 86% and 91% (from 33% and 35%)1

• Raise taxes for all: Would double marginal tax for individuals and corporations (some middle income Americans would be at 66%)2

• Grow the economy: “To stabilize debt at 60% GDP, economy would need to grow at 6% for at least the next 10 years – the economy has never growth by more that 4.4% in any decade since WWII.”1

1. Bipartisan Policy Center presentation to PG Peterson Foundation fiscal summit at www.pgpf.org2. Heritage Foundation presentation to PG Peterson Foundation fiscal summit at www.pgpf.org

http://www.pgpf.org/

http://www.pgpf.org/

Before deciding on solutions we should look at underlying factors

causing the increase in debt…

Entitlements are a major contributor to the rise in federal

debt

Federal expenses vs. GDP, adjusted for inflation (1965-2010)

GDP

Entitlements*

Total outlays

Defense

*Entitlements = ”Payments for individuals” (includes Social Security, Medicare, Medicaid, VA payments, etc.)Source: http://www.whitehouse.gov/omb/budget/Historicals

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

-200%

0%

200%

400%

600%

800%

1000%

1200%

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

-200%

0%

200%

400%

600%

800%

1000%

1200%

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

-200%

0%

200%

400%

600%

800%

1000%

1200%


In addition to the Federal debt, the US also has unfunded

liabilities…

Federal financial hole

Total: $61.9T


$US

D t

rill

ion

s

Unfunded social insurance promises

Explicit liabilities including debt

Commitments and contingencies

Explicit liabilities include such items as military and civilian pensions and retiree health; unfunded social insurance promises are future Medicare and Social Security benefits for the next 75 yrs (estimates as of January 1, 2009; discounted to present value); Total US debt as of September 30, 2010

Total U.S. debt Total liabilities$0.0

$10.0

$20.0

$30.0

$40.0

$50.0

$60.0

$70.0

$13.6 $14.1

$2.0

$45.8

“Now $46,300”

Federal financial obligations per U.S. household as of June 30,

2011

• Total Federal Debt as of June 30, 2011: – $125,500

• Federal Financial Hole as of Sept. 30, 2011: – $536,300

“…the entitlement programs are not self-funded. They are unfunded liabilities to a significant extent at this point. They are the biggest component of spending going forward.” – Ben Bernanke1

“In an uncertain world, our currency and credit are well established. But there are serious questions, most immediately about the sustainability of our commitment to growing entitlement programs” – Paul A. Volcker21. “State of Economy: View from the Federal Reserve”, testimony before the House Budget Committee, June 9, 2010

2. Volcker PA, remarks at the Stanford Institute for Economic Policy Research, May 18, 2010

Federal financial hole – Social insurance programs

Unfunded social insurance promises (2009)$ trillions

Medicaid: Paid from general tax revenue each year and does not have a trust fund

Unfunded social insurance promises are future Medicare and Social Security benefits for the next 75 yrs (estimates as of January 1, 2009; discounted to present value)


Medicare – Why an issue?

• Health costs growing faster than the economy

• Aging population

The growth in healthcare costs has generally outpaced GDP

growth

Growth in healthcare expenditures vs. GDP in the United States (1990-2009)

Cha

nge

in g

row

th

Healthcare expenditures per capita (PPP$)

GDP per capita (nominal)

Source: OECD, 2011

U.S. is not unique in having healthcare expenditures outpace GDP growth

Growth in healthcare expenditures vs. GDP (1990-2009)

CA

GR

* (%

)

GDP per capita (nominal)

Healthcare expenditures per capita (PPP$)

*CAGR = Compound Annual Growth Rate

Source: OECD, 2011

Historical and projected number of Medicare beneficiaries

Number of Beneficiaries (1966-2030) Millions

Source: 2010 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds

Workers paying Medicare tax per Medicare

beneficiary

Number of workers per beneficiary (1970-2030)

Source: Public Agenda, "Fewer Workers Projected Per HI Beneficiary," Retrieved Sept 19, 2011; 2010 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds

But haven’t we paid Medicare taxes over our lives to earn this

benefit?

“Two married 66 year olds with roughly average earnings over their lifetimes will end up paying about $110,000 in dedicated Medicare taxes through the (Medicare) payroll tax, including the portion their employers pay. They can expect to receive about $340,000 in benefits. Two average earning 56 year olds will pay about $140,000 and get back about $430,000 in benefits.”

Source: David Leonhardt, “Generational Divide Colors Debate Over Medicare’s Future,” New York Times, April 5, 2011.

Will the Congressional debt deal solve the problem?

The Economist, August 6th, 2011: • “But the thoughtlessness of the debt deal

– notably its failure to tackle any of the real sources of America’s fiscal problems, such as entitlement spending, raises a bigger worry.”

• Simpson/Bowles “savings” over ten years - $4T

• Bipartisan Policy Center “savings” over ten years - $5.8T

• Super Committee target - $1.5T

Will the health reform bill of 2010 help?

• Half of the health reform bill was "paid for" with across the board reductions in what Medicare will pay for medical services.

• These reductions will lead down the road to providers getting 50% less than presently (according to the Medicare actuary).

• Providers already lose money on average with Medicare patients.

• As the Medicare actuary has said (and as CBO implied), these reductions will lead to less access to providers for Medicare beneficiaries or reduced quality -- or both.

• Should heed the initial advice of Dr. Henry Aaron.

“The costs of extending coverage are certain…The savings from delivery system reform are

speculative and slow.”“…not even the worthy goals of health reform

justify increasing already perilous budget deficits.”

“Reform must therefore be paid for…”

Henry Aaron

Brookings Institution:

Source: NEJM, Perspective, September 3, 2009

A 1967 estimate understated eventual Medicare spending by a

factor of 10

Medicare spending, actual vs.

estimated $billions

Source: Senate Joint Economic Committee Report, 2009

Can the health reform bill’s Independent Payment Advisory

Board (IPAB) help?

• If Medicare spending above a target level after 2014, IPAB issues a plan to get to target.

• HHS must implement the plan unless Congress intervenes

• BUT: “The Board is not allowed to …ration care, raise premiums, increase cost sharing, restrict benefits, or modify eligibility; leaving (further) reductions in payments to providers..”

Source: CBO report: www.cbo.org.gov/ftpdocs/doc2085/03-10-Reducingthe Deficit.pdf

To solve the Medicare problem, can we learn from what these two did to prop up

SocialSecurity in the 1980’s?

What to do: Social Security as an example?

• Annual income greater than expense till 1975-1981• Reforms enacted

– Cut benefits by 5%– Raised tax rates by 2.3%– Increased full retirement age 3% (to age 67)

• Restored stability for 25 years• But demographics impacting again

– “Social Security expenditures exceeded the program’s income in 2011 for the first time since 1983.” *

Source: A Summary of the 2011 Annual Report by the Social Security and Medicare Boards of Trustees on www.ssa.gov

The first step to solving Medicare issue:

“Denial is not a policy.”

What are the options for Medicare?

If Medicare in its present form will not be affordable for

U.S. taxpayers, there are some basic options for

correcting: a. Raise eligibility age

Raise eligibility age

Life Expectancy at age 65 (Years)• 1960 14.3• 2007 18.6

+4.3 Years

Questionable Trust Fund projections for life

expectancy

• 2005 Trust Fund projection of life expectancy at 65 in 2025

• 17.5 male and 20.0 female

• 2007 actual life expectancy at 65• 17.2 male and 19.9 female

Source: http://aging.senate.gov/crs/aging1.pdf

Source: http://www.cdc.gov/nchs/data/hus/hus10.pdf#022

Some pertinent questions:

• Is medicine allowing us to live too long?

• Are we retiring too early?• Or both?

Rising life expectancy and lower retirement age result in higher need for social support –

Can we afford it?

Lifeexpectancy

Year at birth1950 68.22005 77.8

Gain/loss +9.6

Averageretirement

age*

68.3

62.6

-5.7

15.3 year spread

*Weighted average of “by gender” Social Security data for 1950-1955 and 2000-2005 based on labor force composition – rounded Sources: OECD; National Center for Health Statistics; Bureau of Labor Statistics, Monthly Labor Review (2002, 2008)

Working longer – Good for Boomers; Good for economy

• McKinsey Global Institute:• Boomers not financially prepared for

retirement• Boomer options:

– Reduce personal spending– Work longer

• Economic impact of Boomers retiring 2 years later (at 64.1)

• U.S. GDP difference over 2007-2035:– Reduce personal spending: ($5.4) T– Work 2 years longer: $12.9 T

Source: McKinsey Global Institute, “Talkin’ ‘Bout My Generation: The Economic Impact of Aging US Baby Boomers,” June 2008




correcting:

a. Raise eligibility ageb. Increase beneficiary share of costs

Medicare Part B (physician/outpatient services) beneficiary premium as percent of total actual

cost

Individual adjusted gross income Premium % total cost

Up to $85K

$85 - $107

$107 - $160

$160 - $214

$214+

25%

35%

50%

65%

80%

• Increase percentage of cost• Don’t index up the salary cut-offs

Source: Medicare Premiums: Rules for Higher Income Beneficiaries: Social Security Administration Publication #05-10161.




correcting: a. Raise eligibility ageb. Increase beneficiary share of costsc. Limit benefits or move coverage to more

of a catastrophic insurance model

Limit benefits

• To control Medicare costs would require reducing average Medicare benefits by 53% to $5,558 per year

• More limited adjustments are possible, e.g., increase deductibles, co-pays, etc.

• Changes either from program overall, or for selected components like home health, skilled nursing, drugs, etc.

Source: http://www.forbes.com/sites/robertlenzner/2011/07/31/our-country-is-in-deep-financial-trouble/

Joint Select Committee on deficit reduction possible considerations on

reducing benefits

Action Ten year savings

• Prohibit Medigap paying 1st $550

• Subject lab tests to deductible

• Require new home health co-pay

• Increase skilled nursing cost sharing

$53B

$24B

$40B

$21B



U.S. taxpayers, there are some basic options forcorrecting: a. Raise eligibility ageb. Increase beneficiary share of costsc. Limit benefits or move coverage to more of a

catastrophic insurance modeld. Increase Medicare taxes

Increase Medicare taxes

• To correct the underfunding of Medicare would require increasing the Medicare tax by 3.9% to 6.8%

• A self employed person making $100,000 would have Medicare tax move from $2,900 to $6,900 – all in addition to federal income taxes

Source: http://www.forbes.com/sites/robertlenzner/2011/07/31/our-country-is-in-deep-financial-trouble/



U.S. taxpayers, there are some basic options forcorrecting: a. Raise eligibility ageb. Increase beneficiary share of costsc. Limit benefits or move coverage to more of a

catastrophic insurance modeld. Increase Medicare taxese. Change Medicare policies and payment

approaches to encourage greater cost efficiency

CMS can realize ~12-18% annual cost savings if clinical practice style aligns with top decile

Hospital Referral Regions (HRR)

Medicare FFS spending and estimated savings, HRR data (2008)

HRR

Average standardized risk-adjusted per capita costs ($USD)

Potential CMS savings (% total)*

Decile 1

Decile 2

National average**

Decile 9

Decile 10

6,194

6,613

7,500

8,301

8,849

17.6

12.5

--

--

--

*Total = National average standardized risk adjusted per capita cost x total Medicare beneficiaries in sample; Total Medicare beneficiaries n = 25,832,920; Standardization of Spending: To standardize payment rates, examined Medicare’s various FFS payment systems and identified the factors that lead to different payment rates for the same service (e.g., local wages, input prices, DSH, GME); Estimated what Medicare would have paid for each claim without those adjustments; Risk-Adjustment of Spending: Used total Hierarchical Condition Category (HCC) risk scores to risk-adjust spending data; Calculated standardized risk-adjusted costs by taking the standardized costs for each beneficiary in a region and dividing them by his/her actual individual risk score **Includes VI, PR, DC and unassigned data Source: “New Data on Geographic Variation”, Institute of Medicine, 2011

Gaining Medicare efficiencies

• Start by addressing patients with most expensive conditions

• Financially reward providers who get better patient outcomes while using fewer resources – e.g. Pay for Value.

• Value = Patient Outcomes Cost per patient over time

• Change existing financial incentives and start paying for value

• If we accomplish this correctly, providers will self-organize into systems that produce high value

care

• Present Medicare pay for value approach will not reward better outcomes at lower cost.


– Raise eligibility age– Increase beneficiary share of costs– Limit benefits or move coverage to more of a

catastrophic insurance model– Increase Medicare taxes– Change Medicare policies and payment

approaches to encourage greater cost efficiency

– Move Medicare to a premium support model with private insurers

Move Medicare to a premium support model

• Medicare would no longer be a government insurance company

• Instead would function like FEHBP – coordinate private insurance options and provide a set dollar amount to each beneficiary to purchase from the insurance options

• Approach recommended by the Clinton Medicare Bipartisan Commission in 1995 and by the Bipartisan Policy Committee Task Force in 2010

Washington Post editorial, May 8, 2011

• “Democrats have effectively scared seniors as a political tactic for many years. Republicans returned the tables in 2010… Now Rep. Paul Ryan (R-Wis.) has given President Obama and his party a chance to reclaim the low ground and they haven’t hesitated. [premium support proposal]

• “But it’s [Ryan’s proposal] honest enough to acknowledge that simply preserving Medicare as we know it is not an option…

• “…the concept is hardly beyond pale – as past support for it, in some form, from Democrats such as budget expert Alice Rivlin and former Senator John Breaux suggests. [In addition] the principle undergirds how Medicare pays for drugs, and resembles how the Obama health plan would subsidize insurance on market exchanges for some non-senior adults.”


If Medicare in its present form was not be affordable for U.S. taxpayers;

what would you do? a. Raise eligibility ageb. Increase beneficiary share of costsc. Limit benefits or move coverage to more of a catastrophic

insurance modeld. Increase Medicare taxese. Change Medicare policies and payment approaches to

encourage greater cost efficiencyf. Move Medicare to a premium support model with private

insurersg. Some combination

What would you do about Medicare?

If Medicare in its present form was not be affordable for U.S. taxpayers;

what would you do? a. Raise eligibility ageb. Increase beneficiary share of costsc. Limit benefits or move coverage to more of a catastrophic

insurance modeld. Increase Medicare taxese. Change Medicare policies and payment approaches to

encourage greater cost efficiencyf. Move Medicare to a premium support model with private

insurersg. Some combination

“Yes, we can do what it takes to create a better future, but we all must do out part, and we need to start now.”

-Hon. David M. Walker, Former Comptroller General

of the United States (1988-2008)

“Yes, We Can”

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