How does Obamacare cut Medicare?

Maggie Mahar offers a handy list in a September 2011 report (h/t Bill Corfield). The following is, more-or-less quoted from pages 4-6 of the report except that I’ve made some minor edits for brevity, pulled out just the Medicare provisions, and sorted them by size. The figure are CBO’s for 2010-2019 except as indicated. I am not aware of a handy list of more updated figures. (Are you?)

  1. $210 billion generated by lifting Medicare taxes for high-income individuals with adjusted gross income above $200,000 and married couples earning over $250,000
  2. $196 billion will be saved as Medicare trims annual increases (or “updates”) in payments to hospitals, skilled nursing facilities, ambulatory surgical centers and other “non-physician providers” by 1 percent a year for ten years.
  3. $145 billion saved, over a period of ten years, by phasing out overpayments to Medicare Advantage
  4. $75.1 billion in savings that the Tax Foundation describes as flowing from “Interactions between Medicare programs” ($29.1 billion) and “Associated effects of coverage provisions on revenues” ($46 billion)
  5. $36 billion saved by cutting government subsidies to hospitals that will no longer be forced to absorb the cost of treating 32 million uninsured Americans (these subsidies, paid to hospitals that serve a “disproportionate share” of low-income patients, will be cut for a total projected savings of $57 billion between 2012 and 2021, according to CBO)
  6. $20.7 billion saved by eliminating the Medicare Improvement Fund (the ACA creates a new Innovation Center within the Centers for Medicare and Medicaid Services, making the Medicare Improvement Fund redundant)
  7. $10.7 billion saved by reducing the Medicare Part D premium subsidy for seniors with incomes over $85,000 and couples earning more than $170,000
  8. $4.5 billion saved by eliminating the tax deduction for employers who receive Medicare Part D retiree drug subsidy payments

Read the report for references and details. Not included in this list are enhancements Obamacare makes to Medicare, like closing the Part D doughnut hole and providing preventative care with no cost-sharing.

Of all these it’s the 2nd one that is most troublesome to me. It’s a crude cut, the type that can harm quality and/or reduce beneficiaries’ access to high-quality care if it causes Medicare payments to fall too far below those of the private sector.

What we don’t know, however, is whether the incentives for quality elsewhere in the law offset those in this cut. What we do know is that this cut does not stop after 10 years. It’s a year-after-year, across-the-board reduction in payment rates. See the chart here (the top one). It’s frightening. However, what I wrote in that post is worth keeping in mind:

[Beware] the assumption that there will be no further reform or innovations that change the nature of private health insurance. It could be that private health insurance rates come down along with Medicare’s. To the extent that occurs, Medicare rates will not fall as far below private ones as shown. Note that there is nothing (or little, if you count the Cadillac tax or whatever the IPAB might recommend) in the law to encourage such change on the private side. But the private sector can, in principle, innovate its way toward lower payments on its own. Private market advocates suggest it will or can. Congress could pass reforms to encourage it. In other words, another way to address a widening gap between private and Medicare rates is not to increase Medicare rates, but to push down private ones.

Finally, it is possible that lower Medicare payment growth will, itself, encourage lower private payment growth. This possibility has historical precedent. One, but not the only, reason private payment-to-cost ratios grew in the late 1980s is that Medicare payments were pushed downward, which encouraged hospitals to cut costs. In other words, hospitals can cut costs. In an insurance market capable of taking advantage of that through negotiations–as occurred in the 1990s via managed care–private payments could come down.


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