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The Simpson-Bowles Plan and the Fiscal Cliff

What orthopaedic surgeons need to know

Vasanth Sathiyakumar, BA; Jordan Apfeld, BA; Daniel J. Stinner, MD; A. Alex Jahangir, MD; and Manish K. Sethi, MD

As we prepared this article, a lame-duck Congress faced a goal of reducing the federal deficit by $1.2 trillion over the next decade. Congressional leaders and President Obama were once again involved in negotiations to avert the “fiscal cliff”—a mix of tax increases and spending cuts scheduled to take effect on Jan. 1, 2013. By the time you read this, you’ll know whether they were successful.

The fiscal cliff represents nearly $7 trillion in expiring Bush-era tax cuts, domestic spending cuts, and other tax increases that would go into effect under mandates in the Budget Control Act of 2011 calling for “sequestration” or across-the-board spending cuts in defense and domestic programs. According to the Congressional Budget Office, the fiscal cliff may result in a further economic recession by reducing household incomes, contributing to an already high unemployment rate, and decreasing national economic output.

The Simpson-Bowles plan was a compromise attempt to reduce the deficit while avoiding the threat of a recession. With Alan Simpson and Erskine Bowles set to address the AAOS 2013 Annual Meeting (see cover story), the orthopaedic community should be aware of the main components of their plan and its implications.

What is the Simpson-Bowles Plan?
Mr. Simpson, a former Republican senator, and Mr. Bowles, the former Chief of Staff for President Clinton, cochaired The National Commission on Fiscal Responsibility and Reform—a bipartisan commission formed by President Obama in 2010. Other members of the commission included six senators and six representatives, with both political parties equally represented, as well as former corporate chief executive officers, the president of the Service Employees International Union, and a former Federal Reserve chairman.

The commission was charged with finding long-term solutions to the rising national deficit and it identified specific areas of key reform. These included a $200 billion decrease in discretionary spending each year. Specific discretionary spending cuts included the following:

  • reducing entitlements such as farm subsidies by $3 billion each year
  • eliminating funding for NASA’s commercial space programs
  • eliminating subsidized student loans
  • reducing federal pensions
  • reducing the federal workforce by 200,000 workers
  • capping federal wage increases until the end of 2014

The Simpson-Bowles plan also targets spending on national defense by calling for a 15 percent reduction in national defense costs, a 10 percent reduction in voluntary payments to the United Nations, and a 10 percent reduction in foreign aid dollars. It would also eliminate certain costly military programs and reduce the total number of U.S. troops in foreign countries.

Another key area of reform under the Simpson-Bowles plan concerned taxes, with a goal of raising $100 billion through increased taxes. Specific proposed tax reforms included the following:

  • increasing the personal deduction to $15,000
  • charging a gasoline tax on a per gallon basis
  • repealing mortgage interest deductions
  • reducing corporate tax rates by 9 percent

The overall goal of these reforms was to increase the base of taxpayers while promoting economic growth through selective cuts in some taxes.

The commission also recommended changes to the current Social Security program, such as gradually increasing the qualifying retirement age to 69 by 2075. However, citizens who are older than age 62 and unable to work could collect benefits from the program. Furthermore, benefits will be stratified and thereby reduced for relatively wealthy citizens. To help maintain the solvency of the program, the Simpson-Bowles plan recommends increasing the payroll tax to cover 90 percent of wages, increasing taxable income from $106,800 to $190,000 by 2020.

Simpson-Bowles and orthopaedists
For practicing orthopaedic surgeons, Simpson-Bowles has important implications with respect to Medicaid, Medicare, and the Patient Protection and Affordable Care Act (PPACA), calling for a reduction of $282 billion in healthcare costs. For example, the following provisions would apply to Medicare and Medicaid recipients:

  • Individuals who earn below an established threshold will be encouraged to join Medicaid managed care programs while copayments will concurrently be increased.
  • To address annual increases in Medicaid and Medicare costs, growth in these programs will be capped after 2020 and tied to the growth rate of the nation’s gross domestic product plus 1 percent by deferring costs to consumers in the form of increased premiums and co-payments. This growth cap would not only affect Medicare and Medicaid, but also the Children’s Health Insurance Program, TRICARE, and the Federal Employees Health Benefits Program.
  • Stricter eligibility requirements, such as increasing the age for Medicare beneficiaries, could be enacted if costs still cannot be contained.
  • Federal administrative aid for running the Medicaid program would also be cut and hospitals that care for a disproportionate percentage of Medicaid beneficiaries would not receive the same level of federal support as they currently get.

The plan retains the healthcare expansion goals established by PPACA but bolsters cost-cutting mechanisms inherent in the healthcare reform act. For example, the plan entertains the idea of PPACA’s strong public option in healthcare exchanges as well as pilot programs promoting accountable care organizations to reduce overall costs. However, the plan also increases the authority of the Independent Payment Advisory Board to identify cost-saving measures that lie outside of Medicare. Furthermore, the plan would allow the taxation of health benefits and, if necessary, move Medicare toward a premium-supported system.

The Simpson-Bowles plan also placed an emphasis on reducing fraud in Medicare and Medicaid, with a goal of saving $9 billion over the next 8 years. By combining Medicare Parts A and B into a single deductible, making beneficiaries contribute 20 percent of coinsurance above deductibles, and reducing the coinsurance rate to 5 percent for seniors on catastrophic protection plans, the plan would reduce costs by more than $110 billion, and beneficiaries would absorb them as out-of-pocket expenditures.

An additional $38 billion would be saved by requiring Medicare supplemental policies to include a deductible and limiting the federal contribution on healthcare-related treatments to 50 percent of the next $5,000. Dual enrollees in Medicare and Medicaid would be covered by managed care organizations and drug companies would be required to provide rebates, thereby saving $49 billion in costs. Cuts to Medicare home health services and to hospitals providing medical education would save an additional $70 billion.

The Simpson-Bowles plan also had provisions that would directly affect physicians. For example, it called for elements of tort reform to reduce the number of medical malpractice suits. It would reduce Medicare reimbursement rates for physicians each year until 2020, generating savings of $26 billion. The new reimbursement formula would not be based on the current “fee-for-service” model but on coordinated care and quality assessments. The overall effects of these changes would be to abolish Medicare’s Sustainable Growth Rate formula.

Future implications
As of this writing, whether any elements of the Simpson-Bowles plan might be implemented is unknown. Although crafted on a bipartisan platform, the plan failed to receive a majority vote originally in the Senate in December 2010. Even though both presidential candidates heavily borrowed key elements from the plan for their respective economic plans, Democrats supported the increased tax provisions whereas Republicans favored entitlement reforms.

However, opposition has come from economists who argue the plan will raise the unemployment rate, from Republicans who oppose raising taxes, and from Democrats who argue against the proposed changes to Social Security. Whether any agreement incorporates elements of the Simpson-Bowles plan, orthopaedic surgeons should be aware of and prepared for the wide-sweeping changes to healthcare delivery and payments that may result.

Vasanth Sathiyakumar, BA; Jordan Apfeld, BA; Daniel J. Stinner, MD; A. Alex Jahangir, MD; and Manish K. Sethi, MD, are all associated with the Vanderbilt Health Policy Institute.

Bottom Line

  • The Simpson-Bowles Plan was developed in 2010 as a way to help control the increasing national debt.
  • It includes a mix of spending and entitlement cuts as well as tax increases and reforms to programs such as Medicare and Social Security.
  • Although both parties have embraced parts of the plan, neither was willing to adopt it in its entirety, and negotiations to reduce the debt and avoid mandated cuts to programs as well as mandated tax increases are ongoing.

References

  1. Hickey W: Everybody talks about ‘Simpson-Bowles’ again—Here’s what it really is. Business Insider Oct. 8, 2012. www.businessinsider.com/what-is-the-simpson-bowles-debt-plan-2012-10. Accessed Dec. 7, 2012.
  2. Sahadi J: What Obama’s win means for fiscal cliff. CNN Money Nov. 7, 2012. http://money.cnn.com/2012/11/07/news/economy/obama-win-fiscal-cliff/index.html. Accessed Dec. 7, 2012.
  3. Montgomery L: Deficit panel leaders propose curbs on Social Security, major cuts in spending, tax breaks. Washington Post Nov. 11, 2010. www.washingtonpost.com/wp-dyn/content/article/2010/11/10/AR2010111004029.html?sid=ST2010111606900 Accessed Dec. 7, 2012.
  4. McCrank J: Simpson, Bowles call for compromise on U.S. debt problem. Reuters: Nov. 15, 2012. www.reuters.com/article/2012/11/16/usa-fiscal-simpsonbowles-idUSL1E8MG15B20121116 Accessed Dec. 7, 2012.
  5. Boles C: CBO: ‘Fiscal cliff’ could trigger recession. Wall Street Journal Nov. 8, 2012. http://online.wsj.com/article/SB10001424127887324439804578107280483982220.html Accessed Dec. 7, 2012.
  6. Cox J: Obamacare, host of others need slashing: Simpson-Bowles. CNBC: Nov. 15, 2012. www.cnbc.com/id/49845816/Obamacare_Host_of_Others_Need_Slashing_Simpson_Bowles Accessed Dec. 7, 2012.
  7. Reichard J: Simpson-Bowles would bring radical surgery to health policy. The Commonwealth Fund: Oct. 2, 2012. http://www.commonwealthfund.org/Newsletters/Washington-Health-Policy-in-Review/2012/Oct/October-9-2012/Simpson-Bowles-Would-Bring-Radical-Surgery-to-Health-Policy.aspx Accessed Dec. 7, 2012.
  8. Horney J, Van de Water P, Greenstein R: Bowles-Simpson plan commendably puts everything on the table but has major deficiencies because it lacks an appropriate balance between program cuts and revenue increases (PDF). Center on Budget and Policy Priorities: Nov. 16, 2010. http://www.cbpp.org/files/11-16-10bud.pdf. Accessed Dec. 7, 2012.
  9. Majorityleader.gov: The Bowles-Simpson commission. http://majorityleader.gov/BowlesSimpson/ Accessed Dec. 7, 2012.
  10. Tax Policy Center: The Bowles-Simpson “chairmen’s mark” deficit reduction plan. http://www.taxpolicycenter.org/taxtopics/Bowles_Simpson_Brief.cfm Accessed Dec. 7, 2012.
  11. Roehrig C: A new look at the Simpson-Bowles budget plan: Implications for sustainable health spending. Altarum Institute Health Policy Forum: Oct. 30, 2012. http://www.altarum.org/forum/post/new-look-simpson-bowles-budget-plan-implications-sustainable-health-spending Accessed Dec. 7, 2012.

AAOS Now
January 2013 Issue
http://www.aaos.org/news/aaosnow/jan13/advocacy3.asp