President Joe Biden and House Speaker Kevin McCarthy met on Wednesday to discuss the debt limit. The long road to a compromise will be arduous, but one thing is sure: Ideally, the deal would include entitlement reforms. We explain what the debt ceiling debate is about and highlight proposed reforms for healthcare entitlements.

Debt Ceiling: An Explainer

What is the debt limit?

It’s the legally established amount of money that the federal government can borrow to meet its obligations.

What happens when the debt limit is reached?

The Treasury Department can’t borrow money to cover its obligations. On December 16, 2021, Congress raised that limit to $31.381 trillion, an amount that was reached on January 19, according to Treasury Secretary Janet Yellen. When the limit is reached, the Treasury must resort to “extraordinary measures” to prevent the country from defaulting on its obligations. Those measures are essentially behind-the-scenes accounting maneuvers that allow the government to postpone the fateful day of default while lawmakers figure out a longer-term solution. Using those gimmicks this time around should free up $400 billion of borrowing capacity.

Once all extraordinary measures have been used, Congress will have to raise the debt ceiling or Treasury will have to start prioritizing payments. As long as Treasury commits to pay interest and principal on Treasury debt before any other payment with the revenue it collects, we will not technically default on the debt. If Treasury is delinquent in paying its other obligations — Social Security checks, government salaries, Medicare bills, etc. — it won’t be a default, but it will be terribly painful nonetheless.

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What happens after the extraordinary measures have been exhausted?

The date at which the extraordinary measures have been used up and there is no more cash is called the “X Date,” and we might reach it this year. Treasury projects that the X Date is unlikely to occur before early June, while Goldman Sachs and Wrightson ICAP both estimate the X Date around August. It’s ultimately not possible to know exactly when that date will be. But it would be a catastrophe both for financial markets and for individual Americans. It could mean a recession, high unemployment, a market crash and cuts to Social Security payouts.

What is the debt ceiling fight about?

House GOP members are asking that some spending restraints be coupled with the debt ceiling increase. To that effect, they are hashing out a short-term plan that would tie the debt ceiling to spending cuts. A recurring suggestion would be to cap the future growth of discretionary spending at an annual 2% rate. While it may not seem like much restraint, the Manhattan Institute’s Brian Riedl notes that a 1 percentage point cut in the annual growth rate of discretionary spending saves $1 trillion over the decade. Other suggestions include establishing bipartisan commissions to reform entitlement programs, adopting the Responsible Budget Act or freezing the debt as a percentage of GDP.

How do we perpetually keep the X Date at bay?

Whatever budget restraint compromise Republicans get in exchange for raising the debt ceiling, it is unlikely to fix the underlying problem that got us here: The US government is spending more money than it’s collecting every year — not just during economic downturns, but even when the economy is booming. Not only that, but four categories of spending which jointly account for a little over 50% of total federal spending are responsible for 86% of the growth of the national debt between 2008 and 2032: interest payments on existing debt, Social Security, Medicare and Medicaid.

Solutions to Get Healthcare Spending Under Control

This blog is about healthcare, so we’ll focus on ideas that have been floated around to get our healthcare spending under control. The inclusion of ideas in this list doesn’t constitute an endorsement but is rather meant to stimulate discussion about various proposals.

Medicaid

Establish caps on federal spending for Medicaid — Options for Reducing the Deficit, 2023 to 2032 (Congressional Budget Office). The CBO estimates that this measure could yield savings of $501 billion to $871 billion between 2023 and 2032. Our colleague Liam Sigaud suggests using a funding mechanism resembling the Children’s Health Insurance Program.
Reduce federal Medicaid matching rates — Options for Reducing the Deficit, 2023 to 2032 (CBO). The CBO estimates that this measure could yield savings of $68 billion to $667 billion through 2032.
Fully nationalize the financing and administration of Medicaid benefits — Beyond Bailout Federalism: The Case for Nationalizing Entitlements (Chris Pope, Manhattan Institute). According to Chris Pope, this proposal has the benefit of preventing states from tapping into unlimited amounts of federal reimbursement.
Curb waste, fraud, and abuse — Curbing Waste, Fraud, and Abuse in Medicaid (Tara O’Neill Hayes, American Action Forum). Medicaid’s improper payment rate averaged 9.8% in 2016, and the CBO estimated that cutting improper payments would reduce the deficit by more than 11%.
Tighten Medicaid eligibility for long-term care services — Taking the Strain Off Medicaid’s Long-Term Care Program (Chris Pope, Manhattan Institute). Doing so, along with setting up tax-advantaged saving options for long-term care, as proposed by our colleague Kofi Ampaabeng, would reduce Medicaid’s role in paying for long-term care.

Medicare

Increase the premiums paid for Medicare Part B — Options for Reducing the Deficit, 2023 to 2032 (CBO). The CBO estimates that this measure could yield savings of $57 billion to $448 billion between 2023 and 2032.
Reduce Medicare Advantage benchmarks — Options for Reducing the Deficit, 2023 to 2032 (CBO). The CBO estimates that this measure could yield savings of $392 billion by 2032.
Adopt competitive bidding for Medicare Advantage — Implementing Competitive Bidding in the Medicare Program: An Expressway to Solvency (Rohini Chakravarthy, Gail Wilensky, and Brian Miller).
Adopt strict payment site neutrality — How to Reduce Health Care Costs: Understanding the Cost of Health Care in America (David Hyman, Cato Institute).
Eliminate the requirement that Medicare Part D plans cover all approved drugs in six protected classes (immunosuppressants, antidepressants, antipsychotics, anticonvulsants, antiretrovirals, and antineoplastics) — How to Reduce Health Care Costs: Understanding the Cost of Health Care in America (David Hyman, Cato Institute).
Move drugs from Medicare Part B to Medicare Part D — How to Reduce Health Care Costs: Understanding the Cost of Health Care in America (David Hyman, Cato Institute).

Other healthcare-related items

Reduce tax subsidies for employment-based health insurance — Options for Reducing the Deficit, 2023 to 2032 (CBO). The CBO estimates that this measure could yield savings of $500 billion to $893 billion between 2023 and 2032.
Limit state taxes on healthcare providers — Options for Reducing the Deficit, 2023 to 2032 (CBO). State taxes on healthcare providers are responsible for inflated federal reimbursements to states for healthcare expenditures. See this Mercatus Center paper by Brian Blase for more information. The CBO estimates that this measure could yield savings of $41 billion to $526 billion by 2032.
Charge Original Medicare beneficiaries a copay for home healthcare services — How to Cut $343 Billion from the Federal Budget (Brian Riedl, Heritage Foundation).
Eliminate Title X Family Planning, the Maternal and Child Health Block Grant, the Health Professions Opportunity Grants, and the Rural Health Outreach and Flexibility Grants — How to Cut $343 Billion from the Federal Budget (Brian Riedl, Heritage Foundation).
Move drugs from prescription-only to over-the-counter or behind-the-counter — How to Reduce Health Care Costs: Understanding the Cost of Health Care in America (David Hyman, Cato Institute).

Open Health Policy

Debt Ceiling and Healthcare Entitlement…