Health Spending Options on the Chopping Block in the New Administration

A review of the Congressional Budget Office's health-related options for reducing the deficit

As the federal deficit continues to grow, policymakers face increasing pressure to identify ways to reduce government spending and increase revenues. According to the Congressional Budget Office (CBO), under current law, the federal deficit would average $1.9 trillion per year between 2025 and 2034, representing 5.4% of GDP - well above the 50-year average of 3.7%. With health care representing a significant portion of federal spending, examining options to reduce health-related expenditures is likely to occur for any comprehensive deficit reduction strategy. Only time will tell whether the tough decisions to reduce the deficit will be a political priority under the second Trump Administration and among Republicans in Congress. The recent populist bent of the Republican’s has diverged from a historical focus on fiscal conservatism, but the discussion around what has come to be referred to as the Department of Government Efficiency (DOGE) may bring this issue to the forefront.

This article will examine key health spending policies that are likely to have massive impact on both the budget and the health care market. If you are clinician, physician, entrepreneur, investor, health care executive, or patient; these policies could have wide ranging impact on how you operate and receive care.

The Congressional Budget Office, a nonpartisan agency that provides budget and economic analysis to Congress, recently released its "Options for Reducing the Deficit: 2025 to 2034" report. This comprehensive analysis presents various policy options that could help reduce the federal deficit. While the CBO does not make specific recommendations, it provides objective analysis of the budgetary impacts of different policy choices.

Importantly, the report contains options outside of health care, but this is a health care publication, so naturally, that is where this article is focused.

Key Health Care Policies in the CBO Report

Here are the key health-related options identified by CBO for reducing the deficit:

Medicaid Reforms

Several significant options focus on modifying federal Medicaid spending. One major proposal would establish caps on federal Medicaid spending, which could reduce the deficit by between $459 billion to $893 billion over the 2025-2034 period, depending on implementation. Under this option, states would receive either an overall spending cap or a per-enrollee cap, with growth limited to the rate of inflation or inflation plus one percentage point.

The Center for Budget and Policy Priorities has an excellent analysis of the impact here.

Another Medicaid-focused option would limit state taxes on healthcare providers, potentially reducing the deficit by $48 billion to $612 billion over ten years. Currently, some states use provider taxes to help fund their Medicaid programs, with the federal government matching those funds. Limiting these taxes would reduce federal matching payments. The Kaiser Family Foundation has a good overview of this topic.

The CBO also suggests reducing federal Medicaid matching rates, which could save between $69 billion and $561 billion through 2034. This would shift more Medicaid costs to states by reducing the federal government's share of program expenses. Robin Rudowitz has a quick review of this topic here.

Coverage and benefit cuts made by states resulting from these policies would reach providers and hospitals in the form of lower reimbursement and a restriction of services for Medicaid enrollees.

Medicare Modifications

Several options target Medicare spending reductions. One significant proposal would increase Medicare Part B premiums, potentially reducing the deficit by $510 billion over ten years. This would raise beneficiaries' share of Part B costs from 25% to 35% of program costs. The standard Medicare Part B premium is $185 per month in 2025.

Another option would reduce Medicare Advantage (MA) benchmarks by 10%, saving approximately $489 billion through 2034. This would lower payments to private insurers offering Medicare Advantage plans. However, Dr. Oz, the proposed nominee for the administrator of the Centers for Medicare and Medicaid services, has indicated support for MA and with a powerful lobby, this may be more unlikely.

The CBO also suggests modifying payments to MA plans for health risk, which could save between $124 billion and $1,049 billion over the decade. This would address concerns about risk score inflation in the MA program. This has been a hot topic, so this will be an area to monitor closely as it will have significant impact on the Medicare Advantage market. United Healthcare is the largest MA insurer and the recent press around prior authorization practices will make this a politicized issue.

Other Medicare-related options include:

• Changing cost-sharing rules and restricting Medigap insurance ($20 billion to $129 billion in savings)

• Reducing Medicare's coverage of bad debt ($17 billion to $54 billion in savings)

• Consolidating and reducing Medicare payments for graduate medical education ($94 billion to $103 billion in savings)

• Reducing payments for hospital outpatient departments ($6 billion to $157 billion in savings)

• Reducing payments for drugs delivered by 340B hospitals ($15 billion to $74 billion in savings)

Federal Employee and Military Healthcare

Several options in the CBO report target health care benefits for federal employees and military personnel. One proposal would adopt a voucher plan for federal employees' health benefits, potentially saving $14 billion to $16 billion over ten years.

For military healthcare, the CBO suggests introducing enrollment fees in TRICARE for Life (saving $17 billion) and implementing minimum out-of-pocket requirements (saving $32 billion). These changes would affect military retirees and their families who are eligible for both Medicare and TRICARE.

Payment Reform Options

The report includes several options focused on reforming how the federal government pays for health care services. These include reducing payments for hospital outpatient departments, modifying drug reimbursement policies, and changing how graduate medical education is funded at teaching hospitals.

A continued and more aggressive push toward value-based payment and implementing successful models tested by the Center for Medicare and Medicaid Innovation nationally may be a core push by the incoming administration.

Impact Analysis

While these options present significant potential savings, each comes with important considerations and tradeoffs. For example, increasing Medicare premiums or implementing new TRICARE fees would directly affect beneficiaries' out-of-pocket costs. Similarly, reducing Medicaid matching rates would shift costs to states, potentially affecting state budgets and program benefits.

The options vary significantly in their potential impact:

• Large-scale reforms (like Medicaid caps or Medicare Advantage changes) could save hundreds of billions of dollars

• Moderate reforms (like TRICARE modifications or graduate medical education changes) offer tens of billions in savings

• Targeted reforms (like reducing bad debt coverage) provide smaller but still significant savings

Medicaid expansion resulting from the Patient Protection and Affordable Care Act (ACA) is associated with better access to care, increases in insurance coverage, service use, and quality of care. Naturally, it increased spending. Major cuts to Medicaid, federally, could result in a reverse of the gains from ACA health care reform.

Implementation Challenges

Each option presents unique implementation challenges. For example, establishing Medicaid spending caps would require complex formulas and careful consideration of state-specific circumstances. Implementation would take years and with the mid-term elections two years away and the potential for a new presidential administration in four years, the market impact may be muted. Changes to Medicare Advantage payments would need to balance cost savings with maintaining program stability and beneficiary access to care—this is the area most interesting to watch in my opinion.

Many options would face significant political resistance from affected stakeholders, including health care providers, insurers, beneficiaries, and state governments. The technical complexity of health care payment systems also presents administrative challenges for implementing reforms. The Washington, D.C. health lobbying and trade association complex comprised of major stakeholders such as the American Hospital Association, the American Medical Association, and America’s Health Insurance Plans is likely to resist major spending changes to federal health programs.

Conclusion

The CBO's analysis provides policymakers with a range of options for reducing healthcare-related federal spending. These options vary in their potential savings, complexity of implementation, and impact on stakeholders. While some options could generate substantial savings, they would require careful consideration of their effects on healthcare access, quality, and affordability.

As policymakers debate ways to address the federal deficit, these healthcare-related options will likely play a central role in discussions. The challenge lies in balancing fiscal responsibility with maintaining appropriate access to healthcare services for beneficiaries of federal health programs.

The range of options presented by the CBO demonstrates that multiple approaches exist for reducing health care-related federal spending. However, the political feasibility and potential consequences of each option must be carefully weighed against the projected savings. As health care costs continue to grow as a share of federal spending, these options provide important starting points for policy discussions about fiscal sustainability and health care system reform.