• Heritage Action
  • More

September 13, 2010

The Health Law’s Massive Medicare Advantage Cuts

By and

President Barack Obama has repeatedly promised Americans that if they like their current health insurance plans, they will get to keep them under the legislation he championed and Congress passed earlier this year.  But that’s demonstrably not true for millions of senior citizens who are enrolled in Medicare Advantage (MA) plans today.

MA plans are the private insurance options available to Medicare beneficiaries.  The Medicare program pays these plans a fixed monthly fee to provide Medicare services to plan enrollees.  Most MA plans also offer better coverage and lower co-pays and deductibles than provided by traditional Medicare.

The new law will impose deep cuts in the payment rates for MA plans, beginning with a payment freeze in 2011.  Beginning in 2012, the law modifies the formula for making payments to MA plans by tying maximum rates to what Medicare’s administrators estimate it costs to provide coverage through the traditional fee-for-service (FFS) Medicare program at the county level.  These cuts are phased in differently for different regions, but will be fully implemented in every region of the country by 2017.  The chief actuary of Medicare expects this formula change to cut MA payments by about $145 billion over ten years.

But that’s not the end of the reductions.  The new law also imposes large, indiscriminate payment cuts on hospitals and other suppliers of medical services through FFS, and these cuts also automatically get passed through to MA plans as well, in the form of even lower maximum MA rates.

We have estimated what these cuts will mean for Medicare beneficiaries — those who are in MA today and will be in the future, as well as for those who would have enrolled if not for the cuts — when fully implemented in 2017.  The results are staggering.

The average nationwide per capita reduction in the value of coverage for MA and would-be MA enrollees will total about $3,700 annually by 2017, or a nearly 27 percent cut from what would have occurred without the new law.  At the state level, the average cut ranges from $2,020 (21 percent) in Nevada, the state with the smallest cut on a per capita basis, to $4,693 (36 percent) in Hawaii, the state with the highest reduction in the per-capita value of MA-covered benefits.  All together, the aggregate cut in payments to MA plans in 2017 will reach $55 billion.

At the county level (among counties with at least 100,000 residents), the smallest cut on a per enrollee basis — Tuscaloosa, Alabama — will see a cut of more than 15% in the value of services provided. Other densely populated counties will see much larger reductions — 45% in Ascension, Louisiana — in the value of health care services provided to their MA and would-be MA enrollees.

When these cuts are imposed, MA plans will have no choice but to scale back their offerings to seniors to avoid insolvency.  That will mean higher premiums, increases in deductibles and co-payments, and elimination of coverage for things like preventive services not covered by Medicare and vision and dental care.  Some MA plans will exit markets entirely because of the cuts, leaving some Medicare enrollees with no choices whatsoever.

Today, there are about 10 million Medicare beneficiaries in MA plans, and the chief actuary for the program projected that enrollment would have grown to 14.8 million in 2017 without the new law.  Now, however, he expects MA enrollment to fall, to just 7.4 million in 2017, or 50 percent below what would have occurred without the cuts.  Millions of seniors and disabled Americans will thus be forced out of plans they prefer today into government-managed fee-for-service Medicare.  And the result will be more fragmentation and less coordination of patient care.

These deep reductions in MA payment rates will hit low-income and minority beneficiaries disproportionately hard. The reason: Hispanic Americans are twice as likely, and African Americans are 10 percent more likely, to be enrolled in MA plans than the average Medicare beneficiary.  In addition, lower-income seniors who cannot afford Medigap premiums sign up for MA plans in large numbers.  We estimate that the MA reductions will hit seniors and disabled beneficiaries with incomes under $32,500 per year in income (in today’s terms) with 70 percent of the total reduction — $38.5 billion in reduced health care services.

The administration and its allies argue that these cuts are justified because the current MA payment formula overpays private plans.  But the solution is not to eliminate choices but to create a truly level playing field for competition between private offerings and Medicare’s government-managed system by establishing a bidding system for coverage in which even FFS must charge premiums commensurate with its costs.  Every time this common-sense idea has been floated, such as during the debate over adding a prescription drug benefit to Medicare, Democratic leaders have strongly objected on the grounds that private plans would gain enrollment through fair competition.

Polling data indicates that a majority of seniors remain opposed to the new law, despite aggressive political campaigns aimed at convincing them of the law’s virtues.  Some of the new law’s advocates seem perplexed by this unmovable opposition.  They shouldn’t be.  It’s unambiguous that the new law’s Medicare Advantage cuts will restrict health care choices for seniors, eliminate many of the plans they find perfectly acceptable today, and reduce their access to quality health care.  Senior citizens have every right to be upset over what this law will do to their health care.

Robert A. Book, Ph.D., is a Senior Research Fellow at The Heritage Foundation.  James C. Capretta is a Fellow at the Ethics and Public Policy Center.

First appeared in The Daily Caller

Heritage's daily Morning Bell e-mail keeps you updated on the ongoing policy battles in Washington and around the country.


The subscription is free and delivers you the latest conservative policy perspectives on the news each weekday--straight from Heritage experts.


The Morning Bell is your daily wake-up call offering a fresh, conservative analysis of the news.


More than 450,000 Americans rely on Heritage's Morning Bell to stay up to date on the policy battles that affect them.


Rush Limbaugh says "The Heritage Foundation's Morning Bell is just terrific!"


Rep. Peter Roskam (R-IL) says it's "a great way to start the day for any conservative who wants to get America back on track."


Sign up to start your free subscription today!