President Obama released his 2013 budget proposal yesterday. In the short run, it’s a mere formality. With a divided Congress in an election year, Obama’s budget is dead on arrival. But our national conversation about entitlement reform is far from over, and the health care cost-containment approach in Obama’s budget will inform that debate.

Obama’s budget reduces Medicare spending by $300 billion, and cuts another $55 billion from Medicaid. The good news is that Obama achieves many (but unfortunately not all) of these savings by weeding out wasteful spending rather than by pushing costs onto beneficiaries. For example, his budget:

  • • reduces overspending on prescription drugs by requiring drug manufacturers to pay the same rebates for low-income Medicare recipients as they do for Medicaid beneficiaries
  • • improves access to low-cost generic drugs by ending “pay for delay” agreements, a practice that allows brand-name drug manufacturers to pay generic drugmakers to keep their products off the market
  • • creates incentives for nursing homes to avoid needless and costly hospitalizations by providing better primary care to residents
The President proposes that the savings outlined in his budget replace the $1.2 trillion in across-the-board cuts scheduled to go into effect in January 2013 (“the sequester,” triggered by the failure of the Super Committee.) As far as the health care budget is concerned, the policies outlined above represent a marked improvement over the across-the-board cuts: they target the waste in our system rather than indiscriminately cutting good health care spending along with the bad. These policies not only save federal dollars, they actually strengthen Medicaid and Medicare.

The Bad News Unfortunately, not all of the President’s cost-containment proposals are preferable to the across-the-board cuts. The sequester exempts Medicaid from cuts, but the President’s budget shifts billions in Medicaid costs onto states by: 1) reducing federal Medicaid matching rates, 2) limiting states’ ability to use provider taxes to finance Medicaid, and 3) increasing Medicare cost-sharing requirements (which would increase state Medicaid costs since Medicaid pays the Medicare cost-sharing requirements for the “dually-eligible”).

Shifting Medicaid costs onto states is not much better than shifting those costs directly onto vulnerable beneficiaries. Experience tells us that states are likely to compensate for their lost funds by scaling back on benefits like prescription drugs or dental care, raising premiums and co-pays, or cutting already-low provider reimbursement rates – all of which create barriers to needed care for the millions of seniors, children and people with disabilities who rely on Medicaid.

President Obama’s budget also cuts the Prevention and Public Health Fund by $4 billion over ten years. Since slowing our nation’s’ health care costs depends on our success at reducing the incidence of chronic illness, cutting prevention funding is a particularly short-sighted strategy.

We’ll Take More of “The Good”, Please There is far more we can do to save money in our health care system without resorting to policies that would harm access to care for our nation’s most vulnerable citizens or undermine efforts to improve the health of Americans. For example, we should:

  • • Incentivize hospitals to reduce harmful care. The Affordable Care Act began adjusting Medicare payments to provide a stronger incentive to hospitals to prevent complications, such as hospital-borne infections and readmissions. As we outline in this paper, Medicare can do much more to reduce these harmful events. Doing so would not only save the federal government over $100 billion dollars, it would reduce deaths and suffering caused by avoidable infections, other preventable conditions, and needless hospitalizations.
  • • Tax sugar-sweetened beverages. This would bring in over $100 billion dollars in needed revenue over the next 10 years. And by lowering the consumption of sodas, a tax on sugary drinks would reduce the burden of obesity, diabetes, and heart disease on Americans’ lives and our health care costs.
As they debate entitlement reform, politicians will try to convince us that we have no choice – that slowing health care spending necessitates scaling back on our promise to care for our seniors, people with disabilities, and low-income families. By building off of the strengths in President Obama’s cost-containment approach, we can prove them wrong. We can – and we must — reduce our health care spending while strengthening Medicaid and Medicare.

-Katherine Howitt, Senior Policy Analyst -Michael Miller, Policy Director