President Obama’s new deficit reduction plan includes about $320 billion in cuts to government health care programs. Most of the cuts from Medicare and that is sure to get a lot of people’s attention, if not now then in the presidential campaign.

But these reductions are less severe, and less worrisome, than some of the proposals Obama indicated he was willing to support over the summer, while he was negotiating with House Speaker John Boehner. In particular, Obama did not call for increasing the Medicare eligibility age from 65 to 67, as folks like me feared he would.

In fact, the cuts Obama has in mind are more or less consistent with the kind of cuts that you find in the Affordable Care Act: They are reductions designed to change the way Medicare pays for treatment and services, ideally (although not always) in ways that will actually improve the efficiency or quality of care. To the extent they would force individual seniors to pay more, it'd be in the form of higher premiums from wealthy seniors or higher co-pays for treatments likely to be unnecessary or wasteful.

In short, if this proposal were to become law -- fat chance, I know -- the providers of health care along with wealthy seniors would have to make do with less. And, with any luck, health care will actually get a little better as a result. 

Here are the details:

The Medicare cuts total about $250 billion. The biggest, most recognizable changes (at least to those of us who follow health policy) are larger drug rebates for the Medicare program, which is basically demanding that the pharmaceutical industry reduce what the government pays for prescription drugs, and higher Part B premiums for wealthier seniors. Those higher premiums would not start until 2017.

Also of note are increases in cost-sharing under some very limited circumstances. This is actually something conservatives should like, at least in theory, since it’s arguably a version of what they call “consumer-directed care,” albeit in a very small dose. In a nutshell, seniors would have to pay slightly higher out-of-pocket costs for home health care and Part B services, plus they’d have to pay a surcharge on their premiums if their Medigap policies have “first-dollar” coverage (in other words, fi their Medigap policies don’t have any cost-sharing). The hope is that exposing seniors to incrementally higher out-of-pocket costs would make them a little more wary of using services that might not be necessary. 

As with any effort to increase cost-sharing, there’s always a danger that it will penalize people with low incomes or the most serious medical conditions. But these proposals have the endorsement of many experts – and would protect the sick by, for example, waiving the cost-sharing on home health care if it follows hospitalization. Also, these changes, like the changes to Part B premiums, would start in 2017. Finally, this proposal, like previous ones the president has made, would make it easier to introduce “value based insurance design." VBID, as it's known, is a more elegant way to restructure benefits, so that people pay more or less out-of-pocket based primarily on whether the services and treatments they're getting actually add value.

Not all of the health changes are to Medicare. The administration would also modify the scheme for financing Medicaid, calling upon states to kick in a bit more money. The danger of the “blended rate,” as it’s known, is that states would react by weakening the program. It’s the reason Medicaid advocates (like yours truly) were none too happy when this appeared in a previous administration proposals. But this latest version is much smaller, accounting for just $15 billion in savings – an amount that seems unlikely to do much damage.

I can imagine conservatives saying that these changes don’t cut enough – that Medicare needs more dramatic reform in order to survive. I can imagine conservatives saying that these changes cut too much – that they’ll make it harder for seniors to get the care they need. Most likely, though, they will say both things, notwithstanding the internal contradiction -- or the fact that the proposals they favor, starting with the House Republican budget, would effectively eliminate Medicare as we know it.

And what do I think? Based on initial inspection, and subject to revision, these look like a reasonable set of changes to government health care programs. In the long run we'll have to reduce Medicare spending more aggressively, unless we're willing to pay a great deal more to fund it. But it also makes sense to impose cuts a little cautiously -- to see what works and what doesn't, and so on. 

There’s enough here to generate some real savings in Medicare, above and beyond what the Affordable Care Act would generate, but not in a way that will put more seniors at risk. And that’s the real point Obama is trying to make here: His plan to save Medicare (and Medicaid) is to reform the program gradually, focusing on changes to the way it pays for health care, rather than by hacking away at the benefits most seniors get.

Update: Igor Volsky (shockingly!) is thinking along the same lines: 

Bottom line: if what’s driving health care costs at the federal level is national health expenditures, modernization that addresses costs and pays for more efficient care is really the only way of producing long-term savings. Proposals like expanding IPAB and changing payment rates to promote greater efficiency and reduce hospital re-admissions are initiatives that will begin to move us in that direction.

And David Cutler, the prominent Harvard health economist and former Obama adviser, sends this via e-mail:

These proposals are mid-range – not trivial but not too deep either. They continue a path started by the Affordable Care Act to transition Medicare to a better system. In a rational world, conservatives would embrace them and they would be used as a jumping off point for health care modernization.

I also tweaked the wording, to make clearer that this proposal does not call for significant benefit cuts. 

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