Medicare's Status Quo: No, We Can't


Medicare's Status Quo: No, We Can't

Oct 1st, 2012 3 min read
Robert E. Moffit, Ph.D.

Senior Fellow

Moffit specializes in health care and entitlement programs, especially Medicare.

Politicians have promised Medicare benefits worth $37 trillion over the next 75 years. But that huge amount of benefits isn’t paid for, and so those promises will not be kept.

That is why Republicans and Democrats agree — albeit usually in private — that a major reform of this healthcare program for the elderly is necessary. And on one narrow point, there is bipartisan consensus: Medicare must be put on a budget.

President Obama has established the precedent. His Affordable Care Act phases in a hard cap on Medicare spending, indexed to the growth of the general economy (GDP) plus 1 percent. To enforce the cap, the national healthcare reform law creates a presidentially appointed Independent Payment Advisory Board (IPAB) to make cuts to Medicare provider payments. This is the law of the land, not merely a proposal.

Even before the IPAB starts cutting, the Affordable Care Act barrels ahead with massive reductions to Medicare provider payments — mostly to hospitals, health plans, nursing homes, home health agencies and even hospice care. The Congressional Budget Office (CBO) says they will amount to $716 billion in net spending reductions over the next 10 years.

But there’s a problem with these cuts. The Medicare actuary says the lower Medicare payments will start to fall below provider costs. He projects that, by 2019, the cuts will leave 15 percent of Medicare Part A providers operating in the red. By 2050, that number will climb to 40 percent.

But even kindly, old “Marcus Welby, M.D.” had to make a living to keep his practice going. As dropping Medicare rates approach Medicaid levels, more and more providers will have to shift to better-paying business or shutter their offices, thus guaranteeing severe access problems for millions of seniors. Regardless of what administration spokesmen say, cuts in funding for Medicare services directly affect beneficiaries dependent on those services.

The president said he would not sign the healthcare bill into law if it would add a “dime” to the deficit. If “savings” from these payment reductions are set aside for Medicare and deposited in the Hospital Insurance (HI) Trust Fund, then they cannot finance the healthcare law. If the law is not financed adequately, it adds to the deficit, which the president promised he would not do. If, instead of being set aside, the Medicare “savings” are used to finance the law’s provisions outside of the Medicare program, then the new law cannot be said to have strengthened Medicare’s trust fund. The president and his spokesmen can’t have it both ways.

The CBO has clarified the matter. On Jan. 22, 2010, CBO Director Douglas Elmendorf wrote Sen. Jeff Sessions (R-Ala.), ranking member on the Senate Budget Committee, that “the majority of the HI trust fund savings under PPACA would be used to pay for other spending and therefore would not enhance the ability of the government to pay for future Medicare benefits.” (The “other spending” is, of course, the financing of the new law’s entitlement expansions.)

Big Medicare payment cuts guarantee cost-shifting to beneficiaries in the form of reduced access to care, while demoralizing and discouraging medical professionals who treat Medicare patients. CBO formally questioned the political sustainability of the payment reductions, while the Medicare actuary flatly declared them unrealistic. The president’s response: to double down with even tougher Medicare spending caps and deeper payment cuts enforced through IPAB.

Medicare’s status quo is unworkable and undesirable. If the president is successful, the healthcare law will drive Medicare payments down to Medicaid levels, guaranteeing seniors serious problems in accessing care. If the president is unsuccessful, Medicare’s fiscal problems will greatly worsen, guaranteeing serious financial burdens for both beneficiaries and taxpayers alike. 

After the presidential election, we must try again. Medicare’s outdated and inefficient fee-for-service system is costly, and its price controls merely shift costs rather than control them. To remedy these structural deficiencies, Medicare should harness the forces of competition, and do it through a “defined contribution” system of financing, also known as “premium support.”

Reform should also carefully build upon the best features of the Medicare Advantage and the Medicare drug programs that already serve the vast majority of America’s retirees. Reform should encourage innovation, new benefit designs and delivery options, while guaranteeing patients security from catastrophic illness and continuity in care and coverage. Reform, for example, should allow beneficiaries to keep employment-based coverage in retirement, as they do today in Medicare’s drug program.

One more thing: Reform should also be bipartisan, in the same collegial spirit that motivated Sen. Ron Wyden (D-Ore.) and Rep. Paul Ryan (R-Wis.) to jointly create a sophisticated Medicare policy proposal. Patriotism can overcome partisan polarization. It must. America is running out of time. 

Moffit is a senior fellow in The Heritage Foundation’s Center for Policy Innovation.

First appeared in The Hill.

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