Straight talk on health care reform: Medicare debate

The latest debate over the Affordable Care Act is whether the new law cuts Medicare funding by more than $700 billion and then uses the money from those cuts to cover the cost of reforms that have nothing to do with American seniors. The implication is that the ACA will hurt Medicare without offering anything in return. The debate has received a great deal of attention because Medicare is a very popular program, not just with seniors but with most Americans.

Historically, Medicare has been extremely successful in providing health care for America's seniors. Before Medicare existed, many seniors had limited access to health insurance or regular medical care. Even in our current polarized political environment this "government-run" public program is popular with both Republicans and Democrats. In a 2011 Washington Post/ABC poll, 53 percent of those surveyed said that they would prefer to raise taxes on all Americans in order to avoid cutting Medicare, compared to 21 percent who supported cutting Medicare as part of a deficit-reduction plan. (1)

The claim that Medicare would be "cut" by $716 billion comes from a July 24, 2012, analysis concerning the Affordable Care Act by the non-partisan Congressional Budget Office. However, the report does not say that the ACA "cuts" Medicare; rather it states that if the ACA were repealed, "spending for Medicare would increase by an estimated $716 billion" between 2013 and 2022. (2)

The Affordable Care Act does, indeed, reduce the growth in Medicare spending, but those reductions are based on efforts to improve efficiencies and reduce waste and fraud, all of which are designed to extend the solvency of the program. There is no provision in the law that either rations or eliminates any Medicare benefit. In fact, sections of the law specifically prohibit any action that would take away Medicare benefits, restrict eligibility or increase costs to middle- and low-income seniors.

Under the ACA, Medicare expenditures are still projected to grow an average of 6.8 percent per year from 2015 through 2021. (3) In order to control Medicare spending, the law also caps spending growth at the growth rate for GDP (Gross Domestic Product) plus 0.5 percent.  The budget passed - twice - by the U.S. House of Representatives, largely formulated by Wisconsin Rep. Paul Ryan, uses the exact same formula to cap Medicare spending growth.

So, how does the Affordable Care Act reduce Medicare spending? Sixty-five percent of the $716 billion in reductions comes from two sources: reducing reimbursement rates for hospitals and Medicare Advantage plans. (4) For hospitals, those reductions will be offset, in part, by the increase in newly covered patients as a result of other insurance reforms in the ACA.

Medicare Advantage plans (a private insurance alternative to traditional Medicare, also known as Medicare Part C) were introduced as part of the Balanced Budget Act of 1997. (5) The goal was to create greater competition among private insurance companies for the 65+ age market and drive down costs. In practice, however, Medicare Advantage plans have not been as successful at reducing costs as had been hoped. By 2010, the average Medicare Advantage per-patient cost was 17% higher than regular Medicare fee-for-service. (6)

In response, the Affordable Care Act reduces payments to those plans and ties reimbursement to improved efficiencies, quality of care and customer satisfaction. And that strategy may be working. According to the Department of Health and Human Services, Medicare Advantage premiums are projected to be 4 percent lower in 2012 than in 2011, and enrollment is expected to increase by 10 percent under the ACA. (7)

Other spending reductions involve lowering the rate of growth in provider payments, improving administrative efficiencies and reducing waste, fraud and abuse in the claims and reimbursement process.

It is also an exaggeration to claim that these spending reductions are exclusively designed to fund non-Medicare related provisions of the ACA. On the contrary, the spending reductions will be used to extend the solvency of Medicare by eight years, create savings for beneficiaries through lower co-payments and premiums, pay full costs for preventive-care benefits and eliminate the prescription drug "donut hole."

When evaluating the Affordable Care Act, we should also consider how the current Medicare program would be affected under the House budget proposal. Although it was not specifically designed to be an alternative to the ACA, the legislation would fundamentally alter how Medicare would work and how it would be paid for.

Under that proposal, traditional Medicare would remain in place for current enrollees. However, for those 55 and younger, Medicare eligibility would eventually increase to age 67 and the program would be converted into a premium-support system where the government would provide a set amount of money annually that could be used to purchase private insurance or enroll in the traditional Medicare program. The government would pay the full premium for the private plan with the second-lowest bid, or for traditional Medicare, whichever is lower. (8) If costs should rise faster than the size of the annual subsidy, then seniors would have to pay the difference or move to a cheaper and possibly less comprehensive plan. Over time, that could shift more of the cost burden to seniors.

While the House budget proposal would repeal the vast majority of the Affordable Care Act, many of the cost-cutting provisions described above would remain in place. Under this plan, the prescription drug donut hole would continue to exist, allowing significant costs to be passed on to beneficiaries; and preventive services would still be subject to co-pays and deductibles.

While the current debate is focused on Medicare, an even bigger issue may be waiting in the wings.  Under the House plan, Medicaid, the only safety net available for seniors who run out of money for expensive long-term care services, would be turned into a federal block grant. That plan would reduce federal Medicaid spending by $810 billion over 10 years.  We will discuss the impact of these cuts on seniors in the future.

End Notes
1) Epstein, Jennifer, "Poll: Taxing the rich favored over Medicare cuts." Politico, April 20, 2011.
2) Congressional Budget Office, Letter to Speaker John Boehner. July 24, 2012.
3) Fleming, Chris, "Health Spending Growth Projected to Average 5.7 Percent Annually Through 2021." Health Affairs Blog, June 12, 2012.
4) Kliff, Sarah, "Romney's right: Obamacare cuts Medicare cuts Medicare by $716 billion. Here's how." The Washington Post, August 14, 2012.
5) That bill also introduced  a new formula to calculate the Medicare provider reimbursement rate, called sustainable growth rate (SGR). That provision has been postponed on numerous occasions, and if implemented next year would result in a 32 percent pay cut for Medicare doctors and providers.
6) Kliff 2012.
7) "Reducing Costs, Protecting Consumers: The Affordable Care Act on the one year anniversary of the Patient's Bill of Rights." U.S. Department of Health and Human Services, September 23, 2011.
8) Serafini, Megan Werber, "New Ryan Budget Would Transform Medicare and Medicaid." Kaiser Health News, March 20, 2012.