The Medicare distortions

Reuters

Inez Willis, a senior citizen, walks down the hallway with the aide of a cane to visit a neighbor at her independent living complex in Silver Spring, Maryland April 11, 2012.

Article Highlights

  • One of the largest cuts in #Obamacare is in the payments made to Medicare Advantage plans.

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  • In the end, the debate over Medicare is no different from the debate about health care more generally.

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  • The average reduction in benefits for seniors enrolled in Medicare Advantage plans will reach $3700 in 2017. -Capretta.

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In the last three weeks, President Obama and his apologists have been incredulous that the Romney-Ryan campaign would have the audacity to attack them over Medicare. How dare they? That’s what we do, not them!

As my colleague Yuval Levin has already explained, these Democrats don’t seem to realize that Obamacare changed everything. The new health-care law cut Medicare by $716 billion over a decade to partially finance the cost of expanding entitlement benefits for other Americans. Put simply, Medicare was squeezed to grease the way for the president’s main first-term ambition — enactment of a government takeover of American health care. That’s a fact, and it’s one that doesn’t sit well with many voters, especially seniors. Romney and Ryan are helpfully reminding the electorate about this matter, as they should.

"Defenders of the president’s record generally begin by admitting that, well, yes, the Medicare cuts in Obamacare do total $716 billion over ten years. But they then say that these cuts won’t do any harm because they come at the expense of insurance companies and waste in the health-care sector, not benefits for seniors. This is demonstrably false." -James C. CaprettaThose coming to the president’s aid in this debate — and the usual suspects have certainly stepped up to the plate, including Paul Krugman, Peter Orszag, Laura D’Andrea Tyson, and most recently former president Bill Clinton — have offered up a number of different arguments on the president’s behalf, some based on defending his record, and others aimed at changing the subject to the supposed defects of the Romney-Ryan Medicare reform plan. All of these arguments have been thoroughly rebutted elsewhere (see especially Grace-Marie Turner debunking Clinton’s claims and Senator Jim DeMint and his staff at the Joint Economic Committee doing likewise). But because the Democratic propaganda machine is now in high gear, and will remain so all the way to November 6, it is important to confront these arguments often to prevent them from becoming conventional wisdom.

Defenders of the president’s record generally begin by admitting that, well, yes, the Medicare cuts in Obamacare do total $716 billion over ten years. But they then say that these cuts won’t do any harm because they come at the expense of insurance companies and waste in the health-care sector, not benefits for seniors. This is demonstrably false. One of the largest cuts in Obamacare is in the payments made to Medicare Advantage plans. Today, some 13 million seniors are signed up with these plans. Very often, these are seniors with modest incomes who are attracted to the better coverage provided by Medicare Advantage, including reduced cost-sharing, without the expense of a Medigap plan. The Medicare trustees expect that the Obamacare cuts will drive 4 million seniors out of Medicare Advantage by 2018. This is a direct violation of the president’s tattered promise that, under Obamacare, Americans who like their current insurance plans would get to keep them.

The cuts to Medicare Advantage will drive up costs for all 13 million enrollees. They will have fewer benefits covered by their plans, and their premiums and cost-sharing will go up in direct proportion to the payment rates’ going down. That’s a fact. Indeed, it’s a direct consequence of the Medicare law, which requires the insurance plans to pay out in benefits any amounts that they receive from Medicare that are above the bids submitted by the plans for covering basic Medicare. In a study I co-authored with Robert Book, we estimated that the average reduction in benefits for seniors enrolled in Medicare Advantage plans would reach $3,700 in 2017. In addition to providing the average cut by state, that study also calculated the average cut by county and congressional district.

Obamacare also imposes large cuts in reimbursement rates for hospitals, nursing homes, home-health-care agencies, and other providers of medical services. These cuts will hinder access to care for millions of seniors. Medicare’s chief actuary has repeatedly warned that these cuts are not sustainable, because they would drive so many hospitals and other institutions out of the program. According to the latest Medicare trustees’ report, the cuts in Medicare are so deep that 15 percent of hospitals would be forced to stop admitting Medicare patients by the end of the decade, and 25 percent would be in that position by 2030. The idea that these cuts in Medicare payments will not harm care for seniors does not stand up to the slightest scrutiny.

Having failed to make a persuasive case that these cuts are painless, the president’s apologists next assert that Paul Ryan also supports these cuts, by virtue of the fact that his budget plan did not undo the savings associated with them. And it is certainly true that the Ryan budget’s numbers for Medicare did not assume the undoing of the cuts, largely because the committee was unable to find enough offsetting cuts elsewhere in the budget. But that does not mean the Ryan budget endorsed the Medicare cuts in Obamacare. Far from it. The Ryan budget allowed for substituting sensible savings in Medicare for the blunt and irrational cuts contained in Obamacare.

More importantly, the Ryan budget did not use the Medicare savings to pay for a new entitlement elsewhere in the federal budget. Instead, the savings were used exclusively to replenish the Medicare trust fund (and thereby reduce the federal budget deficit, too).

But even these points are now no longer relevant because Governor Romney has made it clear that his budget will undo these cuts in their entirety. As president and vice president, Romney and Ryan will have much greater ability to find other spending cuts throughout the rest of the federal budget that are more sensible than the Obamacare cuts in Medicare.

In an attempt to change the subject from these uncomfortable facts, the president’s defenders have also regurgitated the tired and empty attacks on Paul Ryan’s plan to reform Medicare the right way.

To begin with, those attacking Ryan have resorted to silly name-calling (“VoucherCare,” “CouponCare”) in an attempt to discredit the idea of Medicare premium support. But premium support — which, by the way, has a long bipartisan history, including support from Democratic senator Ron Wyden — cannot be considered a “voucher” program any more than the prescription-drug benefit in Medicare is a voucher program. Under the drug benefit, the federal government accepts bids from private insurers wishing to offer coverage to the beneficiaries. The government’s contribution toward coverage is based on the weighted average of those bids. Every beneficiary in a given market area is entitled to the same level of governmental support. The government provides an organized format to assist the beneficiaries in their choice of plans. And once a beneficiary decides on a plan, the government’s contribution is sent directly to the insurer. No voucher is ever issued. That’s exactly how a Wyden-Ryan premium-support plan would work in the rest of Medicare.

Then there is the line of attack that the Ryan Medicare reform will increase costs for seniors. Ironically, these attacks are based on two studies that contradict each other. The first, from the Congressional Budget Office (CBO), examined the Ryan budget plan from 2011 (rather than 2012), so this study is now outdated. In it, the CBO said that private insurance plans would cost more than the traditional, government-administered Medicare option, and thus eliminating that option would drive up costs for seniors by $6,400 annually. The second study, published in The Journal of the American Medical Association, said that the private plans would cost less than the traditional government option in many parts of the country, and thus seniors who wanted to stay in the traditional option would be forced to pay higher premiums.

So which is it? Are private plans less expensive or more expensive than the traditional program? The truth is that, despite claims to the contrary, private plans are able to deliver the Medicare benefit package at much lower costs than the traditional program in many parts of the country. And that shouldn’t be surprising, because the traditional program is incredibly inefficient. This has been confirmed by data collected by the Medicare Payment Advisory Commission (MedPAC) over many years. In its latest “data book,” MedPAC estimates that the average HMO offering coverage to Medicare beneficiaries in the current Medicare Advantage program can provide the statutory set of Medicare benefits for 5 percent less than the traditional program.

Under the Wyden-Ryan reform plan (which formed the basis of the Medicare reform in Ryan’s 2012 budget plan), the government’s contribution toward coverage would be set at the second-lowest bid in a region. As indicated by the MedPAC data, that would almost certainly be a private plan in many parts of the country, but in rural areas it is entirely possible that the traditional, fee-for-service program could be the lowest-cost option. Regardless, however, beneficiaries will always have access to at least two plans that would not increase their premiums at all above what current law would require. So it is completely false that seniors would have to pay more. The proposal is designed explicitly to ensure that seniors will not have to pay more unless they decide on their own to sign up for more expensive insurance.

Finally, there is the issue of whether premium support will work to slow the pace of rising costs. The president’s defenders have argued that competitive pressures will never work and that the only solution is more government regulation and price controls. It is of course the height of hypocrisy to make this argument now, because less than two years ago the president’s apologists sold Obamacare to the American people on the (false) claim that it would harness competitive pressures in the state-based exchanges. Now that Ryan and others are arguing that competition is needed to control Medicare costs, Obamacare’s defenders are showing their true colors — which is to say they have abandoned their supposed support for competition and are now arguing that the only solution is central government regulation over the entire system.

But the evidence shows otherwise. The Medicare drug benefit, which truly is a premium-support plan, continues to work incredibly well. The average beneficiary premium in 2013 will be just $30, the same as it was in 2012 and 2011, and just $7 more than it was in 2006. Overall, spending on the program is coming in more than 40 percent below initial projections. Competition and transparency in pricing are putting downward pressure on premiums and the costs of individual prescriptions. Seniors like the program, and competition remains vigorous.

As the New York Times recently reported, at the time the drug benefit was enacted, Nancy Pelosi said, “Most seniors will be worse off,” and “This is the beginning of the end of Medicare as we know it.” She couldn’t have been more wrong, as are those attacking Ryan today.

In the end, the debate over Medicare is no different from the debate about health care more generally. Who is in control? Is it the federal government? Or is it American consumers and their families, working with their physicians? President Obama’s plan would lead inevitably to diminished quality in American health care, and eventually to rationing and waiting lists for services. That is always the byproduct of a centrally managed system. The Romney-Ryan vision is very different. They want a patient-centered system that fosters life-saving innovation and disciplines costs without sacrificing quality. When the debate is seen this way, there is little doubt which approach the American electorate would choose.

— James C. Capretta is a fellow at the Ethics and Public Policy Center and was an associate director at the Office of Management and Budget from 2001 to 2004.

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About the Author

 

James C.
Capretta
  • James Capretta has spent more than two decades studying American health care policy. As an associate director at the White House's Office of Management and Budget from 2001 to 2004, he was responsible for all health care, Social Security and welfare issues. Earlier, he served as a senior health policy analyst at the U.S. Senate Budget Committee and at the U.S. House Committee on Ways and Means. Capretta is also concurrently a Senior Fellow at the Ethics and Public Policy Center. At AEI, he will be researching how to replace the Patient Protection and Affordable Care Act (best known as Obamacare) with a less expensive reform plan to provide effective and secure health insurance for working-age Americans and their families.

  • Email: James.Capretta@aei.org
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