In his latest column for RealClearMarkets, the Manhattan Institute's Josh Barro takes a look at a report by the liberal Center for American Progress on how to balance the budget through spending cuts. The report aims to reduce the deficit by $255 billion starting in 2015 mostly by cutting expenditures—expenditures which, as Barro notes, are intended "to demonstrate the draconian steps needed to balance the budget on the spending side of the ledger." But as Barro says, if anything, the cuts it recommends are not big enough. In particular, the report's reccomendations leave Medicare largely untouched:
Regarding Medicare: really, this report could be called "How to Cut The Federal Budget While Touching Very Little Mandatory Spending." While 62% the federal primary budget (i.e., excluding interest) is expected to consist of mandatory spending in 2015, only 14% of the report's proposed reductions come from mandatory spending, and mostly not from the core mandatory programs. While the report includes a 1.4% reduction in Social Security spending, it does not touch health care entitlements at all.
The report notes that the recently passed health care law already includes significant reductions in Medicare reimbursement rates. That's true, and as the authors note, further reductions in reimbursement rates could make it difficult for seniors to receive care, because doctors will take fewer Medicare patients.
But the report then concludes that "there appears to be little more that the federal government can do by 2015 beyond what it has already accomplished to hold down health care spending in the federal budget without significantly compromising the quality of care." This is not true—significant savings are available through avenues other than reimbursement rate cuts. Effectively, these would reduce the quantity of care paid for by government.
One such proposal, advanced last year by three scholars at the American Enterprise Institute, is competitive pricing for Medicare Advantage and traditional Medicare Fee-for-Service plans. Currently, about 20% of Medicare participants receive coverage from private insurers through Medicare Advantage and the remainder are on traditional Medicare Part A and B plans. In some parts of the country, the former plans provide richer coverage at a lower premium, and in others choosing the latter is advantageous; seniors may pick which they prefer and they will generally choose the better deal.
The AEI reform would set these plans on a level price playing field, so seniors who wish to buy up to the richer plan (whichever that is in their area) would have to pay an additional premium, reducing Medicare costs by about 8% or about $50 billion per year.
For more eye-popping ways to slash government programs and expenditures, see the 3-D government-cutting extravaganza in Reason's latest issue.
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