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News January 2013

Washington Watch

Fiscal Cliff Issues Not Yet Fully Resolved: What May Be in Store for Seniors

By Alan M. Schlein

Monthly payments to Medicare prescription-drug plans and Medicare Advantage plans also would face a two percent reduction, as would doctors and insurers a month later. This would mean cuts to community health centers that would result in them seeing fewer low-income patients. Cuts to the Food and Drug Administration would mean scaling back the number of health inspectors to test food, drug and medical products and it could also affect the evaluation of new drugs.

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Our Washington correspondent Alan Schlein analyzed all the facts available during the first few weeks of December to compile this column. With the last-minute passage of a bill to avoid falling off the fiscal cliff late on New Year's Eve, some of the details may have changed slightly. However, the issues most critical to seniors are mostly part of possible spending cuts – the huge policy decisions lawmakers still avoided and will need to resolve in the next couple of months.


 

Despite weeks-long bargaining, negotiating, and votes on the issues facing the country to keep from falling over the so-called financial cliff, many issues were left to solve another day. Among those were many of vital importance to seniors. Possibilities still under consideration in the sequestration budget cuts are many, including:

Money for crucial services such as community health centers, AIDS and HIV programming, disease control and prevention, bio-medical research, and the regulation of food, drugs and medical devices would face immediate reductions of 8.2 percent. Some services are exempt, including veterans’ health programs, Medicaid and the Children’s Health Insurance Program.

Monthly payments to Medicare prescription-drug plans and Medicare Advantage plans – the private plans that provide Medicare benefits – also would face a two percent reduction, as would doctors and insurers a month later. This would mean cuts to community health centers that would result in them seeing fewer low-income patients. Cuts to the Food and Drug Administration would mean scaling back the number of health inspectors to test food, drug and medical products and it could also affect the evaluation of new drugs.

While the sequester wouldn’t affect the main portions of the Affordable Care Act, funding for the prevention and public health fund and other programs would also be cut back, which provides help to fight chronic diseases, obesity, and other health programs.

The Math

Despite hints in December that President Obama and House Speaker Boehner might reach a compromise on the tax rate to be paid by top earners, a host of other difficult tax questions could still derail a deal to avert a fiscal crisis in January. The math shows why.

Even if Republicans agree to Obama’s demand that the top marginal income rates return to the Clinton-era levels of 36 percent and 39.6 percent after December 31 – up from the Bush-era rates of 33 percent and 35 percent –the additional revenue would be only about a quarter of the $1.6 trillion that Obama wants to collect over 10 years. That would be about half of the $800 billion that Republicans have said they would be willing to raise.

Without agreement, the sequester, the automatic tax increases on all Americans and cuts in domestic and military programs will take hold. Economists predict if they are left in place for months, it could cause a recession.

To find the necessary dollars, several other changes in tax law are being considered, including higher tax rates on investment income from capital gains and dividends, restoring restrictions on the itemized deductions and exemptions claimed by affluent individuals. What deductions and how much revenue they generate will be the hardest thing to work out.

Political party philosophies could go out the window as some Democrats and some Republicans worry how those changes in deductions might affect their constituents. Opposition from charitable groups, the housing industry, insurers and others to curbing deductions for charitable giving and mortgage insurance could force timid lawmakers to back down from a tough fight.

Both parties seem poised to confront that opposition, however because they want a budget deal to force Congress and the White House to overhaul the tax code, and avoid the fiscal cliff cuts. But it was that same inability to reach agreement that led Congress to put the fiscal cliff in the first place.

A budget deal will mean an agreement on long term reductions in spending for Medicare and other fast-growing entitlement benefit program – cuts that make most Democrats uncomfortable.

Taxes

What tax increases are in store as a deal is worked out? When a tax cut expires, the practical effect is a tax increase. A slew of tax cuts ($400 billion for 2013) expire on December 31– all of the Bush-era rate reductions; smaller cuts that periodically expire for businesses and individuals; and the 2-percentage point cut in payroll taxes that President Obama pushed through in 2010, which increases an average worker’s take home pay by almost $1,000 a year. Also, about 28 million taxpayers – about one in five, all middle to upper income – would have to pay the alternative minimum tax in 2012, raising their taxes more.

There are many areas of disagreement between the president and the house speaker, and their respective parties about how to find the necessary revenues. Both parties agree that something must be done to cut costs for the big government health insurance programs, Medicare and Medicaid. Democrats do not believe Congress could meaningfully overhaul them in the little time that remains before the fiscal deadline. They stress that entitlement reform is a big step, affecting tens of millions of people, so they are reluctant to include it in a year-end deal.

But Republicans say some changes could be made, with the real structural changes later next year.

Republicans suggest ideas like additional cuts to health care providers or changing the way inflation is calculated to slow not only automatic increases in Medicare and Social Security benefits, but also the annual rise in tax brackets. Democrats counter that a down payment should consist of a combination of tax increases and cuts to program outside the entitlements, like farm programs, for example.

If lawmakers and the White House are able to come to an agreement on the down payment, it would also likely fix targets for larger savings in the tax code and entitlement programs. Then the White House and Congress could spend most of the next year trying to work out the specific policy changes needed to hit those targets.

This is where it becomes complicated for seniors. Among the long term changes to Medicare that could directly affect Medicare’s 52 million beneficiaries are potentially increasing the eligibility age from 65 to 67 and means-testing, meaning higher costs for wealthier retirees.

Other proposals include reducing payments for hospitals, nursing homes, drug makers, insurers and physicians.

Democrats have said they can cut Medicare spending without touching seniors’ benefits. But the reality is different. They can’t get several hundred million dollars out of Medicare without at least some beneficiaries taking a hit. And that could be a problem if the framework or down payment for a fiscal cliff deals calls for upwards of $400 billion in entitlement savings – the base amount expected and most of which would be likely to come from Medicare.

If the president and Congress do agree to raise the eligibility age – which technically wouldn’t touch “benefits” – many of those near-retirees would have to pay more for their health coverage. Lawmakers raised the eligibility age for Social Security from 65 to 67 in the 1980s. If health care providers get hit with another cut of rounds – a likely source of savings – in addition to the ones already on the way from the Affordable Care Act, they warn that some of them won’t survive.

A recent Kaiser Family Foundation study warned that increasing the eligibility age could have some ripple effects on the economy, including higher premiums for seniors because keeping younger seniors out of Medicare would raise costs for the rest; higher premiums under the president’s new health law could also happen because older adults would stick with private insurance for two extra years instead of moving into Medicare; and higher out-of-pocket costs for two out of three older adults whose entry into Medicare would be delayed.

 

SIDEBAR: The Spending Options for Medicare

Whatever kind of deal is worked out, these are the most likely areas where spending cuts or program changes are likely to come from. Among the leading proposals for slowing Medicare spending are:

  • Increasing the Medicare Part B premium to 35 percent of costs, which would save a lot of money, but would violate the Democrats’ pledge not to shift costs to seniors.
  • Prescription drug rebates for dual eligible -seniors whose income are low enough to qualify for Medicaid. But drug companies, a powerful constituency, would fight this relentlessly.
  • Changing cost-sharing for Medicare and medigap insurance, but again, Democrats swear they would never touch seniors benefits.
  • Means testing is more likely to happen than some of the other options, but it doesn’t save as much money as many think it might. While a portion of Medicare premiums are already based on income, this would increase that percentage, raising health care costs to those who can better afford it and reducing the government’s costs. But at best, analysts suggest, this could raise about $20 billion, hardly a dent in the amount needed.
  • Cuts to Medicare providers – payments to the physicians and the hospitals who treat beneficiaries. Both Democrats and Republicans seem to find agreement on this (since it’s easier to cut provider than beneficiaries’ payments), although medical groups are pushing hard against it, saying they’ve already been squeezed by cuts in the Affordable Care Act and further cuts would only harm patients’ access to care.
  • Taxing the value of health insurance that employers provide their workers, could raise more money (an estimated $250 billion) than eliminating the mortgage interest deduction or getting rid of the break for charitable giving, or even scaling back capital gains or state and local taxes. Most people don’t realize that they don’t pay taxes on the value of those health benefits. But this is an unlikely area for lawmakers to try and get dollars because it would seem like a tax increase to most people and would prompt employers to drop coverage for their workers, leaving a huge burden of millions of new potential customers on the still-being-developed health care exchanges under the new Affordable Care Act.

 

Also contributing to this report were Kaiser Health News; NY Times, Washington Post, NPR, AP, and the Los Angeles Times.

Alan Schlein runs DeadlineOnline.com, an internet training and consulting firm. He is the author of the bestselling “Find It Online” books.

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