August 20, 2013 | Issue Brief on Health Care
The Patient Protection and Affordable Care Act (Obamacare) makes dramatic changes in the country’s health care system, especially in Medicare, that will seriously affect American seniors. Indeed, much of the health law’s new spending is financed by spending reductions in the Medicare program.
Obamacare mandates $716 billion in Medicare payment reductions from 2013 to 2022. However, contrary to the way they are often portrayed, these cuts are not aimed at specific instances of waste, fraud, and abuse. Instead, they are across-the-board changes in Medicare payment formulas for a variety of Medicare providers, including hospitals, nursing homes, home health agencies, and hospice agencies.
Despite the constant political rhetoric that Medicare payment reductions affect only providers and not beneficiaries, funding cuts for Medicare services will directly affect those who depend on those services. If Obamacare’s major reductions are implemented by Congress over the coming decade, seniors’ ability to access Medicare services will surely diminish. In fact, the Medicare Trustees project that the lower Medicare payment rates would cause 15 percent of hospitals, skilled nursing facilities, and home health agencies to become unprofitable by 2019, and this percentage would reach roughly 25 percent in 2030 and 40 percent by 2050.
This means that seniors would have an increasingly difficult time accessing care. As the Trustees explain:
Medicare’s payments for health services would fall increasingly below providers’ costs. Providers could not sustain continuing negative margins and would have to withdraw from serving Medicare beneficiaries or (if total facility margins remained positive) shift substantial portions of Medicare costs to their non-Medicare, non-Medicaid payers.
In addition to the provider payment reductions, Obamacare significantly reduces payments to Medicare Advantage (MA) plans by an estimated $156 billion from 2013 to 2022. About 27 percent of all Medicare beneficiaries are enrolled in MA plans, a system of regulated and private plans competing against each other as an alternative to traditional Medicare. MA plans are attractive to beneficiaries because they offer more generous and comprehensive coverage than traditional Medicare by capping out-of-pocket costs and offering drug coverage.
When Obamacare was enacted in 2010, the Medicare Actuary projected that the impact of Obamacare’s cuts would be significant: “We estimate that in 2017, when the MA provisions will be fully phased in, enrollment in MA plans will be lower by about 50 percent (from its projected level of 14.8 million under the prior law to 7.4 million under the new law).” This means that these enrollees would have to enroll in the less generous traditional Medicare program, causing them to lose their current health plan and likely face increased out-of-pocket costs.
The Congressional Budget Office (CBO) recently updated its MA enrollment estimates, projecting a significant increase in seniors who will be enrolled in MA plans by 2023. Thus, conflicting enrollment projections leave Medicare Advantage with an uncertain future. It is not yet known how MA plans will react to Obamacare’s significant reductions or how beneficiaries will respond to any changes made by MA plans.
Obamacare gives new powers to make additional cuts in Medicare through the Independent Payment Advisory Board (IPAB). IPAB is comprised of 15 unelected bureaucrats charged with meeting a newly created Medicare spending target. If spending exceeds the target, the board is to make recommendations to Congress to rein in spending. Congress must heed its recommendations or enact reforms with equivalent savings.
One of the only significant tools available to IPAB to reduce Medicare spending is to cut physician reimbursement rates. The trustees project that Medicare spending will exceed the target spending level for the first time in 2016, prompting IPAB to make its initial recommendations. Doctors are already leaving the Medicare program, likely due to ever-increasing government regulations and the habitual uncertainty regarding their reimbursement. The Centers for Medicare and Medicaid Services released information that 9,539 physicians who had accepted Medicare opted out of the program in 2012, which is significantly more than the 3,700 who dropped out in 2009. With the ominous power of an unelected new board hanging over them, it is likely that more physicians will choose to leave the Medicare program in coming years.
The House has passed bipartisan legislation to repeal IPAB.
Obamacare gradually reduces seniors’ out-of-pocket costs in the Medicare Part D drug coverage gap, commonly referred to as the “donut hole,” until the gap is completely phased out in 2020. While this will help a small number of seniors who face the gap, it will increase the cost of the Part D benefit, a portion of which will be passed on to the beneficiaries.
According to the CBO, “enacting those changes would lead to an average increase in premiums for Part D beneficiaries of about 4 percent in 2011, rising to about 9 percent in 2019.” This average premium increase means a lot considering how few seniors actually fall into the gap. While the average premiums of all Part D beneficiaries will increase, of the 48.6 million Medicare enrollees in 2011, only 3.6 million actually fell into the donut hole.
Obamacare will also cause seniors to pay higher taxes. The higher taxes on prescription drugs (effective in 2011) and medical devices (effective in 2013) will affect seniors especially, as they are more heavily dependent on those very products. Older people, of course, have higher health costs than younger people, but the existing tax deduction for medical expenses will be raised from 7.5 percent to 10 percent of adjusted gross income in 2013. The reduced tax deductibility of medical expenses is waived for seniors only from 2013 to 2016. Likewise, older people have larger investments than younger people, so high-income seniors will be more heavily affected by the new 3.8 percent Medicare tax imposed on unearned or investment income (effective in 2013).
New federal health insurance taxes, both premium taxes and excise taxes, will also affect older workers and retirees. The federal premium tax (effective in 2014) will be applicable to Medicare Advantage plans and health plans offered to federal retirees in the Federal Employees Health Benefits Program (FEHBP). Oliver Wyman, a leading benefits consulting firm, has estimated that “[in] the Medicare market, the premium tax would increase the expected cost of MA coverage per enrollee by $3,604 over the ten-year period.”
Obamacare’s changes in Medicare, and thus its impact on seniors, must be viewed in the overall context of the Medicare program. Medicare faces a dire financial future. The Medicare Part A trust fund is projected to be exhausted by 2026, and under the most realistic scenario, the entire program has a long-term unfunded obligation of $36 trillion. This means that Medicare will owe $36 trillion worth of benefits for which it currently does not have the money to pay.
However, despite these enormous problems, Obamacare’s Medicare “savings” are not even reserved to enhance the solvency of the financially troubled program. Instead, the money is counted as paying for new spending on non-Medicare coverage expansions in Obamacare.
Rather than implementing the structural reform desperately needed in Medicare, Obamacare’s provisions threaten current seniors’ ability to access care and leave Medicare in jeopardy for future generations.
Douglas W. Elmendorf, Director, Congressional Budget Office, letter to Speaker John Boehner (R–OH), U.S. House of Representatives, July 24, 2012, pp. 13–14, http://www.cbo.gov/sites/default/files/cbofiles/attachments/43471-hr6079.pdf (accessed July 30, 2013). The letter estimates the cost of repealing Obamacare, which would increase Medicare spending due to the absence of Obamacare’s Medicare cuts. If Obamacare were repealed, the CBO states, “[w]ithin Medicare, net increases in spending for the services covered by Part A (Hospital Insurance) and Part B (Medical Insurance) would total $517 billion and $247 billion, respectively. Those increases would be partially offset by a $48 billion reduction in net spending for Part D.”
Centers for Medicare and Medicaid Services, 2013 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplemental Medical Insurance Trust Funds, May 31, 2013, p. 206, http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/ReportsTrustFunds/Downloads/TR2013.pdf (accessed July 30, 2013).
Elmendorf, letter to Speaker Boehner.
Centers for Medicare and Medicaid Services, “Estimated Financial Effects of the ‘Patient Protection and Affordable Care Act,’” as amended,” April 22, 2010, p. 11, http://www.cms.gov/Research-Statistics-Data-and-Systems/Research/ActuarialStudies/downloads/PPACA_2010-04-22.pdf (accessed July 30, 2013).
Congressional Budget Office, “CBO's May 2013 Medicare Baseline,” http://www.cbo.gov/sites/default/files/cbofiles/attachments/44205_Medicare_0.pdf (accessed July 30, 2013).
For more on the flaws of Medicare’s physician reimbursement arrangement, see Chris Jacobs, “Medicare’s Sustainable Growth Rate: Principles for Reform,” Heritage Foundation Backgrounder No. 2827, July 18, 2013 http://www.heritage.org/research/reports/2013/07/medicares-sustainable-growth-rate-principles-for-reform.
Melinda Beck, “More Doctors Steer Clear of Medicare,” The Wall Street Journal, July 29, 2013, http://online.wsj.com/article/SB10001424127887323971204578626151017241898.html (accessed August 19, 2013).
Congressional Budget Office, “Comparison of Projected Medicare Part D Premiums Under Current Law and Under Reconciliation Legislation Combined with H.R. 3590 as Passed by the Senate,” March 19, 2010, http://cbo.gov/sites/default/files/cbofiles/ftpdocs/113xx/doc11379/comparison.pdf (accessed July 30, 2013).
For a further explanation of the impact of these taxes, see Curtis Dubay, “Obamacare and New Taxes: Destroying Jobs and the Economy,” Heritage Foundation WebMemo No. 3100, January 20, 2011, http://www.heritage.org/research/reports/2011/01/obamacare-and-new-taxes-destroying-jobs-and-the-economy.
Chris Carlson, “Annual Tax on Insurers Allocated by State,” Oliver Wyman, November 2012, p. 7.
Centers for Medicare and Medicaid Services, 2013 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplemental Medical Insurance Trust Funds, p. 6.
Suzanne Codespote, “Medicare Unfunded Obligations for 2013 Trustees Report,” Centers for Medicare and Medicaid Services, Office of the Actuary, letter to the Senate Budget Committee, June 3, 2013.
Congressional Budget Office, “Effects of the Patient Protection and Affordable Care Act on the Federal Budget and the Balance in the Hospital Insurance Trust Fund,” December 23, 2009, http://www.cbo.gov/publication/25017 (accessed August 19, 2013). The CBO writes: “CBO has been asked whether the reductions in projected Part A outlays and increases in projected HI [hospital insurance] revenues under the legislation can provide additional resources to pay future Medicare benefits while simultaneously providing resources to pay for new programs outside of Medicare. Our answer is basically no.”
For a further discussion on structurally reforming Medicare, see Robert E. Moffit, “The Second Stage of Medicare Reform: Moving to a Premium Support Program,” Heritage Foundation Backgrounder No. 2626, November 28, 2011, http://report.heritage.org/bg2626.