HMOs Pop on Medicare Decision

 Highlight transcript below to create clipTranscript:  Print  |  Email Go  Click text to jump within videoTue 02 Apr 13 | 02:10 PM ET HMO stocks jumped on decisions on 2013 Medicare rates, but is this all roses? CNBC's Scott Cohn and Ipsita Smolinski, offer insight.

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The Obama Medicare Agenda: Why Seniors Will Fare Worse

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.

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]

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]

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]

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.

[1] Centers for Medicare and Medicaid Services, 2012 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, April 23, 2012, http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/ReportsTrustFunds/Downloads/TR2012.pdf(accessed April 15, 2013). There is a “hold harmless” provision that applies to Part B premium increases. As the Trustees’ report explains, “Part B premiums may also vary from standard rate because a ‘hold-harmless’ provision can lower the premium rate for individuals who have their premiums deducted from their Social Security benefits. On an individual basis, this provision limits the dollar increase in the Part B premium to the dollar increase in the individual’s Social Security benefit. As a result, the person affected pays a lower Part B premium, and the net amount of the individual’s Social Security benefit does not decrease despite the greater increase in the premium.”

[2] Ibid.

[3] Douglas W. Elmendorf, Director, Congressional Budget Office, letter to Speaker John Boehner, U.S. House of Representatives, July 24, 2012, http://www.cbo.gov/sites/default/files/cbofiles/attachments/43471-hr6079.pdf(accessed May 15, 2013).

[4] Centers for Medicare and Medicaid Services, 2012 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, April 23, 2012, p. 217.

[5] Ibid.

[6] Douglas W. Elmendorf, Director, Congressional Budget Office, letter to the Honorable Jeff Sessions (R–AL), U.S. Senate, January 22, 2010. The letter states, “The reductions in projected Part A outlays and increases in projected HI revenues resulting from PPACA would significantly raise balances in the HI trust fund and might suggest that significant additional resources…had been set aside to pay for future Medicare benefits. However, only the additional savings by the government as a whole truly increase the government’s ability to pay for future Medicare benefits or other programs, and those would be a much smaller.… Unified budget accounting shows 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.”

[7] Elmendorf, letter to Speaker Boehner.

[8] Elmendorf, letter to Senator Sessions.

[9] Charles Blahous, “The Fiscal Consequences of the Affordable Care Act,” Mercatus Center at George Mason University, April 10, 2012, p. 49, http://mercatus.org/sites/default/files/The-Fiscal-Consequences-of-the-Affordable-Care-Act_1.pdf (accessed May 16, 2013).

[10] Medicare Payment Advisory Commission, “A Data Book: Health Care Spending and the Medicare Program,” June 2012, p. 159, http://www.medpac.gov/documents/Jun12DataBookEntireReport.pdf (accessed May 15, 2013).

[11] 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 May 15, 2013).

[12] We should note here that the Congressional Budget Office (CBO) released a May 2013 Medicare baseline that estimates an increase in Medicare Advantage enrollment over the next decade, a projection directly at odds with the decline the Medicare actuary predicts. The CBO, however, offered no explanation for its latest adjustment to estimated MA enrollment or its revision of previous projections.

[13] Centers for Medicare and Medicaid Services, 2012 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, April 23, 2012, p. 229, and calculations based on Department of Health and Human Services, “Variation and Trends in Medigap Premiums,” December 2011, http://aspe.hhs.gov/health/reports/2011/medigappremiums/index.pdf (accessed May 15, 2013). For Medigap plans, the average annual premium increase from 2001 to 2010 was 3.8 percent, and average premiums in 2010 were $177. If premiums continued to increase at 3.8 percent a year, the average Medigap premium would be $229.80 in 2017.

[14] Robert A. Book and James C. Capretta, “Reductions in Medicare Advantage Payments: The Impact on Seniors by Region,” Heritage Foundation Backgrounder No. 2464, September 14, 2010, http://www.heritage.org/research/reports/2010/09/reductions-in-medicare-advantage-payments-the-impact-on-seniors-by-region.

[15] Chris Carlson, “Annual Tax on Insurers Allocated by State,” Oliver Wyman, November 2012, p. 7.

[16] Office of Management and Budget, Budget of the United States Government: Fiscal Year 2014, http://www.whitehouse.gov/sites/default/files/omb/budget/fy2014/assets/budget.pdf(accessed May 15, 2013).

[17] Under the Heritage Foundation proposal, for example, the current Medicare policy of reducing taxpayer subsidies for high-income seniors’ Medicare coverage would be continued and expanded. Reductions in taxpayer subsidies would be phased down gradually, and phased out entirely for the wealthiest 3 percent of Medicare recipients. But the Heritage subsidy reduction proposal would affect less than 10 percent of the entire Medicare population. See Stuart M. Butler, Alison Acosta Fraser, and William W. Beach, eds., Saving the American Dream: The Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity, The Heritage Foundation, 2011, p. 20, http://savingthedream.org/.

[18] Department of Health and Human Services, “Variation and Trends in Medigap Premiums.” Together, Medigap plans C and F enroll 57.7 percent of all Medigap enrollees.

[19] Calculation based on data from Department of Health and Human Services, “Variation and Trends in Medigap Premiums.” The average annual premium increase from 2001 to 2010 was 3.8 percent and average premiums in 2010 were $177. If premiums continued to increase at 3.8 percent a year, the average Medigap premium would be $229.80 in 2017. Therefore, a 15 percent surcharge would equal $34.47 a month and $413.64 a year in 2017.

[20] For a discussion of this issue, see Robert E. Moffit and Alyene Senger, “Medicare’s Outdated Structure—and the Urgent Need for Reform,” Heritage Foundation Backgrounder No. 2777, March 22, 2013, p. 3, http://www.heritage.org/research/reports/2013/03/medicares-outdated-structureand-the-urgent-need-for-reform; Robert E. Moffit, “The First Stage of Medicare Reform: Fixing the Current Program,” Heritage Foundation Backgrounder No. 2611, October 17, 2011, http://www.heritage.org/research/reports/2011/10/the-first-stage-of-medicare-reform-fixing-the-current-program; and Robert E. Moffit and Drew Gonshorowski, “Double Coverage: How It Drives Up Medicare Patient and Taxpayer Costs,” Heritage Foundation Backgrounder, forthcoming.

[21] The “donut hole” is the congressionally created gap in Medicare drug coverage in which beneficiaries must pay 100 percent of the total costs up to a specific “catastrophic” threshold ($4,750 in 2013). When that dollar threshold is reached, the insurance resumes payment. The oddity of this benefit design has no parallel in the private market.

[22] 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 October 24, 2012).

[23] Kaiser Family Foundation, “The Medicare Prescription Drug Benefit,” October 2012, p. 1, http://www.kff.org/medicare/upload/7044-13.pdf (accessed November 1, 2012).

[24] Medicare Payment Advisory Commission, “A Data Book: Health Care Spending and the Medicare Program,” p. 163.

[25] Doug Holtz-Eakin and Michael Ramlet, “Cost Shifting Debt Reduction to America’s Seniors: Medicare Part D Rebates Would Dramatically Increase Drug Premiums,” American Action Forum, July 21, 2011, http://americanactionforum.org/sites/default/files/AAF_Part%20D%20Financial%20Impact%202%20.pdf (accessed May 15, 2013).

[26] Elmendorf, letter to Speaker Boehner, and Elmendorf, letter to Senator Sessions.

[27] Alyene Senger and John Fleming, “Medicare at Risk: Visualizing the Need for Reform,” Heritage Foundation chart series, March 2013, http://www.heritage.org/research/projects/medicare-at-risk-visualizing-the-need-for-reform#.UYGA7qLUep0.

[28] For a further discussion on premium support, 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://www.heritage.org/research/reports/2011/11/the-second-stage-of-medicare-reform-moving-to-a-premium-support-program.

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Real Medicare Reform: Why Seniors Will Fare Better

[1] Centers for Medicare and Medicaid Services, 2012 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, April 23, 2012, p. 229, Table V.E2, http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/ReportsTrustFunds/Downloads/TR2012.pdf (accessed November 16, 2012).

[2] For a description of the Heritage Medicare reform plan, 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. See also, Robert E. Moffit and Rea S. Hederman Jr., “Medicare Premium Support: The Best Reform Option,” Heritage Foundation WebMemo No. 3483, February 2, 2012, http://report.heritage.org/wm3483.

[3] For an overview of the performance of the government’s defined-contribution programs, including cost control, see Robert E. Moffit, “Expanding Choice Through Defined Contributions: Overcoming a Non-Participatory Health Care Economy,” Journal of Law, Medicine and Ethics (Fall 2012), pp. 558–573.

[4] For the best summary of this issue, see Walton J. Francis, Putting Medicare Patients in Charge: Lessons from the FEHBP (Washington, DC: AEI Press, 2009), pp. 111–143.

[5] Under the FEHBP formula, no plan can get a government contribution on behalf of a beneficiary that exceeds 75 percent of the plan’s total premium cost. In other words, by limiting the savings that enrollees can secure, current law undercuts the greater potential of FEHBP to achieve an even better performance in cost control.

[6] Moffit, “Expanding Choice Through Defined Contributions,” p. 565, and Congressional Research Service, The Federal Employees Health Benefits Program: Possible Strategies for Reform, May 24, 1989, p. 255.

[7] Deborah Brunswick, “Health Insurance Costs to Rise Again Next Year,” CNN Money, September 22, 2011.

[8] Jeff Lemieux, Memorandum to the Medicare Commission, The National Bipartisan Commission on the Future of Medicare, February 17, 1999, http://medicare.commission.gov/medicare/jeff.html (accessed May 15, 2013).

[9] Roger Feldman, Bryan Dowd, and Robert Coulam, “A Competitive Bidding Approach to Medicare Reform,” Preserving Medicare for Future Generations: Market-Based Approaches to Health Care Reform, The Robert Wood Johnson–American Enterprise Series (April 2013), p. 10.

[10] The Heritage Foundation was opposed to adding a universal prescription drug entitlement to Medicare, but has always favored a competitive system of private plans offering seniors drug coverage.

[11] In 2003, there were several Democratic proposals to have the government cap monthly premiums. See “Medicare Overhaul Continues in Congress,” Coalition on Human Needs, June 23, 2003, p. 3.

[12] Centers for Medicare and Medicaid Services, 2012 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, April 23, 2012, p. 231.

[13] Sarah Kliff, “What a 76 Cent Premium Decrease Says About Medicare’s Future,” The Washington Post, August 9, 2011.

[14] News release, “Medicare Prescription Drug Premiums to Remain Steady for Third Straight Year,” U.S. Department of Health and Human Services, August 6, 2012, http://www.hhs.gov/news/press/2012pres/08/20120806b.html (accessed May 15, 2013).

[15] Jonathan D. Ketcham, Claudio Lucarelli, Eugenio J. Miravette, and M. Christopher Roebuck, “Sinking, Swimming, or Learning to Swim in Medicare Part D,” American Economic Review, Vol. 102 (October 2012), pp. 2639–2673. The researchers used data for the years 2006 and 2007.

[16] Ibid., p. 2642.

[17] Ibid.

[18] Centers for Medicare and Medicaid Services, 2004 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, Table II.C18, http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/ReportsTrustFunds/Downloads/tr2004.pdf (accessed May 15, 2013), and 2012 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, Table III.D3, http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/ReportsTrustFunds/Downloads/TR2012.pdf (accessed May 15, 2013).

[19] Marsha Gold, Gretchen Jacobson, Anthony Damico, and Tricia Neuman, “Medicare Advantage 2012 Data Spotlight: Enrollment Market Update,” The Henry J. Kaiser Family Foundation, Data Spotlight, June 2012, p. 1, http://kff.org/health-costs/report/medicare-advantage-2012-enrollment-market-update/ (accessed May 15, 2013).

[20] In fact, the average bid for all Medicare Advantage plans is 98 percent of the costs of traditional Medicare in the geographic bidding regions, and for HMOs the bids are 95 percent of those traditional Medicare costs. See James C. Capretta, “The Role of Medicare Fee-for-Service in Inefficient Health Care Delivery,” in Preserving Medicare for Future Generations: Market-Based Approaches to Reform, The Robert Wood Johnson- American Enterprise Series, (April 2013), p. 7.

[21] The law does not allow seniors to receive cash rebates for choosing plans that provide coverage below the Medicare benchmark payments.

[22] Most Medicare Advantage plans come under the Medicare payment benchmark, and are thus legally required to rebate 75 percent of the difference to enrollees in richer benefits or lower premiums. The remaining 25 percent is retained as savings to the federal government. See Medicare Payment Advisory Commission, “A Data Book: Health Care Spending and the Medicare Program,” 2012, p. 142.

[23] National Bipartisan Commission on the Future of Medicare, “Impact of the Commission Premium Support Proposal on Different Types of Beneficiaries,” p. 1., http://medicare.commission.gov/medicare/impact.htm (accessed May 20, 2013).

[24] Letter from Dan Crippen, CBO director, to Senator John Breaux (D–LA), co-chair, National Bipartisan Commission on the Future of Medicare, February 18, 1999, http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/10xx/doc1092/breaux.pdf (accessed May 13, 2013).

[25] Douglas W. Elmendorf, “CBO’s 2011 Long-Term Budget Outlook,” testimony before the Committee on the Budget, U.S. House of Representatives, June 23, 2011, http://budget.house.gov/uploadedfiles/623elmendorftestimony.pdf (accessed May 13, 2013).

[26] A Medicare spending cap is no longer just a policy proposal; it is current law. As a policy matter, a Medicare spending cap has been embraced by the Obama Administration (a key feature of the PPACA) and congressional Republicans. In the case of centrist and conservative proponents of Medicare premium support, however, any such cap would function as a “backstop” to ensure savings that are guaranteed and thus measurable by the Congressional Budget Office. For conservatives and centrists, competition, not global Medicare budgets or price controls, is to be the mechanism to control cost and slow the growth in Medicare spending.

[27] Roger Feldman, Robert Coulam, and Bryan Dowd, “Competitive Bidding Can Help Solve Medicare’s Fiscal Crisis,” American Enterprise Institute Health Policy Outlook, February 2012, http://www.aei.org/files/2012/02/16/-competitive-bidding-can-help-solve-medicares-fiscal-crisis_081704430956.pdf (accessed May 13, 2013).

[28] Ibid.

[29] Zirui Song, David M. Cutler, and Michael E. Chernew, “Potential Effects of Reforming Medicare Into a Competitive Bidding System,” Journal of the American Medical Association, Vol. 308, No. 5 (August 1, 2012), http://jama.jamanetwork.com/article.aspx?articleid=1273025 (accessed April 15, 2013).

[30] James C. Capretta and Yuval Levin, “More Mediscare,” The Weekly Standard, August 20, 2012, http://www.weeklystandard.com/articles/more-mediscare_649725.html (accessed May 15, 2013).

[31] National Economic and Domestic Policy Councils, “The President’s Plan to Modernize and Strengthen Medicare for the 21st Century,” detailed description, July 2, 1999, p. 8, http://clinton2.nara.gov/WH/New/html/medicare.pdf (accessed April 15, 2013).

[32] For a description of the Medicare Advantage payment system and its flaws, as well as the program’s strengths in delivering high quality care, see Jeet S. Guram and Robert E. Moffit, “The Medicare Advantage Success Story—Looking Beyond the Cost Difference,” The New England Journal of Medicine, Vol. 366 (March 29, 2012), pp. 1177–1179, http://www.nejm.org/doi/full/10.1056NEJMp1114019?viewType=Print&viewClass=Print (accessed May 15, 2013).

[33] The Center for American Progress Health Policy Team, “The Senior Protection Plan,” November 2012, p. 6, http://www.americanprogress.org/wp-content/uploads/2012/11/SeniorProtectionPlan-3.pdf (accessed April 15, 2013). It is unclear whether a senior could choose a plan that bids above or below the benchmark under CAP’s proposal.

[34] Office of Management and Budget, “A New Era of Responsibility: Renewing America’s Promise,” February 2009, p. 28, http://www.gpo.gov/fdsys/pkg/BUDGET-2010-BUD/pdf/BUDGET-2010-BUD.pdf (accessed April 15, 2013).

[35] Obama for America, “Promises,” television ad, August 25, 2012, http://www.youtube.com/watch?feature=player_embedded&v=b9XkVonSIxk (accessed May 13, 2013).

[36] For a more detailed discussion of this controversy, see Rea S. Hederman Jr., “Why Medicare Premium Support Would Not Cost Future Beneficiaries $6,400 More,” Heritage Foundation Issue Brief No. 3745, September 28, 2012, http://www.heritage.org/research/reports/2012/09/why-medicare-premium-support-would-not-cost-future-beneficiaries-$6400-more.

[37] Glenn Kessler, “Health Care’s $6,400 Question—Fast Fact Check,” The Washington Post, September 4, 2012, http://www.washingtonpost.com/politics/health-cares-6400-question--fast-fact-check/2012/09/04/086b1046-f6d9-11e1-8398-0327ab83ab91_video.html (accessed October 19, 2012).

[38] Gretchen Jacobsin, Tricia Neuman, Anthony Damico, “Transforming Medicare into a Premium Support System: Implications for Beneficiary Premiums,” Kaiser Family Foundation, October 2012, http://www.kff.org/medicare/upload/8373.pdf (accessed October 23, 2012).

[39] Joseph R. Antos, “The Problem with Kaiser’s Premium Support Study? Seniors are Smarter than That—and So Are Health Plans,” AEIdeas blog, October 15, 2012, http://www.aei-ideas.org/2012/10/the-problem-with-kaisers-study-on-premium-support-seniors-are-smarter-than-that-and-so-are-health-plans/ (accessed May 15, 2013).

[40] Ketcham et al., “Sinking, Swimming, or Learning to Swim in Medicare Part D,” p. 2642.

[41] News release, “Feds Health Benefits Changes Save Taxpayers and Employees Nearly $2 billion,” U.S. Office of Personnel Management, October 17, 1983.

[42] U.S. Office of Personnel Management, Compensation Report: U.S. Civil Service Retirement System, Federal Employees Health Benefits Program, Federal Employees’ Group Life Insurance Program, Pay Programs, fiscal year 1983, p. 2, http://babel.hathitrust.org/cgi/pt?id=uiug.30112105073313#page/n2/mode/1up (accessed January 18, 2013).

[43] News release, “Feds Health Benefits Changes Save Taxpayers and Employees Nearly $2 billion.”

[44] U.S. Office of Personnel Management, Compensation Report: U.S. Civil Service Retirement System, Federal Employees Health Benefits Program, Federal Employees’ Group Life Insurance Program, Pay Programs, p. 55.

[45] Determined using a Consumer Price Index calculator: Federal Reserve Bank of Minneapolis.

[46] For a comparative description of the leading Medicare premium support proposals, see Robert E. Moffit, “Saving the American Dream: Comparing Medicare Reform Plans,” Heritage Foundation Backgrounder No. 2675, April 4, 2012, http://report.heritage.org/bg2675.

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GOP Senators: We’ll Hold Up Treasury Nominee Unless Obama Makes Medicare Cuts That He’s Already Made

In a letter sent to the White House on Tuesday, 22 Republican senators are demanding that President Obama propose Medicare cuts before the chamber considers Treasury Secretary nominee Jack Lew.

The letter is part of an ongoing GOP smear campaign against Lew alleging that, during his tenure as director of the Office of Management and Budget (OMB), Lew and the Obama Administration failed to comply with a law requiring the White House to submit Medicare cost-cutting proposals “whenever the program’s trustees express concerns about its solvency in their annual report.” The senators suggest that Lew should have known about that legal requirement and spurred the Administration to take action by formally proposing Medicare cuts:

“We find it stunning and noteworthy that so far Mr. Lew has not provided adequate responses to congressional inquiries on the matter,” the senators wrote to Obama Tuesday.

“Congress needs a clearer understanding about his role in the violation of this law, including exactly when Mr. Lew first became aware of this legal requirement and what counsel, if any, he provided the administration on whether it should comply with this law.”

But there are some glaring falsehoods in the senators’ claims and their subsequent demand for an Administration plan to curb Medicare cost growth.

First, calling for Medicare cuts to ensure the program’s long-term solvency is based on the assumption that inflation in medical services — and, consequently, spending on health care entitlements like Medicare — will continue to balloon at staggering rates indefinitely. But the key to reducing national health expenditures is to reduce the actual price of consuming care — so if forces in the health care market facilitate cost reductions in medical technology and services, then entitlement spending will drop accordingly. Recent evidence shows that that is exactly what is happening, as the recent slowdown in health care cost growth has reduced Medicare’s future projected spending by over half a trillion dollars, all without a single policy change. Furthermore, a just-released GAO report found that if Obamacare and its cost-containment mechanisms are fully implemented, then future spending on Medicare would decrease “from 6.2 percent of GDP in 2035 in the simulations run before [Obamacare] was enacted to 4.7 percent in the simulations run immediately after enactment.”

President Obama also directly cut Medicare spending to the tune of $716 billion over the next decade by signing Obamacare, which reduces overpayments to providers servicing private Medicare Advantage plans. In fact, the GOP — led by their presidential nominee, Mitt Romney — hammered the president mercilessly over these cuts during the 2012 election cycle, claiming that the provider payment reductions amounted to “robbing Medicare.” And the president has proposed further cuts to entitlement programs — including Medicare — on multiple occasions, including his proposed budget and this month’s State of the Union address.

The only way that the senators’ claims bear credence is if they are hewing to an absurdly narrow, literal interpretation of the law in question, and want the Administration to submit a single specific bill addressing Medicare cuts. But the more likely explanation is that the senators are engaging in a bit of political grandstanding that affords them an opportunity to attack both the president’s entitlement policies as well as one of his highest-profile cabinet nominees.

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Here Comes The Boom: CMS Slashes Medicare Advantage; 'Disarray For Many Seniors'

WASHINGTON - DECEMBER 23: U.S. President Barack Obama signs the payroll tax bill in the Oval Office December 23, 2011 in Washington, DC. Payroll taxes fund Social Security and Medicare. (Image credit: Getty Images via @daylife)

Though Democrats denied it during the 2012 campaign, Obamacare cut Medicare by $716 billion in order to partially fund $1.9 trillion in new entitlement spending over the next ten years. A big chunk of those Medicare cuts came from the market-oriented Medicare Advantage program. Cleverly, the Obama administration postponed the Medicare Advantage cuts until after the election, so as to persuade seniors that everything would be just fine. But the election is over. On Friday, the administration announced that it would be significantly reducing funding for the popular program. Obama’s proposal, according to one analyst, “would turn almost every plan in the industry unprofitable.”

Democrats have long been hostile to the Medicare Advantage program, which allows seniors to get their Medicare coverage through plans administered by private insurers. Today, more than a quarter of retirees get their coverage through Medicare Advantage, and the program has experienced rapid growth over the past decade. Richard Foster, the recently-retired chief actuary of the Medicare program, has projected that Obamacare’s cuts to Medicare Advantage would force half of its current enrollees to switch back to the old, 1965-vintage Medicare program. Robert Book and James Capretta estimate that this will cost enrollees an average of $3,714 in 2017 alone.

New rates to be ‘enormously disruptive’

The new rates proposed by the Centers for Medicare and Medicaid Services, a.k.a. CMS, will have the net effect of reducing payments to Medicare Advantage plans by 7 to 8 percent in 2014, according to Citi managed care analyst Carl McDonald. “This includes the 2.3% reduction in per capita growth rate announced by CMS on Friday, and estimated 2-3% drop as rates move to parity with fee for service…a 1.5% reduction associated with the change in coding intensity adjustment” and the 2% health insurance premium tax. “These negatives are partially offset by an estimated 1% benefit from improved Star quality ratings, re-basing, better risk scores, and fee for service normalization, resulting in an overall decline of 7-8%,” wrote McDonald yesterday in a note to clients.

Because the typical for-profit managed care plan targets profit margins of only 5 percent, and non-profits even less, the net consequence would “turn almost every plan in the industry unprofitable,” according to McDonald, unless CMS changes its proposal. “If implemented, these rates and the program changes CMS is suggesting would be enormously disruptive to Medicare Advantage, likely forcing a number of smaller plans out of the business and creating disarray for many seniors.”

Could CMS bend the rules again?

CMS didn’t issue these rates because they’re mean. Obamacare requires these rate cuts; indeed, as I noted above, they were supposed to have been implemented before the election. “We appreciate that plans are facing several legislatively mandated changes affecting payment for 2014,” CMS’ Jonathan Blum and Paul Spitalnic write in their 199-page report. “We solicit comment on suggestions to address these challenges within the parameters of current law.” The final rates are to be issued on April 1.

CMS is likely to come under pressure to once again postpone the cuts, by engaging in rule-bending or accounting gimmicks. If CMS assumes that Congress passes a “doc fix” by the end of the year, in order to avoid a 25 percent reduction in physician reimbursement rates, plans could benefit from a 4 percent increase in government reimbursements. Understandably, CMS normally doesn’t incorporate the “doc fix” into its calculations unless one has been actually passed by Congress. CMS could also decline to implement a recalibration of its risk adjustment formula, something that would ease the pressure on insurers.

2014 will be the year when reality hits

It’s important to reduce the amount that the government spends on Medicare, and to do so in a way that minimally affects the care that seniors receive. The simplest way to do this is to gradually raise Medicare’s eligibility age by three months each year. Now that we have Obamacare’s insurance exchanges to support lower- to middle-income seniors, it’s not necessary to force Americans to pay taxes in order to subsidize health insurance for wealthy seniors like Warren Buffett and Mitt Romney.

But Obamacare chose a different path, one that will force more Americans into creaky, out-of-date programs like Medicaid and Sixties-era fee-for-service Medicare. The law will dramatically increase the cost of privately-purchased health insurance, something that Obamacare supporters are only now starting to admit.

There will be much more to talk about as the Obama administration issues the rates, regulations, and mandates that the “Affordable Care Act” requires. Stay tuned.

Follow Avik on Facebook and on Twitter at @aviksaroy.

INVESTORS’ NOTE: Among publicly-traded insurers, Universal American (UAM), Humana (HUM), WellCare (WCG), Cigna (CI), and UnitedHealth (UNH) garner the largest proportion of their revenue from Medicare Advantage.

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Health Insurers Decline on Proposed Medicare Advantage Cuts

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Humana Shares Fall as 2014 Medicare Rates Cloud Outlook

Ty Wright | Bloomberg | Getty Images The Humana Inc. headquarters office stands in Louisville, Kentucky, U.S.

Health insurer Humana said on Tuesday that the government's proposed 2014 payment rates for Medicare Advantage participants were lower than expected and would affect its profit outlook, sending its shares lower.

Medicare Advantage is the Medicare program in which private insurers provide health insurance to seniors and are reimbursed by the government. Humana has around 2 million members enrolled in Medicare Advantage programs.

On Friday, the government's Centers for Medicare and Medicaid Services issued preliminary base payments rates for this business that implied a mid-single-digit decline in those rates for the company, Humana said.

"Humana is closely analyzing all operational avenues available to address those preliminary rates and the related impact upon the company's ability to grow both its Medicare membership and its earnings for 2014," Humana said in a regulatory filing.

Humana shares were down about 10 percent at $70.50 from a close on Friday of $77.99. Shares in UnitedHealth Group, another large provider of Medicare Advantage plans, were down about 6 percent at $54, from $57.32 on Friday.

UnitedHealth was not immediately available to comment.

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Obama Medicare rebate plan could hurt drug companies

Feb 13 (Reuters) - President Barack Obama's decision to spotlight drug rebates as a way to save money on Medicare is likely to be opposed by the pharmaceutical industry, which could potentially lose billions of dollars in profits.

In his annual State of the Union speech on Tuesday, Obama said he would "reduce taxpayer subsidies to prescription drug companies" to rein in the rising cost of Medicare, the $600 billion healthcare program for the elderly and disabled.

Administration officials say the President was talking about requiring pharmaceutical manufacturers to offer rebates on drugs for 10 million people known as "dual eligibles" because they qualify for Medicare and Medicaid, and receive drug benefits through Medicare's Part D prescription drug program. Medicaid is the federal and state funded healthcare program for the poor.

The nonpartisan Congressional Budget Office estimates that requiring rebates for dual eligibles would save $137 billion in Medicare spending. Often the oldest and sickest beneficiaries, dual eligibles account for fewer than 20 percent of Medicare beneficiaries, but more than 30 percent of program spending.

Damien Conover, an analyst with the Morningstar investment research firm, said requiring Medicaid-level rebates for dual eligibles could trim 2 percent to 7 percent from the profits of drug manufacturers. The impact would vary depending on how much of a company's business is in the United States and how much is dependent on Medicare reimbursement, he said.

The U.S. pharmaceutical industry takes in about $300 billion a year in revenue.

"For most companies, it's probably a couple of percent hit to earnings, which is something clearly negative for the industry but manageable," said Barbara Ryan, a long-term pharmaceutical industry analyst, who now runs her own consulting firm. "Whether it could happen or not is another question, but it's unequivocally going to be the hot potato that's thrown around for the industry."

The rebate proposal, which has been circulating among policymakers and think tanks in Washington for years, had drawn industry ire before Obama's remarks on Tuesday.

Eli Lilly & Co Chief Executive John Lechleiter estimated it would cost the industry $112 billion over 10 years and reduce the number of new drugs developed.

"I think this would be disastrous for patients. It would be disastrous for pharmaceutical research. We think it's bad policy and we are going to fight it," he told a biotech conference in New York on Monday.

Other major drug companies contacted by Reuters, including Merck & Co and Pfizer Inc, declined to comment on the potential impact.

Pharmaceutical Research and Manufacturers of America, the industry's chief Washington trade group, warned that the proposal could "up-end" the successful Medicare Part D program that allows beneficiaries to purchase private drug coverage priced through competition.

It was unclear whether the proposal would ever succeed as legislation, given a bitterly divided Congress and predictions by some lobbyists that Medicare would see reforms only under a broad agreement that would require Republicans to accept higher tax revenues.

But analysts say the President, who this week backed away from a separate proposal to raise Medicare's eligibility age to 67 from 65, has few alternatives for wringing fiscal savings from the program. One option is raising costs for wealthier Americans eligible for Medicare benefits, which he also highlighted in his speech on Tuesday.

"Those two ideas are among the most palatable ideas for getting savings from the Medicare program," said Drew Altman, president and chief executive of the nonpartisan Kaiser Family Foundation, which tracks healthcare issues.

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White House: Raising Medicare Eligibility Age Is Off The Table

The Obama administration has ruled out raising the Medicare eligibility age from 65 to 67 as a means of reducing spending, White House Press Secretary Jay Carney announced during a briefing on Monday.

The measure — which the President floated as part of a larger deal to reduce the deficit in 2011 — is widely supported by Republicans, but would only save the federal government a net $5.7 billion, while shifting an added $11.4 billion in health care spending to states, employers, and individuals.

The proposal could also devastate the majority of seniors. While the richest Americans have fared well during the sluggish economic recovery, most Americans continue to struggle with falling wages and job uncertainty. According to a recent report from the Conference Board, 62 percent of workers between 45 and 60 plan to delay their retirements, a stark jump from 2010 — when 42 percent of workers planned a delay.

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Doctors Praise Bill To Repeal Medicare Cost-Cutting Board

The American Medical Association praised the reintroduction Wednesday of a bill to repeal the controversial Medicare payments board in President Obama's healthcare law.

Rep. Phil Roe (R-Tenn.) reintroduced his bill to repeal the Independent Payment Advisory Board (IPAB) — a panel of 15 healthcare experts with the power to cut Medicare payments to doctors if spending grows faster than a prescribed rate.

The AMA and other healthcare providers strongly oppose the IPAB, which would essentially have the power to make Medicare cuts now reserved for Congress — and thus subject to intense lobbying by groups trying to avoid a cut to their payments.

"IPAB is a panel that would have too little accountability and the power to make indiscriminate cuts that adversely affect access to healthcare for patients," AMA President Jeremy Lazarus said in a statement.

Rep. Allyson Schwartz (D-Pa.) is again cosponsoring Roe's bill, as she did in the last Congress.

Republicans — including Majority Leader Eric Cantor (R-Va.) — have called for IPAB repeal to be on the table in debt and deficit negotiations, but because the IPAB reduces costs, repealing it would add to the deficit.

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Raise the Age for Medicare & Soc. Security?

 Highlight transcript below to create clipTranscript:  Print  |  Email Go  Click text to jump within videoFri 18 Jan 13 | 04:33 PM ET CNBC's John Harwood reports House Republicans are going to propose to extend the debt limit until April 15; and Max Richtman, National Committee to Preserve Medicare; and Bill George, Harvard Business School professor, debate whether eligibility for these programs should be raised to age 70.

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How the US Can Save $500 Billion in Medicare: UnitedHealth

The U.S. could save more than $500 billion in Medicare and Medicaid spending over the next ten years, by more aggressively coordinating medical care for seniors and the poor, according to new research from health insurer UnitedHealth Group.

The report is aimed squarely at Washington, as leaders on Capital Hill wrangle over debt reduction options ahead of automatic budget cuts due to take effect in two months.

"It's either going to be a debate that's purely focused on cutting people's benefits, or it's going to be a debate that's focused on further cuts to doctors and hospitals," said Simon Stevens, UnitedHealth executive vice president, who chairs the insurer's Center for Health Reform & Modernization.

(Read More: Medicare Premium Increase Plan Redefines 'Well-Off')

But in the report, which Simon co-authored, he argues there should be third strategy: to focus on cutting costs, while improving care.

Under the Affordable Care Act, known as Obamacare, the government has begun to align reimbursement rates more on the quality of care for seniors in Medicare, rather than simply paying fees for each procedure.

The UnitedHealth report contends Medicare could save another $200 billion over the next ten years by more aggressively adopting cost-saving managed care initiatives.

Similarly, the report contends the federal government could save an additional $150 billion by integrating managed care for the 9 million low-income seniors and disabled who are enrolled in both Medicare and need-based Medicaid, and who account for a large share of spending in both programs.

Under Obamacare, roughly 2 million of this so-called dual-eligible population will be enrolled in coordinated care programs this year. But Stevens argues the government should expand the program faster, in order to save more.

"All of these options have got a very strong empirical, practical track record behind them," Stevens said. "We've got a sense of what works and what doesn't work."

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Obama’s Medicare Plan: Seniors Will Pay More

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”), and President Obama’s budget proposals guarantee higher costs for today’s seniors.

Status Quo Hikes

The 2012 Medicare trustees report says that, over the period 2012 to 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 coinsurance will climb from $289 to $334. And for seniors in the hospital beyond 90 days (lifetime reserve days), the per diem coinsurance costs are estimated to reach $668 by 2017.[2]

In other words, under current law, anyone over 65 who fails to buy private catastrophic insurance coverage is taking a huge risk.

Obamacare Impact

Obamacare already mandates $716 billion in Medicare payment cuts over the next 10 years, but these cuts are not targeted 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.

Moreover, as every responsible analyst has noted, one cannot simultaneously use that money to pay for Obamacare and extend the life of the Medicare trust fund. Notwithstanding the tiresome claptrap that Medicare payment cuts affect only providers and not beneficiaries, cuts in funding for services directly affect those persons who depend on those services.

Obamacare will also increase Medicare taxes. The law raises the Medicare payroll tax, which funds the hospital insurance (HI) trust fund, on high-income earners 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 $318 billion from 2013 to 2022.[3]

However, the Medicare payroll tax revenue is again double-counted as paying for new spending and extending the life of the trust fund.[4] As for the tax on investment income, Medicare trustee Charles Blahous explains, “Though 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.”[5]

Higher Premiums

President Obama has also proposed major Medicare changes in his fiscal year 2013 budget proposal. For Medicare Parts B and D, Obama’s budget plan would increase premiums by 15 percent for upper-income seniors. But by 2035, those premium increases would be expanded to cover 25 percent of all Medicare beneficiaries. Thus, President Obama’s proposed special premium increase on upper-income retirees would substantially increase the number of seniors paying the tax.

According to Heritage’s Center for Data Analysis calculations, an individual with an income of $85,000 in 2017 who is enrolled in Part B and Part D would have a combined premium increase of $874.44 for that year. For a married couple with an income of $170,000 in 2017 enrolled in Part B and Part D, the combined premium increase for the couple would be $1,748 for that year.

While there is a large and growing consensus among a variety of analysts on the need to expand the scope of “means testing,” a better approach is to reduce the government subsidy for upper-income seniors rather than foster the illusion of the subsidy by making seniors pay more.[6]

New Fees

President Obama would also impose new fees on baby boomers joining Medicare beginning in 2017. His 2013 budget proposal introduces a $25 increased Part B deductible for new beneficiaries in 2017, 2019, and 2021 and a $100 copayment for home health services in certain cases.

While there is a broad consensus on the need to curb the “first-dollar” coverage that drives up Medicare costs, President Obama 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 most new beneficiaries.[7] A better approach would be to restructure Medicare’s cost-sharing arrangements rather than adding a new “tax” to seniors.

New Drug Costs

The Obama Administration’s proposed new out-of-pocket costs will be coupled with increased premiums for all Part D beneficiaries. Obamacare spends an estimated $48 billion closing the “donut hole,” the congressionally created gap in drug coverage in which beneficiaries must pay 100 percent of the total costs up to a specific “catastrophic” threshold ($4,750 in 2013). When that threshold is reached, the insurance resumes payment.

Obamacare closes the “donut hole” by 2020. While out-of-pocket costs for Medicare Part D will be reduced, the changes enacted under the new health law will come at a higher premium price. Thus, according to the Congressional Budget Office’s (CBO) 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.”[8]

These 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, note that of all 48.6 million Medicare enrollees in 2011, only 3.6 million actually fell into the donut hole.[9] Moreover, approximately 11 million enrollees get 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.[10]

Out of Options

Obama’s latest budgetary scheme for cost-shifting to seniors is just another indication that the Administration and its allies on Capitol Hill are running out of options. They have already cut the Medicare provider payments to achieve a 10-year “savings” estimated at $716 billion, but most of those “savings” will finance Obamacare.[11] In a letter to Senator Jeff Sessions (R–AL), ranking member of the Senate Finance Committee, the CBO writes, “Unified budget accounting shows 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.”[12]

Americans may differ on Medicare reform or the right future for Medicare, but one thing is certain: Under the Obama plan, seniors will pay more—a lot more—and they will pay this steep price in many different ways, including a loss of access to care from demoralized doctors and other medical professionals. Bottom line: Medicare “as we know it” is already a thing of the past.

—Robert E. Moffit, PhD, is Senior Fellow in the Center for Policy Innovation, Rea S. Hederman Jr. is Assistant Director of and Research Fellow in the Center for Data Analysis, and Alyene Senger is Research Assistant in the Center for Health Policy Studies at The Heritage Foundation.

[1]Centers for Medicare and Medicaid Services, 2012 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplemental Medical Insurance Trust Funds, April 23, 2012, http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/ReportsTrustFunds/Downloads/TR2012.pdf (accessed October 19, 2012). It should be noted that there is a “hold harmless” provision that applies to Part B premium increases. As the trustees’ report explains, “Part B premiums may also vary from standard rate because a ‘hold-harmless’ provision can lower the premium rate for individuals who have their premiums deducted from their Social Security benefits. On an individual basis, this provision limits the dollar increase in the Part B premium to the dollar increase in the individual’s Social Security benefit. As a result, the person affected pays a lower Part B premium, and the net amount of the individual’s Social Security benefit does not decrease despite the greater increase in the premium.”

[3]See Douglas W. Elmendorf, Director, Congressional Budget Office, letter to Speaker John Boehner, U.S. House of Representatives, July 24, 2012, http://www.cbo.gov/sites/default/files/cbofiles/attachments/43471-hr6079.pdf (accessed October 19, 2012), and Elmendorf, letter to Senator Jeff Sessions, January 22, 2010.

[4]See Elmendorf, letter to Senator Sessions. The letter states, “The reductions in projected Part A outlays and increases in projected HI revenues resulting from PPACA would significantly raise balances in the HI trust fund and might suggest that significant additional resources…had been set aside to pay for future Medicare benefits. However, only the additional savings by the government as a whole truly increase the government’s ability to pay for future Medicare benefits or other programs, and those would be a much smaller.… Unified budget accounting shows 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.”

[6]Under the Heritage Foundation proposal, for example, the current Medicare policy of reducing taxpayer subsidies for high-income seniors’ Medicare coverage would be expanded, but the reductions would be phased down gradually, affecting less than 10 percent of the entire Medicare population. See Stuart M. Butler, Alison Acosta Fraser, and William W. Beach, eds., Saving the American Dream: The Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity, The Heritage Foundation, 2011, p. 20, http://savingthedream.org/.

[11]Elmendorf, letter to Speaker Boehner.

[12]Elmendorf, letter to Senator Sessions.

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