8 Medicare and Medicaid reforms that would have the biggest impact on federal spending

With the federal budget deficit skyrocketing in the wake of the 2017 tax reform law, the Congressional Budget Office (CBO) is scoring dozens of potential options for reducing spending and raising revenues.

Among the many policies CBO evaluated in its November report (PDF) were several major changes to Medicare and Medicaid law, such as reducing federal Medicaid matching rates and raising the Medicare eligibility rate to 67.

Changes of this magnitude would require an act of Congress, so their prospects in the divided government next year are likely dim. Still, CBO's detailing of the alternatives provides a window into how future deficit reduction could impact healthcare coverage in the country.

Here's a summary of eight of the CBO's most impactful suggestions:

Establish caps on federal spending for Medicaid

Purely in terms of deficit reduction, the biggest impact the federal government could make through healthcare policy would be limiting the growth of Medicaid spending. CBO noted that spending increases in the program are expected to slow in the coming years, but it will still rise faster than the growth of GDP.

CBO evaluated two options based on enforcing spending caps in Medicaid. One alternative, overall caps on spending, would see the federal government giving each state a block grant for Medicaid. State governments would be responsible for costs above that grant amount, so they would be incentivized to curtail costs. 

Similarly, a per-enrollee cap would set a limit on the average spending-per-enrollee states are allowed through Medicaid. States would then need to make that money fit their unique populations.

All else being equal, a per-enrollee cap would reduce the deficit more than an overall cap, CBO said. The per-enrollee cap would decrease the deficit by $703 billion between 2019-2028, while the overall cap would decrease it by $496 billion over the same period.

Depending on how states respond to caps, they could either restrict Medicaid coverage or spend more of the state's budget on the program. Some states will certainly do the former, so setting caps could ultimately hurt coverage among impoverished communities.

Still, CBO noted the option was more modest than some other alternatives, which the agency didn't explore in depth.

Reduce federal Medicaid matching grants

Another major hit to Medicaid's funding sources would come if the federal government reduced the rates at which it matches state government funding. CBO noted that the federal government matches many administrative costs between 70% and 100%. This made the average federal share for administrative expenses 64% in 2017.

CBO explored three possibilities for bringing that share down:

  1. Bringing the federal share of all administrative spending down to 50% would reduce spending by $55 billion between 2019 and 2028.
  2. Removing the Federal Medical Assistance Percentage (FMAP) 50% floor for enrollees not made eligible through the Affordable Care Act. This would cause FMAP rates to fall below 50% in states with the highest per capita  income, reducing spending by $394 billion over 10 years.
  3. Reducing the federal share of medical expenditures for ACA-enabled enrollees to the same FMAP formula that applies to other enrollees. The office estimated this would reduce the deficit by $345 billion.

"For all three alternatives, reducing the share of total spending by the federal government would shift additional financial responsibility to states for the cost of Medicaid. Lower federal spending would require additional spending by states in order for them to maintain the same eligibility levels, covered services, and provider payment rates in their Medicaid programs," CBO wrote.

Similar to Medicaid spending caps, shifting more of the costs of Medicaid onto states could ultimately hurt coverage for beneficiaries. While every state will respond differently, some states will undoubtedly respond by restricting coverage—either directly or through programs like work requirements. 

Change the cost-sharing rules for Medicare and restrict Medigap insurance

While Medicare has cost-sharing rules built in, most enrollees have some form of supplemental insurance that eliminates their cost-sharing obligations. This diminishes the impact cost-sharing rules are supposed to have—namely reducing the amount of unnecessary care.

CBO evaluated two alternatives: First, Medicare could replace its current cost-sharing formula with a single annual deductible of $750 for Parts A and B, uniform coinsurance of 20% above that deductible, and an annual out-of-pocket cap of $7500. The office said this would reduce spending by $44 billion over 10 years.

Another option would be to leave the cost-sharing rules as they are but restrict Medigap policies from paying portions of enrollees' deductible and coinsurance. This could save the federal government $72 billion between 2019 and 2028, though the new rules would only come into effect in 2022.

If Congress made both changes, it would save $116 billion over the same period.

Increase the premiums for Parts B and D of Medicare

Increasing premiums for members on Part B and D plans is probably the most straightforward way to reduce the deficit. Congress would have two options: increase the basic premiums everyone pays and/or extend the current freeze on income thresholds through 2028.

The first option would save $389 billion over 10 years, while the second would only save $40 billion. Congress could also enact both alternatives and save $418 billion between 2019 and 2028.

Raise the age of eligibility for Medicare to 67

Interestingly, the controversial option of raising the Medicare eligibility age doesn't actually produce much savings, according to CBO. That's because many of those in the 65-67 age bracket would be able to get coverage through Medicaid or the ACA marketplaces, both of which are on the federal government's dime anyway.

As a result, if Congress raised the eligibility age by two months a year, ending at 67, it would only decrease the deficit by $15.4 billion. Even if it took the slightly speedier route of raising it by three months a year, it would only save $21.8 billion.

Require manufacturers to pay a minimum rebate on Part D drugs for low-income beneficiaries

CBO noted that Medicare Part D beneficiaries in the Low-Income Subsidy (LIS) program represented 50% of the total spending for Part D drugs, even though those in the program only make up 30% of overall beneficiaries. The office reasoned that if the federal government is paying for brand-name drugs through this program, the manufacturers of those drugs could chip in.

At a rebate of 23.1% of a drug's average manufacturer price, CBO said the government could save $154 billion between 2019 and 2028.

Modify payments to Medicare Advantage plans for health risk

Medicare Advantage programs are getting more popular by the day, which is why federal law is requiring CMS to apply across-the-board reductions in payments to those plans. Through current law, CMS is already set to reduce payments to all plans by a minimum of 5.9%. CBO proposed raising that to 8%, which it says would save an additional $47 billion over 10 years.

Alternatively, CMS could change the formula for health risk scores by using two years' worth of diagnostic data instead of one. CBO said this would reduce the gap between risk scores in MA plans versus fee-for-service plans.

Reduce quality bonus payments to Medicare Advantage plans

One major source of federal funding in MA plans are quality bonuses, which are additional payments based on an MA plan's average quality score.

The fed could save some money by reducing these quality payments. CBO looked at both eliminating benchmark increases tied to quality scores starting in 2021 and just eliminating double bonuses from these benchmarks. The former, more comprehensive option would save $94.2 billion over 10 years, the office said, while the latter would only save $18.2 billion.