Obama’s Deficit-Reduction Proposal Cuts $320B in Healthcare Spending

President Obama’s deficit-reduction proposal would cut $320 billion in U.S. healthcare spending through changes to prescription drug coverage and nursing home spending, as well as by increasing individuals’ payments for Medicare coverage. A total of $248 billion of Medicare spending will be cut, while another $72 billion in savings will come from Medicaid.

The single-biggest reduction included in Obama’s Medicare cuts is $135 billion in drug prices the government pays companies like Pfizer (NYSE:PFE) and Merck & Co. for low-income beneficiaries. “We will reform Medicare and Medicaid, but we will not abandon the fundamental commitment that this country has kept for generations,” said Obama in a speech from the White House this morning.

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One change would require senior citizens to pay more for their Medicare services, though Obama has said he will veto any changes to Medicare that are not accompanied by tax increases. The proposal would have seniors new to Medicare paying $25 more for physician insurance, beginning in 2017. Another aspect of the proposal seeks to limit insurance plans that eliminate to reduce co-payments and deductibles, adding a premium of around 15% to Medicare coverage for people buying those plans.

Obama’s proposed changes to Medicare would save the government roughly $3.9 billion between 2017 and 2021. Obama might also seek a higher premium for higher-income Medicare recipients, saving another $20 billion. Nursing homes with high rates of readmittance after discharge would also have their Medicare payments cut by 3% starting in 2015, under the terms of the current plan.

Drugmakers will be hit twice by the plan, the first blow being dealt by Obama’s proposal that the window of market exclusivity for drugs be reduced from 12 years to seven. The second aspect of the plan would require makers of brand-name drugs to give a 23% rebate to the government for low-income Medicare beneficiaries receiving a subsidy to pay for coverage, according to two senior administration officials who wish to remain anonymous. Generic drugmakers would have to give a 13% rebate.

The program would also cut $72 billion from Medicaid, with $26.3 billion coming from a limit on a state taxation technique used to boost the share the federal government has to pay for the program. Many states now tax hospital and doctors, paying them back in Medicaid reimbursements, thus generating more matching dollars from the U.S. government.

Another $29.5 billion in savings over the next decade would come from simplifying the formula the U.S. uses to pay states for its share of the program, and by looking at Social Security payments in order to decide whether families are eligible for government subsidies beginning in the new health insurance markets that start in 2014.

Two other changes would save $29.5 billion in a decade by simplifying the formula by which the U.S. pays states for its share of the program, and by including U.S. Social Security payments in deciding whether families will be subsidized by the government in new health insurance markets that start in 2014. While the cuts would save the Federal government money, Ron Pollack, executive director of the consumer health lobbying group Families USA, says “they are merely cost shifts to the states.” AARP executive vice president Nancy LeaMond has gone on record saying, “the President and Congress should be thinking of ways to restore middle-class prosperity, not weaken it through cuts.”

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The plan also faces opposition from the Pharmaceutical Research and Manufacturers of America, a drugmaker advocate group, as it would hurt drugmakers’ bottom lines. The group claimed that the cuts were unnecessary because federal drug programs were under budget.

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