Abstract
Today’s seniors are facing higher Medicare costs. Over the
next five years, current law, as amended by the Patient Protection and
Affordable Care Act, already guarantees higher out-of-pocket costs for
seniors. Beyond the current law, President Obama’s latest budget
proposal would increase seniors’ costs even more. Many seniors will
experience a reduction in their Medicare Advantage benefits or even a
loss of their existing plan. Medicare “as we know it” is already a thing
of the past—the only way to preserve the Medicare benefit for current
and future retirees is through structural reform.
Today’s seniors are facing higher Medicare costs. Over the next
five years, current law, as amended by the Patient Protection and
Affordable Care Act (PPACA, also known as Obamacare), already guarantees
higher out-of-pocket costs for today’s seniors. Beyond the current law,
the President’s latest budget proposal would increase seniors’ costs
even more. So, notwithstanding “progressive” politicians’ rhetorical
promise to “keep Medicare as we know it,” the Obama Administration is
formally committed to increasing seniors’ out-of pocket costs, while the
President and his allies in Congress have already enacted major
Medicare payment reductions that threaten their access to care. Beyond
the payment reductions to hospitals, skilled nursing facilities, and
home health care agencies, many seniors will also experience a reduction
in their Medicare Advantage benefits or even a loss of their existing
plan.
Status Quo Hikes
The 2012 Medicare trustees report says that between 2012 and 2017,
seniors’ standard Medicare Part B monthly premiums will jump from $99.90
to $128.20, while their Part B deductibles will rise from $140 to $180.
[1] Seniors’ Medicare hospital deductible will increase from $1,156 to $1,336, while their
daily hospital
co-insurance will climb from $289 to $334. For seniors who remain in
the hospital beyond 90 days (lifetime reserve days), the per diem
co-insurance costs are estimated to reach $668 by 2017.
[2]
Obamacare: Impact on Access to Care. Obamacare mandates $716 billion in Medicare payment reductions over the next 10 years.
[3]
However, contrary to the way they are often portrayed, these cuts are
not aimed at specific instances of “waste, fraud, and abuse.” Rather,
they are across-the-board changes in Medicare payment formulas for
hospitals, nursing homes, home health agencies, hospice agencies, and
Medicare Advantage plans.
Notwithstanding the tiresome rhetoric that Medicare payment reductions affect
only providers and
not beneficiaries,
funding cuts for Medicare services directly affect those who depend on
those services. If these major reductions are implemented by Congress
over the coming decade, seniors’ ability to access Medicare services
will surely be compromised. In fact, the Medicare Trustees said that
“[a]bsent other changes, the lower Medicare payment rates would result
in negative total facility margins for an estimated 15 percent of
hospitals, skilled nursing facilities, and home health agencies by 2019,
and this percentage would reach roughly 25 percent in 2030 and 40
percent by 2050.”
[4]
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. Under such circumstances, lawmakers would probably
override the productivity adjustments, much as they have done to prevent
reductions in physician payment rates.[5]
Moreover, these “savings” are not even reserved to enhance the
solvency of the financially troubled Medicare program. Instead, the
“savings” are used to finance new spending for non-Medicare coverage
expansions in Obamacare.
[6]
Despite the simple fact that the same dollar cannot be spent twice, the
Obama Administration simultaneously claims credit for extending the
life of the Medicare trust fund, financing expanded health insurance
coverage outside Medicare, and reducing the federal deficit.
Higher Medicare Taxes. The PPACA will also increase Medicare
taxes. The law raises the standard Medicare payroll tax, which funds the
hospital insurance (HI) trust fund, on high-income earners (individuals
with an annual income of $200,000 and couples with an annual income of
$250,000) from 2.9 percent to 3.8 percent and also extends the 3.8
percent Medicare tax to investment income. Together, this is the largest
tax increase in Obamacare, costing taxpayers almost $318 billion
between 2013 and 2022.
[7]
Once again, however, the new Medicare payroll tax revenue is
double-counted: It is paying for new spending, while also extending the
life of the trust fund.
[8] As
for the new Medicare tax on investment income, Medicare trustee Charles
Blahous explains that “[t]hough termed an ‘Unearned Income Medicare
Contribution’ (UIMC) under the law, this revenue would not come from
Medicare’s traditional contribution base and it would
not be allocated to a Medicare Trust Fund.”
[9] (Emphasis added.)
Obamacare: Impact on Seniors’ Medicare Advantage Coverage.
Currently, 27 percent of all Medicare beneficiaries are enrolled in
Medicare Advantage (MA) plans. MA plans are attractive to beneficiaries
because they offer more comprehensive coverage than traditional
Medicare. Most notably, unlike traditional Medicare, MA plans cap
out-of-pocket costs, which eliminates the need for beneficiaries to pay
extra and purchase separate supplemental insurance, and these plans also
routinely offer drug coverage. Further, since 2007, between 85 percent
and 94 percent of participating seniors have had the option of enrolling
in these private plans while paying
no premium other than the standard Medicare Part B premium.
[10]
The PPACA reduces payments in the MA program by $156 billion between
2013 and 2022. When the law was enacted in 2010, the Medicare
actuary projected the impact of these cuts: “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).”
[11]
According to the Medicare actuary, then, an estimated 7 million
seniors will leave Medicare Advantage over the next four years, but that
means that they will have to re-enroll in the less generous traditional
Medicare program.
[12]
Not only will these seniors face the loss of their existing
comprehensive health plan, they will somehow have to fill big gaps in
their Medicare benefits—which would mean substantial increases in their
out-of-pocket costs. To compensate for gaps in traditional Medicare
coverage, nearly all seniors enrolled in traditional Medicare purchase
separate drug coverage and supplemental health insurance coverage, which
are projected to cost on average $42 a month and $230 a month,
respectively, in 2017.
[13]
An analysis by health care economists Robert Book and James Capretta
shows, “By 2017, Medicare beneficiaries who would have enrolled in
Medicare Advantage under prior law will lose an average of $1,841 due to
the MA changes alone and $3,714 when the effects of the entire bill,
including the FFS [fee-for-service] cuts, are considered.”
[14]
But those seniors who remain in MA will also face increased
out-of-pocket costs because of other features of the President’s health
care law. Obamacare imposes a special “fee” (a tax) on all health
insurance plans beginning in 2014, including MA plans. Of course, as
with all taxes on firms in any market, the costs of the tax increases
are routinely passed on to consumers in the form of higher prices or, in
the case of insurance, higher premiums. In this particular case, Oliver
Wyman, a leading benefits consulting firm, has estimated, “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.”
[15]
Obama’s FY 2014 Budget: Higher Seniors’ Premiums. In his
fiscal year (FY) 2014 budget proposal, President Obama has proposed
additional Medicare changes that would also increase costs for seniors.
[16]
For Medicare Parts B and D, the President’s budget plan would expand
“means testing” in the Medicare program for upper-income seniors,
resulting over time in a total of 25 percent of all Medicare
beneficiaries paying an income-adjusted premium. Under current law,
there are four income-adjusted brackets; seniors in these income
brackets pay progressively higher premiums, ranging from 35 percent to
80 percent of total Medicare program costs. In his latest budget
proposal, President Obama expands the number of brackets from four to
nine, requiring seniors to pay from 40 percent to 90 percent of total
Medicare premium costs. For the lowest bracket, an individual with an
income of $85,000 to $92,333 who is enrolled in Part B and Part D would
have a combined premium increase of about $401.76 in 2017, compared to
what he would pay under current law. For an individual with an annual
income between $178,000 and $196,000, his combined premium increase
would be an estimated $1,615 in 2017 (at 85.5 percent of total costs).
Reduction of taxpayer subsidies for high-income Medicare recipients
is sound policy. There is indeed a large and growing bipartisan
consensus among a variety of analysts on the need to expand the scope of
Medicare “means testing.” While it makes sense to gradually reduce
taxpayer subsidies for an expanded pool of upper-income seniors, it is
not necessary to require one out of every four Medicare beneficiaries to
pay more than the standard Medicare premiums.
[17]
Obama’s Budget: New Fees
President Obama’s FY 2014 budget would also impose new fees on baby
boomers joining Medicare beginning in 2017. His 2014 budget proposal
introduces a $25 increase in the Part B deductible for new beneficiaries
in 2017, 2019, and 2021, a $75 total increase by 2021, plus a $100
co-payment for home health services in certain cases.
Traditional Medicare incurs excessive costs resulting from
“first-dollar” coverage by Medigap and other supplemental insurance.
This first-dollar coverage increases utilization of medical services and
drives up Medicare costs for seniors and taxpayers alike.
President Obama is right to address the need to curb the first-dollar
coverage that drives up Medicare costs. His solution, however, is
hardly the best available option. The President proposes a premium
surcharge—a kind of “premium tax”—for new beneficiaries who choose a
Medigap plan with first-dollar or near-first-dollar coverage. This
approach would affect a majority of new beneficiaries in Medigap.
[18]
The surcharge would be equivalent to 15 percent of the average Medigap
premium, adding an estimated $413.60 a year to these seniors’ premium
costs.
[19] While
there is general agreement that supplemental coverage drives up overall
Medicare costs, a much better approach would be to restructure
Medicare’s cost-sharing arrangements, instead of imposing yet another
federal “tax” on seniors.
[20]
Obamacare and Obama’s Budget: New Prescription Drug Costs
The Obama Administration’s proposed new out-of-pocket costs will be
coupled with a general increase in premiums for beneficiaries enrolled
in Medicare Part D, the Medicare drug program.
The PPACA designates an estimated $48 billion to reduce out-of-pocket
costs for Medicare beneficiaries, particularly those who find
themselves faced with a gap in coverage for their drug costs, commonly
referred to as the “donut hole.” The President’s policy is to close this
Medicare Part D donut hole.
[21] Under the law, the donut hole is slated to close by 2020.
While out-of-pocket costs for Medicare Part D will be reduced, the
changes enacted under the new health law will only come at a higher
premium price for seniors. According to the Congressional Budget
Office’s 2010 estimate, “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.”
[22]
These Medicare prescription drug premium increases must be understood
in terms of how the Part D donut hole actually affects today’s seniors.
While the average premiums of
all Part D beneficiaries will
increase, of all 48.6 million Medicare enrollees in 2011, only 3.6
million actually fell into the donut hole.
[23] Moreover,
approximately 11 million enrollees receive low-income subsidies for
drug coverage, including coverage in the donut hole. Today, most private
health plans already provide additional coverage for beneficiaries who
might find themselves in the donut hole. For 2012, 52 percent of all
plans provide generic or some generic and some brand-name drug coverage
in the donut hole.
[24]
The President’s FY 2014 budget proposal would close the Part D
coverage gap for brand-name drugs in 2015, five years sooner than under
current law. For the small minority of seniors who fall into the donut
hole annually, that would be a welcome development; but most seniors
should also realize that while assisting the small number of seniors who
fall into it, the President’s proposal makes the drug benefit more
expensive and thus will result in a general increase in seniors’ Part D
premiums.
A Backdoor Tax on Seniors. Today in Medicare Part D, private
plans and drug manufacturers negotiate a discounted price; it is a
market price. The government is not involved at all in these
negotiations. The result: Market efficiencies have been dramatically
successful in controlling Medicare drug costs and stabilizing the growth
in seniors’ premiums.
The President’s recent budget proposal, however, would require drug
companies to pay the government the difference between the privately
negotiated Medicare price and the price (the “rebate”) the government
sets for the sale of drugs in the Medicaid program for low-income
Medicare beneficiaries. These seniors today receive subsidies, and they
account for about 30 percent of all Medicare Part D enrollees.
The President’s proposed Medicare “rebate” would act as a tax on the
drug companies doing business with the federal government, but it would
also function as a price control on Medicare drugs. In other words, the
new rebate policy would distort the Part D market by fixing artificially
low prices for one group of beneficiaries, and creating powerful
incentives for the companies to try to make up the revenue losses by
charging higher prices in other sectors of the Medicare market. This
means that most seniors would experience increased premiums. Analysts
with the American Action Forum estimate that a Medicaid-style rebate for
Part D would increase beneficiary premiums by anywhere between 20
percent and 40 percent.
[25]
Out of Options
President Obama’s latest budgetary scheme is not a serious
prescription for long-term Medicare reform. While it tweaks Medicare’s
administrative payment systems, it simply retains the current structure
and provides for more cost shifting to seniors.
The President’s budget is another indication that the Administration
and its allies on Capitol Hill are running out of consequential options.
They have already cut Medicare Part A and Medicare Advantage
provider-reimbursement rates to levels that even government actuaries
have stated, in print, to be unrealistic. They have instituted a new
Medicare tax on the “unearned” income of upper-income Americans (such as
investment income) that will not even be exclusively used to enhance
the solvency of Medicare. The vaunted Medicare “savings” from Medicare
provider payment reductions and other changes enacted through the PPACA
will also finance health insurance coverage mandated by Obamacare.
[26]
America needs a sound Medicare policy. The Obama Administration’s
agenda for increased costs for Medicare beneficiaries, plus the latest
budget tweaks to administrative payments, will not reverse the troubled
program’s unsustainable course.
[27]
Americans differ on Medicare reform. They may disagree on the right
future for Medicare. But one thing is certain: Under the Obama agenda,
seniors will pay more—much more—and they will pay this steep price in
many different ways, including a loss of access to care resulting from
demoralized doctors and other medical professionals cutting back on
Medicare practice or, in some cases dropping out of Medicare practice
altogether. Doctors and other medical professionals are facing a bleak
future of continued reimbursement reductions and the higher
administrative costs of complying with an even larger set of
increasingly complex rules and reporting requirements.
The bottom line: Medicare “as we know it” is already a thing of the
past and the only way to preserve Medicare for current and future
retirees is through major, market-based structural reform.
[28]
—Robert E. Moffit, PhD, is Senior Fellow, and Alyene Senger
is Research Assistant, in the Center for Health Policy Studies at The Heritage Foundation.
