Yesterday, President Obama released a plan to reduce the deficit by more than $3 trillion over the next decade. It’s certainly not perfect, but his plan achieves these savings while largely protecting health security for the low-income families that rely on Medicaid and Medicare.

Reaction to the plan was almost entirely predictable. Republican lawmakers rejected it out of hand, while a wide range of health care interest groups offered up variations on the theme of: “I know we need to make an omelet but don’t break my egg.” The award for most cynical response among health care interests should probably go to the American Hospital Association which simultaneously attacked the President’s plan while embracing a proposal to raise the Medicare eligibility age—an idea that raises health care costs for everyone other than the federal government while also, not coincidentally, raising revenue for the hospital industry.

In fact the debate over raising the Medicare eligibility age underscores the danger of defining the health care cost issue narrowly as only a federal spending issue as opposed to taking a broader systematic approach. Community Catalyst laid out the core principles for sound health care cost containment here. Although there are a few unfortunate exceptions, most of the health care savings in the President’s plan come from good ideas that will reduce waste and inefficiency

Good News First
The president’s plan starts off on the right foot: it minimizes the cuts required in health and other entitlement programs by demanding a real contribution from the wealthiest Americans and corporations. New revenues, from sources such as closing corporate tax loopholes and cutting tax preferences for the wealthiest Americans, account for half ($1.5 trillion) of the total proposed deficit-reduction.

And while his proposal cuts $248 billion in Medicare spending and $73 billion in Medicaid and other health programs, it does so at least partially by targeting waste. For example, the president’s plan:

• – reduces overspending on prescription drugs by requiring drug manufacturers to pay the same rebates for low-income Medicare recipients as they do for Medicaid beneficiaries
• – improves access to low-cost generic drugs by ending “pay for delay” agreements, a practice that allows brand-name drug manufacturers to pay generic drugmakers to keep their products off the market
• – creates new incentives for nursing homes to provide better primary care to residents to avoid needless and costly hospitalizations

These policies not only save federal dollars, they move our health care system in a better direction; they are smart policy regardless of their deficit-reduction effects.

Here’s the “But”
While the president’s plan represents the most serious attempt yet to trim the deficit without harming the health of low-income Americans who rely on Medicaid and Medicare, some of his policies are worrisome.

Particularly concerning are proposals that would shift costs onto Medicaid mainly by reducing federal Medicaid matching rates and limiting the ability of states to use provider taxes to finance the program. Raising state Medicaid costs is likely to reduce access to health care for very vulnerable populations. And, because Medicaid is already the lowest-cost health insurer and states have much less ability than the federal government to finance the program, there is something perverse – embarrassing, even – about the federal government attempting to get its financial house in order by shifting costs onto states.

Although we haven’t seen the details, even here there appear to be some positive features of the president’s plan. Specifically, although he proposes to save about $15 billion by reducing federal Medicaid matching rates (a smaller number than in earlier proposals) he also proposes to automatically increase federal matching rates during economic downturns—an idea advocates fought for during the ACA that did not make it into the final legislation. He also proposes to give states an incentive to make the ACA work by rewarding states who sign up a higher share of newly-eligible Medicaid beneficiaries.

Another concern is that under the president’s plan, Medicare cost-sharing requirements would increase. Not only will this create barriers to care for low-income Medicare beneficiaries, it will also increase state Medicaid costs since Medicaid pays the Medicare cost-sharing requirements for the “dually-eligible.”

Finally, the president’s plan cuts $3.5 billion from the $15 billion Prevention and Public Health Fund. This is particularly shortsighted because improving the underlying health of the American people is one of the three key pillars of a long term cost containment strategy.

What’s particularly unfortunate is that the White House missed an opportunity to do more to improve the health care system (click here and here to read about missed savings opportunities).

Where does this leave us?
What’s most striking about POTUS Debt Reduction Plan is what it does not do. Most of the egregious proposals that were bandied about in the context of the debt ceiling debate this summer – such as raising the Medicare eligibility age or cutting federal matching rates more significantly – have been eliminated or dramatically scaled back. It appears that administration strategists have concluded (and let’s be glad they did) that there was no advantage in unilaterally offering up cuts that would anger important constituencies while Republicans remain entirely intransigent on new revenue.

If the president had given up a lot of ground by offering up cuts to entitlement programs that would harm health security for low-income and older Americans, that would have undercut the ability of Democrats on the Super Committee to protect Medicare and Medicaid. It also would have blurred a key Democratic message point going into the 2012 election — Democrats are committed to preserving Medicare and Medicaid while Republicans have committed essentially to eliminating them and replacing them with programs that, even if they had the same names, lack key beneficiary protections.

Of course the President’s plan itself is dead on arrival — the Super Committee members will likely ignore the details of the President’s proposal as they develop (or attempt to develop, or attempt to appear as though they’re attempting to develop) a deficit-reduction plan of their own. But at least it offers us a tolerable, if imperfect, vision of how serious progress could be made on debt reduction without slashing programs that provide health security to the most vulnerable Americans.

–Michael Miller, Policy Director
–Katherine Howitt, Senior Policy Analyst