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'Entitlement reform' is finally here—and it's ugly

Rick Newman
Senior Columnist

The Senate plan to remake the Affordable Care Act is called the “Better Care Reconciliation Act.” But it’s not really about “care,” as in healthcare. It has a lot more to do with Medicaid, the health-insurance program for lower-income Americans, which Republicans aim to prune aggressively.

Medicaid is one of the three big “entitlement” programs, so named because people who meet the right criteria qualify for benefits, with no limit on total federal spending. States pay a portion of the Medicaid tab, but the program still costs Uncle Sam about $350 billion per year, making it the third-largest federal entitlement. The biggest is Social Security, with payouts of more than $1 trillion per year, followed by Medicare, the health program for seniors, with about $600 billion in annual spending. Combined, those three entitlement programs account for roughly half of all federal spending.

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That portion is growing, because healthcare costs are rising more rapidly than inflation or federal tax revenue, and baby boomers are starting to swell the ranks of Social Security and Medicare participants. Since there’s no check on total spending in those programs, something needs to change, or else entitlements will devour so much federal revenue that there won’t be anything left for repairing highways, financing student loans, operating foreign embassies or maintaining national parks.

Budget analysts have insisted for years that “entitlement reform” is coming, meaning costs for these three programs will have to be reined in, somehow. That moment has now arrived, with House and Senate bills that take aim at Medicaid, under the guise of repealing the Affordable Care Act, passed in 2010 under President Obama.

Rolling back Medicaid

The Senate just released a plan that would roll back an expansion of Medicaid included in the ACA, and put other limits on Medicaid funding. The Congressional Budget Office estimates an additional 22 million Americans would end up uninsured within 10 years under the Senate plan. By 2026, there would be a total of 49 million Americans without health insurance; in 2013, right before the ACA went into effect, there were only 45 million uninsured Americans.

The Senate bill would, however, reduce federal deficits by $321 billion over a decade. On balance, the Senate bill would save more money than a similar bill the House passed in May, because tax credits to help people pay for insurance are less generous in the Senate version. Both bills would slash funding for Medicaid—by $77 billion per year in the Senate bill, and $88 billion in the House bill. That’s about one-fourth of the program’s current federal cost, which would be a giant reduction sure to cause pain for rural and public hospitals and many other providers dependent on the funding.

For anybody who’s ever wondered what “entitlement reform” is—well, this is it. In this instance, “reform” is a euphemism for “cuts,” because there’s no real effort to improve the efficiency of Medicaid, to get more bang for the buck. But entitlement reform inevitably involves cutbacks in benefits, unless voters agree to higher taxes in order to cover ever-rising expenditures. And that’s not in the cards anytime soon.

The Senate plan may not pass, and even if it does, the odds of a full bill clearing the entire Congress, for President Trump to sign, are perhaps somewhat less than 50-50. But even if the GOP plan dies, it is a useful preview of cutbacks that seem inevitable when entitlement costs rise beyond sustainable levels, which could happen in the late 2020s or sooner.

The 2010 Simpson-Bowles report on fiscal responsibility—considered one of the more credible efforts to control the mushrooming national debt—would have cut Social Security benefits and raised the retirement age. And some analysts thought that didn’t go far enough. The plan also proposed cuts in Medicare benefits—even for lower-income participants—and a higher eligibility age. Medicaid enrollees would have faced higher costs, too. There were tax hikes in the Simpson-Bowles plan as well, providing something for everybody on every side to hate. The plan was so troubling (and honest) that hardly any members of Congress endorsed it.

Though it has outsourced study on the issue to groups like Simpson-Bowles, Congress has deftly avoided actual entitlement reform—until now. Some Republicans have long argued that Medicaid amounts to too much of a handout, especially since Obama expanded the program in the ACA. The test now is whether entitlement reform that takes benefits away from voters is politically plausible. Many mainstream groups oppose it, including AARP, the American Medical Association and the American Cancer Society. Yet the vote in Congress is likely to be surprisingly close, which suggests that even if it can’t pass now, entitlement reform may have a better shot in the future, when the need to trim spending is more urgent.

Confidential tip line: rickjnewman@yahoo.com. Encrypted communication available.

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Rick Newman is the author of four books, including Rebounders: How Winners Pivot from Setback to Success. Follow him on Twitter: @rickjnewman