Examining the Proposed Medicare Part B Drug Demonstration

Comments for the Record

Senate Committee on Finance

Examining the Proposed Medicare Part B Drug Demonstration

Tuesday, June 28, 2016, 10:00 AM

by Michael Bindner

The Center for Fiscal Equity

Chairman Hatch and Ranking Member Wyden, thank you for the opportunity to submit our comments on this topic.  We will leave the description of the experiment to the Administration witnesses and concentrate on why the experiment may or may not be necessary.  As usual, our comments are based on our four-part tax reform plan, which is as follows:

• A Value Added Tax (VAT) to fund domestic military spending and domestic discretionary spending with a rate between 10% and 13%, which makes sure very American pays something.
• Personal income surtaxes on joint and widowed filers with net annual incomes of $100,000 and single filers earning $50,000 per year to fund net interest payments, debt retirement and overseas and strategic military spending and other international spending, with graduated rates between 5% and 25% in either 5% or 10% increments.  Heirs would also pay taxes on distributions from estates, but not the assets themselves, with distributions from sales to a qualified ESOP continuing to be exempt.
• Employee contributions to Old Age and Survivors Insurance (OASI) with a lower income cap, which allows for lower payment levels to wealthier retirees without making bend points more progressive.
• A VAT-like Net Business Receipts Tax (NBRT), essentially a subtraction VAT with additional tax expenditures for family support,  health care and the private delivery of governmental services, to fund entitlement spending and replace income tax filing for most people (including people who file without paying), the corporate income tax, business tax filing through individual income taxes and the employer contribution to OASI, all payroll taxes for hospital insurance, disability insurance, unemployment insurance and survivors under age sixty.

While the Administration may be correct in siting this experiment as a way to both improve cost and care, the underlying reason has to be cost minimization.  As we saw with Medicare Part C in the mid-90s, minimization on its own leads to decreased care and providers who exit the system and need premium pay to return.

Aside from throwing up our hands and agreeing to deficit spending, as Congress did in establishing such incentives for Part C when it established Part D, some form of revenue increase is required.

Both the Simpson-Bowles Commission and the Rivlin-Domenici Commission recommended an increase in Part B and D premiums. That is all well and good, but seniors and the disabled don’t simply have spare cash to throw around without decreasing other spending, like housing or food.  For most people, that European vacation only comes as a gift from grateful children or merciful siblings.  Therefore, the only way to increase premiums is to also increase the basic Social Security and Disability benefit (which will need to happen anyway if the drive to a $15 minimum wage keeps gaining success).

Increasing the benefit is usually seen as a matter of raising the income cap and making the bend points in benefit calculation more severe so that the contribution increase does not simply lead to higher benefits for wealthier retirees.  There is, however, another option.

Our proposal is to lower the employee income cap on contributions to decrease the entitlement for richer retirees while the employer income cap is eliminated, the employer and employee payroll taxes are decoupled and the employer contribution credited equally to each employee at some average which takes in all income.  If a payroll tax is abandoned in favor of some kind of consumption tax, all income, both wage and non-wage, would be taxed and the tax rate may actually be lowered.

Ultimately, fixing health care reform will require more funding, probably some kind of employer payroll or net business receipts tax – which would also fund the shortfall in Medicare and Medicaid (and take over most of their public revenue funding), regardless of whether Part B and D premiums are adjusted.

Our Net Business Receipts Tax/Subtraction VAT proposal above is the recommended consumption tax.  It would not show up on the receipt because it can be offset by employer provided substitutes.

The NBRT can provide an incentive for cost savings if we allow employers to offer services privately to both employees and retirees in exchange for a substantial tax benefit, either by providing insurance or hiring health care workers directly and building their own facilities. Employers who fund catastrophic care or operate nursing care facilities would get an even higher benefit, with the proviso that any care so provided be superior to the care available through Medicaid. Making employers responsible for most costs and for all cost savings allows them to use some market power to get lower rates, but no so much that the free market is destroyed.

This proposal is probably the most promising way to arrest health care costs from their current upward spiral – as employers who would be financially responsible for this care through taxes would have a real incentive to limit spending in a way that individual taxpayers simply do not have the means or incentive to exercise. While not all employers would participate, those who do would dramatically alter the market.

A kind of beneficiary exchange could be established so that participating employers might trade credits for the funding of former employees who retired elsewhere, so that no one must pay unduly for the medical costs of workers who spent the majority of their careers in the service of other employers.

Thank you for this opportunity to share these ideas with the committee.  As always, we are available to meet with members and staff or to provide direct testimony on any topic you wish.