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The fiscal gap … measures the difference between government spending and revenues over the very long term, typically as a percentage of Gross Domestic Product. The fiscal gap can be interpreted as the percentage increase in revenues or reduction of expenditures necessary to balance spending and revenues in the long run. For example, a fiscal gap of 5% could be eliminated by an immediate and permanent 5% increase in taxes or cut in spending or some combination of both. It includes not only the structural deficit at a given point in time, but also the difference between promised future government commitments, such as health and retirement spending, and planned future tax revenues. Since the elderly population is growing much faster than the young population in many countries, many economists argue that these countries have important fiscal gaps, beyond what can be seen from their deficits alone.

Military retirement/disability benefits: $3.6 trillion
     Obligation per household: $31,200
The wars in Iraq and Afghanistan have contributed to a 46% increase since 2004 in the cost of pension, medical care and disablity benefits for former service members. Biggest jump: a 71% increase since 2004, to $1.3 trillion, in the cost of future pension checks to retired military personnel. The funding shortfall for the disability program rose to $1.5 trillion, up 54% since 2004, and to $900 billion for retiree health care, up 32%.

Federal employee retirement benefits: $2 trillion
     Obligation per household: $17,000
The unfunded liability for federal pensions is $1.6 trillion, plus another $400 billion for retiree health care. The federal government makes its pension fund contributions with IOUs (approx. $2 trillion). Civil servant retirements will be financed by taxes or borrowing.

Bob Moffit May 27, 2011

The hot Washington Medicare debate centers on whether congressional Republicans will, in the language of the left, "End Medicare As We Know It." But the dirty little secret on Capitol Hill is that Obamacare already ended the program as we know it.

They don’t tell you that in those clever "Mediscare" ads.

Here’s what Obamacare has already done:

• Replaced Medicare’s traditional financing. Obamacare replaces Medicare’s fee-for-service structure—the very heart of traditional Medicare financing—with capitated payments and salaried physicians. Whether this is a good or bad idea, it’s not your grandpa’s Medicare.

• Capped future Medicare spending. While slashing roughly a half-trillion dollars in Medicare provider payments over the next 10 years, congressional liberals imposed a hard cap on future Medicare spending. Once again, good or bad idea, it’s the law right now: No open-ended Medicare entitlement.

• Put an unelected board in charge. Then congressional liberals went even further: They created the Independent Payment Advisory Board [1] (IPAB), a group of 15 unelected bureaucrats, to cut payments to Medicare providers. In fact, unless Congress enacts an alternative plan to cut Medicare spending by the pre-ordained amount, the Secretary of Health and Human Services is authorized to enforce the board’s recommended cuts without congressional approval.

Republicans and Democrats alike want to behead the IPAB piece of the Obamacare Hydra. (Check out Greek mythology [2] on that Hydra thing.) There’s a reason you don’t see the Congressmen who voted for the IPAB out there on the hustings beating their chests and shouting themselves hoarse in a full-throated defense of their handiwork.

But this week, some high-powered policy wonks came to IPAB’s rescue. A group of health policy experts and economists penned a letter [3] to congressional leaders to express their support for IPAB as a solution to Medicare’s looming insolvency, which the Medicare Trustees’ gloomy annual report highlighted last week [4]. (That was followed by an even gloomier assessment from the Medicare Actuary.)

The problem is that IPAB cannot achieve its goals any more than the goofy Medicare payment formula is going to guarantee a 30 percent cut in doctors’ pay next year.

Except for a bloody toolbox of axes, cleavers, knives, and scalpels, IPAB doesn’t have any tools that would change the conditions of supply and demand for medicine. And when the bureaucratic slicing and dicing starts, ordinary Americans are going to find the board a pretty objectionable citadel of contemporary liberalism.

Politico’s Sarah Kliff writes that [3] "health industry groups are concerned the board will have to reduce spending by slashing payment rates—mainly to certain providers and the Medicare prescription drug program." No kidding.

To repeat, current law stipulates that IPAB cannot reduce the cost of Medicare by rationing care, raising taxes or premiums, or reducing benefits or eligibility. (It’s important to note that the law also assumes if the government cuts payments for medical services, this is not considered "rationing.") As Heritage expert Robert Moffit explains [1], the law leaves little room for anything but provider payment cuts, a method that has been tried and failed time and again. Moffit writes:

Physicians’ services under Medicare Part B could be subject to more payment reductions, even though Medicare physicians are already struggling under a flawed and volatile payment update system that routinely threatens them with draconian reductions. Hospital payments under Medicare Part A are exempt, even though they are the largest single category of Medicare spending. Though hospital payment updates would be reduced under other provisions of PPACA, their exclusion from the board’s range of action over the next 10 years is still a serious limitation on the board’s ability to control Medicare spending. Medicare providers that are exempt from the range of the board’s recommendations accounted for 37 percent of all Medicare benefit payments in 2009.

Dr. Alice Rivlin, former director of the Congressional Budget Office, signed the letter supporting IPAB. She said [3], "There are a lot of unreasonable fears about the IPAB. It’s been associated with death panels and stuff like that…I view it as a much more benign device to improve the efficiency of delivery systems in a lot of different ways." But the problem for Rivlin and others is simply this: The Board does not have a lot of different ways to do what it is supposed to do. If all you have is a hammer (provider payment cuts), as the saying goes, everything starts to look like a nail. President Obama now wants the hammer to be even bigger. Seniors’ benefits and medical treatments are going to look like a large bunch of nails.

This is not the kind of Medicare "reform" most Americans had in mind.

There’s a better way to achieve higher value for the dollars spent on Medicare. The key issue is who is going to make health care judgment calls. In Heritage’s "Saving the American Dream Proposal," rather than empower IPAB, we leave the crucial judgment calls to doctors and patients—where they belong. To learn more, visit www.savingthedream.org [5].

Of all the sweeping reforms in Rep. Paul Ryan’s 2012 budget, none is more politically charged than the proposal to transform Medicare from what it is today — an entitlement with no spending bounds — into a "defined contribution" program with a fixed and predictable budget. "Radical." "Extreme." "Cruel." "The end of Medicare as we know it." The ink wasn’t dry on Ryan’s plan before groups in the Democratic political orbit began launching their rhetorical attacks. And don’t expect the demagoguery to end before November 2012.

Why did Representative Ryan include in his budget plan a controversial entitlement reform, giving Democrats something to exploit for political gain? Certainly Ryan wasn’t unaware of what was coming. He grabbed hold of the third rail of Social Security and Medicare reform more than three years ago, when he proposed his precursor to this year’s Republican budget, "A Roadmap for America’s Future." Since then, his opponents have thrown everything — and the kitchen sink — at him. So why is he now asking his Republican colleagues to join him on his lonely crusade?

The answer is straightforward: They have no choice. Fixing the federal budget — the raison d’être of the new Republican House — is impossible without slowing the increase in health-care costs. And that can’t be done without a thorough restructuring of Medicare. It’s a daunting challenge, but the reward will be great: a federal budget without crushing tax hikes, and a health-care system that works for patients, not the government.

Even the Obama administration agrees that Medicare is at the heart of the health-care-cost problem. Everything it claims will "bend the cost curve" of health care is a change in how Medicare works and pays for care.

That’s no small concession. For many years, Democrats were in complete denial about Medicare’s cost-raising features. They likened Medicare to a railcar attached to a runaway freight train: The only way to slow down Medicare would be to slow down the whole train — that is, to make health care cheaper for everyone. But now there is widespread recognition on both sides of the aisle that Medicare is the train’s engine (or, at a minimum, the most important engine).

American health care has virtues. We have highly skilled physicians and capital-intensive inpatient institutions, and our system is open to medical innovation in ways that other systems around the world are not.

But there is no denying that health care in the U.S. is highly inefficient. The system is characterized by extreme fragmentation. Physicians, hospitals, clinics, labs, and pharmacies are all autonomous units that are financially independent. They bill separately from each other when they render services to patients. What’s worse, there’s very little coordination of care among them, which leads to a disastrous level of duplicative services, and often to low-quality care. The bureaucracy is maddening, the paperwork is burdensome and excessive, and there is very little regard for the convenience and comfort of patients.

Medicare’s FFS insurance is the largest and most influential payer in most markets. As the name implies, FFS pays any licensed health-care provider when a Medicare patient uses services — no questions asked. More than 75 percent of Medicare enrollees — some 35 million people — are in the FFS program. Physicians, hospitals, clinics, and other care organizations most often set up their operations to maximize the revenue they can earn from FFS payments.

In June 2009, Atul Gawande wrote an influential article for The New Yorker in which he contrasted the high-use, high-cost care provided in McAllen, Texas, with the less costly and higher-quality care provided at institutions such the Mayo Clinic. But what Gawande did not explore is what allowed a delivery structure such as McAllen’s to develop in the first place. The answer is Medicare. Without Medicare payments for every physician-prescribed diagnostic test and surgical procedure, the expensive infrastructure that was built in McAllen would never have been viable.

For FFS insurance to make any economic sense at all, the patients must pay some of the cost when they receive health care. Otherwise, there is no financial check against the understandable inclination to agree to all of the tests, consultations, and procedures that a doctor offers to perform, no matter how small the expected benefit.

But Medicare’s FFS system does not have effective cost-sharing at the point of service. Yes, the program requires cost-sharing, including 20 percent co-insurance to see a physician. But the vast majority of FFS beneficiaries — nearly 90 percent, according to the Medicare Payment Advisory Commission — have additional insurance in the form of Medigap coverage, retiree wrap-around plans, or Medicaid, and it covers virtually all costs not covered by FFS. Further, Medicare’s rules require providers to accept the Medicare reimbursement rates as payment in full, effectively precluding any additional billing to the patient.

In the vast majority of cases, then, FFS enrollees face no additional cost when they use additional services, and the only way for health-care providers to earn more is to provide more. So it is not at all surprising that Medicare has suffered for years from an explosion in the volume of services used by FFS participants. The Congressional Budget Office reports that the average beneficiary used 40 percent more physician services in 2005 than the average beneficiary did eight years earlier, and spending for physician-administered imaging and other tests was up approximately 40 percent in 2007 compared with 2002.

FFS also stifles much-needed service-delivery innovation. The payment rules, established in regulation, reward higher use of last year’s services, offered by last year’s list of qualified providers. New service-delivery organizations, pricing approaches, and ways of taking care of a patient (such as over the Internet and phone) are simply not accommodated by the payment rules, which in some cases were written two decades ago. Even small changes can take years to implement; often, a multi-year test is required. Providers are thus reluctant to invest in new approaches, no matter how promising, that will pay off only if Medicare accommodates the change. The result is that today’s fragmented, dysfunctional, and costly system is virtually frozen in place — for all users of U.S. health care, not just Medicare patients.

That’s right. Obamacare imposes an upper limit on Medicare spending growth every year, beginning in 2015. This is not yet widely understood among voters, probably because the Obama administration doesn’t want it to be. And, for some Americans (and reporters), maybe it is just too hard to believe that the most liberal Congress in a generation placed a spending cap on one of the Left’s iconic entitlement programs.

But make no mistake: That’s exactly what it did. Beginning in 2015, growth in per capita Medicare spending will be limited to a fixed rate, initially set at the midpoint between general inflation in the economy and inflation in the health sector. Starting in 2018, it will be set permanently at per capita–GDP growth plus one percentage point.

To enforce the cap, Obamacare’s authors resorted to a favorite liberal solution: a board of technocrats. The 15-member Independent Payment Advisory Board, or IPAB, is charged with coming up with ways to hold Medicare spending below the annual caps.

To hit its budgetary targets, IPAB is strictly limited in what it can recommend and implement. It can’t change cost-sharing for covered Medicare services. Indeed, it can’t change the nature of the Medicare entitlement at all, or any aspect of the beneficiary’s relationship to the program. The only thing it can do is cut Medicare payment rates for those providing services to the beneficiaries.

Obamacare’s apologists argue that this cap will spur innovative "delivery system" reforms that will cut costs with no pain to the program’s participants by steering patients to higher-quality, lower-cost providers of care. But this is wishful thinking in the extreme. The federal government has never shown any capacity to build and maintain what might be called a high-quality delivery system in Medicare. Indeed, the whole point of the Medicare FFS model is that beneficiaries get to see any licensed provider they choose, to whom Medicare pays a fixed reimbursement rate. When attempts have been made to steer patients toward preferred physicians or hospitals, they have failed miserably. Politicians and regulators have found it impossible to choose among hospitals and physician groups, because the available quality measures are disputed.

Instead, Congress and Medicare’s regulators have cut costs the old-fashioned way: with across-the-board payment-rate reductions that apply to every licensed provider, without regard to any measures of quality or efficiency. Tellingly, that’s exactly how Obamacare cuts Medicare spending, by nearly $500 billion, over the coming decade, and that’s exactly how IPAB will meet the new Medicare cap under the law in the future.

The risks to Medicare’s participants from this approach to cost-cutting are very real. The chief actuary for the Medicare program has warned repeatedly over the past year that Obamacare’s cuts will drive scores of providers from the program because payments will be too low to cover their costs. He expects 15 percent of the nation’s hospitals to drop out of the program by the end of the decade. At that point, Obamacare’s cuts would have driven average Medicare payments below those paid by Medicaid, which are notoriously low.

The Obamacare "solution" for Medicare is nothing of the sort, and nothing new at all. It’s an approach that has never worked to control costs in the past, and it won’t work this time. All price controls ever do is drive out willing suppliers, after which the only way to balance supply and demand is with waiting lists.

The Ryan alternative starts from an entirely different premise. Its solution is not top-down cost-cutting but a more productive and efficient health sector. The only way to slow the rise in costs without compromising the quality of American health care is by getting more bang for the buck: making the provision of services to patients more efficient each year.

Beginning in 2022, new Medicare enrollees would get their entitlement in the form of a "defined contribution" or "premium support" payment from the government (those who turn 65 before 2022 would be exempted from the switch). Initially, the entitlement would be set at roughly the average cost of Medicare coverage. In future years, its value would grow at the rate of general inflation. Beneficiaries would be given a menu of insurance options on which they could spend their entitlement. Importantly, the value of the entitlement would be set independently of whatever insurance plan they selected. If beneficiaries selected plans with higher-than-normal premiums, they would pay the extra cost themselves. If they selected less expensive options, their out-of-pocket expenses would reflect the lower price of coverage.

Critics argue that this change would do nothing to control health-care costs, but would shift the risk of rising costs onto individuals because the government’s support would no longer keep pace with premium growth.

However, the goal is not to shift rising premium costs onto beneficiaries, but rather to set in motion an entirely different market dynamic that will achieve greater efficiency. With cost-conscious consumers looking for the best value for their money, cost-cutting innovation would be rewarded, not punished as it is today. Physicians and hospitals would have strong financial incentives to reorganize themselves to become more productive and efficient and thus capable of capturing a larger share of what would become a highly competitive marketplace. That’s the only way to slow the growth of health-care costs without harming the quality of care.

The government plays an important oversight role in Ryan’s Medicare-reform plan, as it should. Participating insurance companies must offer transparent pricing and meet minimum-benefit and -quality standards. But decisions about where to put limited resources should be made by individual consumers, not the federal government.

The Obama administration would like to see high-quality, low-cost networks form in every region of the country. That’s a worthy goal. But the federal government has no capacity to make that happen. Those networks will form only when it is attractive and profitable for them to do so, on their own, organically and in the communities in which they operate. And that means unleashing the power of competition to reward innovators and entrepreneurs.

Medicare’s prescription-drug benefit became the first truly competitive market in the program when it was enacted in 2003. Beneficiaries get a fixed-dollar entitlement that they can use to buy coverage from a number of different competing plans. The insurers understand that they have to keep costs down to attract price-sensitive enrollees. And the government has no role in setting premiums or drug prices. And how is it working? Costs are now expected to come in 47 percent below original expectations over the first decade.

The federal government’s health-care administrators have been trying to micromanage Medicare to control costs for four decades now. They haven’t succeeded, yet Obamacare doubles down on their failed model, this time with an arbitrary cap on spending that poses great risk for beneficiaries.

Paul Ryan has a different vision and solution, grounded in the American experience. He understands that the best way to help the program’s future enrollees is to give them more control. When the beneficiaries, not the government, direct the entitlement, the entire health-care system will reorient itself to deliver what they want and need at an affordable price. That’s the way to patient-centered care. That’s the way to rewarding productivity and efficiency in the health sector, and making health care more affordable for everyone, including the uninsured. It’s the most important step toward fiscal sanity, too.

1. The Path to Prosperity makes no changes to Medicare for those 55 and older, guaranteeing they will receive coverage when they become eligible. But I am younger than 55 – do your reforms mean I am no longer guaranteed Medicare?

No. In fact, the opposite is true. The Path to Prosperity protects and preserves the Medicare guarantee not only for current beneficiaries, but for future generations as well. Beginning in 2022, beneficiaries are guaranteed a choice among Medicare-approved private health options and a premium-support payment to help pay for the cost of that plan. The plans, which will also be listed on a new Medicare exchange, are required to provide coverage to any Medicare beneficiary that asks. As the Congressional Budget Office notes: "Plans would have to issue insurance to all people eligible for Medicare who applied".[i] In other words, all Medicare beneficiaries are guaranteed that a health plan will be available for them.

This is in stark contrast to what would happen to the Medicare guarantee for future generations if we fail to act now. The Congressional Budget Office estimates that Medicare will go bankrupt in the next nine years. Experts on both sides of the aisle recognize that Medicare is on an unsustainable path. If we do nothing – that is, if Washington chooses to continue the tradition of punting on the biggest issues of our time – Medicare’s guarantee will in fact disappear. And not just for future Medicare beneficiaries, but for those who depend on Medicare today.

2. I understand that The Path to Prosperity guarantees a Medicare premium-support payment and access to a health plan. But how do I know there will be a plan I can afford? What good is a premium-support payment if I can’t afford any of the options?

In addition to requiring that Medicare-exchange health plans provide coverage to anyone who is eligible, The Path to Prosperity also prevents companies from charging prohibitively high premiums. That is, insurers will not be able to charge high-risk or costly Medicare patients excessively high premiums in order to avoid having to provide them with coverage. The Congressional Budget Office describes this Path to Prosperity provision as requiring plans to, "charge the same premiums for all enrollees of the same age".[ii] Combining this requirement with a premium-support payment that is tailored to meet an individual’s age, health status, and income level ensures that Medicare beneficiaries will be able to both find a plan that fits their needs and have the financial resources to afford it.

3. Beginning in 2022, when I become eligible for Medicare, The Path to Prosperity guarantees that I will receive a premium-support payment and that there will be a plan I can afford. But what kind of coverage can I expect to receive?