Karen Davenport, Director of Health Policy at the Center for American Progress Action Fund, contributed to this post.
The Center for American Progress Action Fund’s analysis of Senator McCain’s reliance on reduced spending in Medicare and Medicaid to pay for his health care plan was cited by Senator Obama on October 17 and thus has garnered unprecedented attention in the last 48 hours. In a spirit of transparency and openness, we are sharing our original spreadsheet:
Origin of the $1.3 Trillion, Ten-Year Medicare and Medicaid Cut Estimate: In early October, McCain campaign advisor Douglas Holtz-Eakin told the Wall Street Journal that McCain would reduce Medicare and Medicaid to help fund his health care plan. The Tax Policy Center had previously estimated that McCainʼs health care plan had a $1.3 trillion budget hole to fill.
Allocation of the $1.3 Trillion Cut Between Medicare and Medicaid: The campaign has been silent about both its specific policies and how much of the reductions would be taken from Medicare versus Medicaid. In the absence of additional information, we allocated McCain’s $1.3 trillion in proportion to the projected, FY 2009 to 2018 Federal spending for these two programs — $882 billion (68%) for Medicare, and $419 billion for Medicaid (32%).
Could Benefits Be Sustained with a Cut of this Magnitude? With the news that McCain would use Medicare and Medicaid to fill this hole, we decided to see whether cuts of this magnitude would enable the programs to keep up with medical inflation and enrollment growth. In other words, could you cover the same proportion of people for the same benefits, assuming growth in Medicare could not be kept below the increase in medical inflation? Medical inflation itself does not take into account the changes in service mix and utilization that typically are needed to sustain health care services. We reasoned that if McCain’s restrictions on Medicare and Medicaid spending fell below medical inflation and population growth, meaningful program cuts – specifically eligibility cuts or benefit reductions – would be required to hit McCain’s target.
So we looked at the Congressional Budget Office’s current estimates of Medicare and Medicaid spending from fiscal years 2009 to 2018, which project that Medicare will grow, on average, 6.9 percent per year, while Medicaid will grow by an 8.0 percent average annual growth rate. We used these figures to calculate what total Medicare and Medicaid spending would have to be under the McCain proposal through 2018 to hit these targets by changing the programs’ average annual growth rates. Our results: a 4.5 percent average annual growth rate for Medicare, and 5.5 percent average annual growth in Medicaid.
These growth rates fall far below the combination of medical inflation (4.4 percent for the most recent year) and CBO’s enrollment growth projections for each program over the 2009 to 2018 period (2.7 percent for Medicare and 1.5 percent for Medicaid). The most aggressive cost containment policies possible could not make up the difference between 7.1 percent and 4.5 percent growth for Medicare, and 6.0 percent and 5.5 percent growth for Medicaid. As such, we concluded, would require eligibility cuts, benefit cuts, or both.
Mismatch in McCain’s Target and Policies: Prior to the recent announcement McCain was already relying on savings in Medicare and Medicaid to fund his tax cut proposals. These funds included Medicaid savings that could result from some lower-income people using the new tax credits to purchase private coverage – but Holtz-Eakin also mentioned these particular Medicaid funds as an offset to the $1.3 trillion, which meant these funds were being double-counted. We also know that McCain’s proposed health system savings – from new incentives for coordinated care, greater use of health information technology (IT) and reduced levels of waste, fraud and abuse, some of which would accrue outside of Medicare — would not approach this $1.3 trillion cost. For example, Sen. McCain has not proposed making any up-front investment in health IT, nor has he offered any specifics for how to reorganize doctor payments to improve care for people with chronic diseases. Regardless, no amount of savings from such policies could yield savings of this magnitude within these programs.