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Originally Published: 8/24/2012




It’s time to put this into something concise. We’ve all heard the sound bites about how the Patient Protection and Affordable Care Act (PPACA), known as Obamacare, has cut Medicare. Well, it has. But not to beneficiaries. So, let’s get our facts straight.

You may have heard - months ago - that Obamacare cut $507 billion from Medicare. But more recently it’s been said that Obamacare cut $716 billion. What’s the difference? In 2011 the Congressional Budget Office (CBO) determined that PPACA would reduce Medicare outlays by $507 billion between 2012 and 2021. However, CBO did another estimate earlier this year looking at the years 2013 to 2022 and determined that the savings would be even greater than expected - $716 billion. There’s the difference - different time periods. And let me point out that these aren’t cuts. They’re cost savings. Isn’t that what everyone wants from all government programs?

So, where are the savings coming from? Well, there are lots of things, like reduced payments to some providers and a crackdown on Medicare fraud. But more than 66% of the savings come from 2 areas: (1) ending the extraordinary overpayments we taxpayers give to private insurance companies through Medicare Advantage and (2) from reduced payments to hospitals.

Medicare Advantage.  The Kaiser Family Foundation put together a great history of Medicare Advantage (MA) and you can read the whole thing for yourself. Let me just point out a few things that are important here. The option of choosing Medicare benefits from private health plans, mainly health maintenance organizations (HMOs), began in the 1970s. Our standard Medicare program is a fee-for-service (FFS) plan. In 1997 Congress expanded the private plan options and renamed the program “Medicare+Choice.” It authorized local preferred provider organizations (PPOs), private FFSs, and medical savings accounts (MSAs). It also modified the payments made to these plans. In 2000 Congress increased the payments. In 2003 Congress again increased the payments and renamed the program “Medicare Advantage.” In 2008 Congress again increased payments. As of 2008 about 23% of enrollees opted for Medicare Advantage.

Private health organizations receive payments based on a per enrollee basis. Originally private health companies wanted “in” so they said they would provide the coverage for 95% of what it costs the federal government. In 2006 Medicare began to use the bidding process. There are many details with this and you can read it for yourself. The bottom line is that by 2008 we taxpayers were paying an average of 113% to private health organizations for what the federal government could do for 100%. In other words, we used taxpayer money to provide private health insurance organizations with profits. Now, this isn’t a simple calculation because of the bidding process and all the machinations. However, according to the MedPac report to Congress, it is projected that payments for all Medicare Advantage plans will be about 107% of the Medicare FFS program. (see Table 12-3) So the reduction to Medicare Advantage is from paying them 113% of what the services cost to paying them 107% of what the services cost. We’re just given them less profit.

Reduced payments to hospitals. The hospitals agreed to these reductions primarily because Obamacare will put another 30 to 50 million people on insurance plans. (Bloomberg) Therefore, hospitals will no longer lose so much money on expensive emergency care to people who can’t afford to pay the bill. Hospital administrators and lobbyists aren’t stupid. They’d never have agreed to this if they were going to lose money. They’ll be ahead.

Where do the savings go? Well, some of the savings is being used to help people who can’t afford health insurance get it and plumping up the Medicare trust fund. But some of the savings is going to pay for increased benefits for Medicare beneficiaries, like preventive services with no cost-sharing and closing the prescription “doughnut hole.”

One more point. Medicare isn’t expensive because it’s a bloated government program. Just the opposite is true. Medicare is remarkably efficient. Unlike private insurance companies, Medicare doesn’t have to spend millions on marketing, underwriting, big salaries for executives, or shareholder dividends. It’s administrative costs run less than 2% of its costs (Kaiser Family Foundation) where private insurance companies’ administrative costs run at least 25%. (Science Daily) Also, the fact that Medicare is so large means that it has tremendous negotiating power which enables it to keep many costs low. The increased costs are coming from the baby boomers hitting the system. This will continue for at least another decade so it’s necessary to get control of the costs now.

For a more detailed account of all that the Affordable Care Act does, see the Center for Medicare Advocacy.



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