The Affordable Care Act and Medicare Spending

November 20, 2012

Medical expensesIt is time to stop pretending that there is any better healthcare delivery system of Medicare services than Medicare itself.  “Privatization” of Medicare just means failure.

The Affordable Care Act, also known as “Obamacare,” reduces unnecessary Medicare costs by $716 Billion according to a July 24, 2012 analysis of the ACA by the non-partisan Congressional Budget Office (CBO), an Office respected for its accuracy by all political persuasions in Washington, D.C. until the present time.

The CBO report states that if the ACA were repealed, “spending for Medicare would increase by an estimated $716 billion” between 2013 and 2022  just to cover all the charges made by providers.

The ACA does not cut any benefits which Medicare-eligible seniors are entitled to receive, now or in the future.

Projected savings of that size will extend the life of the Medicare Hospital Insurance Trust Fund by 12 years from 2017 to 2029, more than doubling the time before exhaustion of the Trust Fund.

More than two-thirds of the savings outlined in the CBO report come from two distinct but related groups of changes:

  1. Changes in the way hospitals and providers of care to Medicare patients are compensated, and
  2. Reductions in reimbursement rates to Medicare Advantage plans.

Hospital and Provider Compensation:  Charges for healthcare are currently paid based on the outdated and inefficient Fee For Services or “FFS” model.  The FFS model rewards the volume of services charged.  Physicians and other providers are paid for each test or procedure they prescribe under the FFS model, rather than for the quality of those services. Under the ACA, Medicare payments to providers will be closely linked to performance of successful results.

Medicare Advantage Plans:  The Medicare Payment Advisory Commission estimates that Medicare pays Medicare Advantage plans 14 percent (or $1,000 per person on average) more for health services than it pays under traditional Medicare, with not a paper’s width of  difference, as they say, in successful outcomes.

The difference in outcomes would have been much more decidedly in favor of the traditional Medicare model if all plans fully enrolled eligible applicants.  Instead, some Medicare Advantage plans apparently chose not to follow the law but for whatever reason have instead made it difficult for people in poor health to enroll in Medicare Advantage as opposed to enrolling in traditional Medicare. See, “How Does Risk Selection Respond to Risk Adjustment? Evidence for the Medicare Advantage Program,” (NBER Working Paper No. 16977),

The history of the private delivery of Medicare benefits definitely raises solid concerns about the viability of proposals to replace traditional Medicare with vouchers or “premiums subsidies” which Medicare beneficiaries would then use to buy insurance in the private market. Because the existing Medicare program has bargaining power that no commercial insurer will ever match, Medicare manages to pay 22 percent less than commercial insurers pay for physician services.

Private insurers cannot profitably insure the senior population while charging anything close to the current per capita cost of traditional Medicare without reducing benefits. This is why the insurance industry opposed privatization proposals when Medicare was debated in 1965, and why similar proposals do not provide a responsible plan for balancing the budget and controlling health care spending today.