Speaker of the House Kevin McCarthy sent a letter last week to President Joe Biden in which he admonished the White House for not taking more seriously talks to raise the nation’s debt limit, currently set at almost $31.4 trillion. The Biden administration responded by saying House Republicans should increase the ceiling without preconditions and present fleshed out proposals for reducing the budget deficit.
A failure to raise the ceiling could lead to the US government defaulting on its debt obligations in what would be a global financial catastrophe. So far, GOP leaders have fixated on proposals designed to expand oil and gas production in return for raising the debt limit. That’s a worthy goal, but will do next to nothing to reduce a deficit that the bi-partisan Congressional Budget Office forecasts will roughly double to $2.7 trillion by 2033. (1) Instead, Republicans should push for commonsense reforms to the largest driver of long-term deficits, Medicare.
Sure, advocating for benefit cuts for seniors is political kryptonite. What I’m suggesting is much milder, though it would still require a good bit of fearlessness – perhaps more than the GOP is willing to muster.
Right now, Medicare pays more for outpatient services performed in hospitals than for those same services at a physician’s office. This has contributed to consolidation in the medical industry as more independent doctors and small practices can no longer afford the rising costs of public and private insurance on their own. The Committee for a Responsible Federal Budget estimates that equaling payments across services could reduce the deficit by as much as $279 billion over the next 10 years. Concrete versions of this proposal have been offered by the bipartisan Medicare Payment Advisory Commission and backed by officials in both the Trump and Obama administrations.
Conversely, Medicare Advantage – a program designed to hold down costs by allowing Medicare recipients to opt for private health plans – has been plagued by widespread fraud. Four of the five largest insurance companies that participate in Medicare Advantage have been sued in federal court for encouraging physicians to diagnose patients with more severe diseases and health problems. The sicker patients look, the more the government pays for their care, regardless of what it ultimately costs an insurance provider. Artificially inflating diagnoses leads to higher profits as the care provided is the same.
University of California San Diego professor Richard Kronick developed a method for preventing insurers from exploiting this loophole. It would have Medicare estimate each insurer’s propensity to overbill by analyzing the annual growth rates in diagnosis between each cohort of Medicare Advantage enrollees. Medicare then cuts payment to the insurer according to its propensity score. The Committee for a Responsible Federal Budget estimates that if enacted, Kronick’s proposal could reduce the deficit by as much as $372 billion.
Both proposals have already been fleshed out by academics and think tanks. They require no policy innovation from Congress. Combined, they could save taxpayers $650 billion over the next 10 years and reduce premiums for Medicare enrollees by as much as $150 billion. Plus, reforming payments could spill over into the employer-provided insurance market, providing additional savings for Americans in the hundreds of billions of dollars.
Both, however, require overcoming the efforts of the powerful lobbies for hospitals and insurers to achieve deficit reductions that would only accrue over time. And although taxpayers overall will save massive sums, no individual taxpayer is guaranteed to save any particular amount. That makes these reforms a difficult sell for Congress.
The debt ceiling talks, with their intense focus on deliverables and media scrutiny, provide the ideal vehicle for getting over that hurdle. But first, the Biden administration must be willing to start negotiating in good faith and House Republicans must be willing to push for reforms that, although advantageous to beneficiaries and taxpayers alike, makes them vulnerable to criticism that they are “cutting Medicare.”
That’s a lot to ask for on both sides. Probably too much. But there is a lot to be gained, both for workers who would otherwise bear the cost of a rising government debt load and for current retirees who could see lower premiums, and the economy as whole in the form of lower inflationary pressures. Members of Congress have certainly been willing to take financial markets to the brink for far less.
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(1) To the extent that expanding oil and gas production helps hold down energy prices, the Federal Reserve will be somewhat more likely to cut interest rates and that will reduce the cost of financing the national debt. However, this effect is speculative and likely to be minor.
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ABOUT THE WRITER
Karl W. Smith is a Bloomberg Opinion columnist. Previously, he was vice president for federal policy at the Tax Foundation and assistant professor of economics at the University of North Carolina.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
