'Read between the lines'

President Barack Obama's blink-and-you'll-miss-it mention of healthcare in his State of the Union address left industry leaders to speculate how far the administration will go toward reforming Medicare to reduce the nation's deficit—and which programs will take the hardest hit in the process.

Focusing his speech on economic growth, the president said lawmakers must begin by making budget decisions that will affect the nation's recovery and added that “the biggest driver of our debt is the rising cost of healthcare for an aging population.” He also said those who care about programs such as Medicare must embrace a need for modest reforms to keep it alive. But after making these assertions, the president offered scant details on what reforms he hopes to achieve, or how deeply he'll change Medicare for the sake of deficit reduction and the program's future.

“It's very hard to read between the lines when there weren't many lines,” said Ilisa Halpern Paul, managing government relations director at Drinker, Biddle & Reath in Washington.

Those lines came early in the address, when the president said he's prepared to enact reforms that would achieve the same amount of healthcare savings at the beginning of the next decade as those outlined in the Simpson-Bowles plan, the late-2010 deficit-reduction proposal from the president's national fiscal commission led by former Clinton administration chief of staff Erskine Bowles and former Sen. Alan Simpson (R-Wyo.). According to the Center on Budget and Policy Priorities, the Simpson-Bowles plan would shave about $480 billion from Medicare and Medicaid between 2013 and 2022. Meanwhile, the Obama administration estimates the president's budget would yield about $340 billion in healthcare savings over that period.

“The bottom line is that if you think Bowles-Simpson's Medicare savings represented a real savings target, the president's proposals are in the same ballpark,” said Paul Van de Water, a senior fellow at the Center on Budget and Policy Priorities, a left-of-center research center. “It's not fair to accuse the president of not achieving Medicare cuts. They are about the same in the 10th year.”

But while Obama alluded to the Simpson-Bowles plan as a way to suggest a target number, he offered only hints at how to achieve those budget savings. He also credited the Patient Protection and Affordable Care Act with slowing the growth of healthcare costs, although the CMS actuaries concluded last month that the law's provisions in 2010 and 2011 have had only a minimal effect on health spending growth.

The few specifics came when the president said he wants to “decrease taxpayer subsidies to prescription drug companies and ask more from our wealthiest seniors.” The latter refers to expanded means-testing in Medicare, while the former refers to a proposal in the president's budget last year that would align Medicare drug payments with policies in Medicaid for low-income beneficiaries.

Currently, drug manufacturers pay specified rebates for drugs given to Medicaid beneficiaries, while Medicare Part D plan sponsors negotiate with manufacturers for plan-specific rebates. The president's proposal would require drug manufacturers to pay the difference between rebate levels they provide Part D plans and Medicaid rebate levels. According to the nonpartisan Congressional Budget Office, that proposal could save about $137 billion over 10 years.

That proposal drew strong resistance from the Pharmaceutical Research and Manufacturers of America, which criticized the idea in a statement a day after Obama gave his speech.

“Part D is now 45% below the cost originally expected, and last week, while reducing Part D's 10-year projected cost by over $100 billion for the third consecutive year, the nonpartisan Congressional Budget Office pointed out that Part D is the single biggest factor responsible for lower Medicare spending projections,” Matthew Bennett, senior vice president at PhRMA, said in the statement. “Seniors' Part D premiums have been flat at $30 per month—less than half the level originally projected—for the last three years.”

The little attention the president gave to healthcare is an important signal about his approach to entitlement reform. He did not mention Medicaid, which affirms comments this month from Gene Sperling, assistant to the president for economic policy, that the program is off the table in upcoming deficit-reduction negotiations.

And for Medicare, the president mentioned a few program cuts, but not any structural reforms to a program that was created more than 45 years ago. Halpern Paul at Drinker, Biddle & Reath said real entitlement reform requires a discussion centered on payment-system reform and aligning incentives toward value and away from volume, which the president mentioned just briefly in his speech when he said medical bills shouldn't be based on the number of tests or inpatient hospital stays.

“He's pretty clear there does not need to be sweeping reform,” said Tevi Troy, a senior fellow at the Hudson Institute, a right-of-center Washington think tank and former deputy secretary of HHS in the George W. Bush administration. “You can't tinker around the edges. You need real reforms (to) make sure it's around for our children and grandchildren,” he continued. “Not an open-ended system that is a series of promises.”