The Wonk Room has long argued that to finance his health plan, Sen. McCain would have a tax increase of $1,100 on the average family—and that absent the tax increase there would be a $1.3 trillion budget shortfall. Now, McCain has dramatically changed his proposal. As explained by McCain adviser Douglas Holtz-Eakin, the McCain plan will keep the payroll exemption for health insurance and, instead, cut $1.3 trillion from the Medicare and Medicaid programs to finance his health care plan.
Bearing a strong resemblance to the cuts that were sought by former-Speaker of the House Newt Gingrich, McCain’s call for radical cuts to Medicare and Medicaid will undermine their vital role in our health care system, putting affordable health care out of reach for millions of seniors, people with disabilities, and low-income families, and driving up the cost of health insurance for everyone else.
Assuming that the $1.3 trillion cut is taken proportionately from both Medicare and Medicaid:
- Medicare: The McCain plan will cut $882 billion from the Medicare program, roughly 13 percent of Medicare’s projected spending over a 10-year period. At this level, Medicare spending will not keep pace with inflation growth and enrollment increases – 4.5 percent compared to over 7 percent — thereby requiring cuts in benefits, eligibility or both.
- Medicaid: The McCain plan will cut $419 billion over 10 years from the Medicaid program, roughly 13 percent of Medicaid’s projected spending over this period. At this level, McCain’s Medicaid spending growth – 5.5 percent – does not keep pace with inflation growth and enrollment increases (at 6 percent), thereby requiring cuts in benefits, eligibility or both. Because federal Medicaid funds match state spending, this cut in federal funds would likely yield a parallel cut in state funding, for a total reduction in Medicaid spending of $738 billion over 10 years—more than the cost of providing benefits for all Medicaid beneficiaries for two years. These cuts could also cascade into the State Children’s Health Insurance Program, or SCHIP, the federal progam that covers millions of children who otherwise would not have access to health insurance.
- Private Insurance: As the government’s support of public programs fall, those with private insurance will end up paying more as health care providers shift costs to private payers.
McCain Proposes Large Medicare Cuts:
McCain would cut Medicare by 13 percent over 10 years. To achieve his Medicare spending target, McCain will have to limit growth to 4.5 percent annually. However, just to maintain the current operations of the existing Medicare Program, a growth rate of 7.1 percent is needed over the next ten years to cover the 2.7 average annual growth in enrollment and a projected rate of medical price inflation of 4.4 percent.
The difference in growth rates can be seen in the chart below. Absent yet another change in the McCain plan, it is clear that McCain will reduce Medicare eligibility, reduce benefits, increase cost-sharing, or some version of all three:
McCain Proposes Large Medicaid Cuts:
Assuming proportional cuts divided between the two programs, McCain would also cut Medicaid spending by 13 percent over 10 years. As Governors struggle to fund existing Medicaid programs in the face of the nation’s economic crisis, cuts of this magnitude would place extraordinary pressure on states. Under these circumstances, states could have no choice but to reduce eligibility and benefits, or increase cost sharing.
To achieve his Medicaid spending target over the next years, McCain will have to limit growth to 5.5 percent annually. However, just to keep up with medical inflation and enrollment growth – to say nothing of changing patterns of health care use –a growth rate of 6 percent is needed over the next ten years. The difference in growth rates can be seen in the chart below. Absent yet another change in the McCain plan, it is clear that Sen. McCain will reduce Medicaid eligibility and benefits, increase cost-sharing, or some version of all three.
Those with Private Insurance Will Pay More Under McCain:
The various pieces of our health system are linked. As public funding falls, private health care costs will go up in at least two ways:
- Cost-shifting to the private market: Low payment rates in the public market mean that health care providers will pursue higher payments from the private market. This represents what some have called a hidden tax on those with private insurance. Given the radical cuts in the McCain plan, those with private insurance will surely pay more for coverage.
- Increase uncompensated care costs: As states are forced to cut back on their Medicaid programs, more people will turn to the emergency room – the highest-cost setting for health care services. As those costs increase, there is a hidden tax on those with health insurance.
McCain’s original health care plan was designed to unravel the current employer-based health care system and push individuals and families into the individual insurance market. Now he proposes deep and unsustainable cuts to Medicare and Medicaid, which provide critical health benefits and economic security to elderly, disabled and low-income Americans, while pushing up costs for everyone else. What will he think of next?
Read the full memo here.