Off the Charts Blog | Center on Budget and Policy Priorities

The Congressional Budget Office’s (CBO) latest Medicare estimates show that opponents of health reform were wrong:  phasing down overpayments to the insurance companies that serve some Medicare beneficiaries through the Medicare Advantage program won’t gut the program or lead insurers to drop out.  Instead, CBO expects Medicare Advantage to keep growing.

Before health reform (in 2009), Medicare paid Medicare Advantage plans 14 percent more per beneficiary than it would cost to cover these people in regular Medicare, according to the Medicare Payment Advisory Commission (MedPAC).  These overpayments drove up premiums for people in regular Medicare and weakened Medicare’s finances.

Health reform began shrinking the overpayments last year.  Eventually it will bring Medicare Advantage payments more in line with the cost of regular Medicare.  (Even if policymakers went further and required that Medicare Advantage plans receive no more than what regular Medicare costs, the plans would still be overpaid.  That’s because they enroll healthier-than-average — hence lower-cost — beneficiaries and Medicare’s “risk adjustment” mechanism can’t fully account for these differences in determining plans’ payment rates.)

Opponents of health reform claimed that cutting the overpayments would harm millions of beneficiaries and devastate Medicare Advantage.  Insurers use the overpayments to provide some benefits that regular Medicare doesn’t offer, they argued, so insurers would have no choice but to institute deep benefit cuts.  They might even withdraw from the program.

But, while part of the overpayments pay for extra benefits, insurers keep a substantial part as profit and to cover overhead.  For example, as we wrote in 2009, MedPAC found that Medicare paid Medicare Advantage plans an average of $1.30 for every $1 in additional benefits they delivered.

If insurers become more efficient, they can still provide some extra benefits and offer other inducements to enroll, despite the cuts in excessive payments.  (In fact, Medicare originally allowed insurers to provide additional benefits only if they covered Medicare beneficiaries at less cost than regular Medicare.)

CBO projects that Medicare Advantage plans will continue to thrive.  It expects enrollment in Medicare Advantage (plus some other, much smaller plans that predated Medicare Advantage) to grow from 13 million last year to 18 million by 2019, even with health reform.  That’s hardly a sign of the program’s impending collapse.

House Budget Committee Chairman Paul Ryan and various other health reform opponents have been warning governors and state legislators not to adopt health reform’s Medicaid expansion, contending the federal government will renege on its financial commitment to pick up nearly all the costs of the expansion.

There is no evidence to support this claim.  President Obama had previously supported two Medicaid savings proposals that would shift some costs to states, which health reform opponents cited as showing that federal deficit reduction almost certainly will force states to bear a greater cost of the expansion.  But, he dropped those proposals from his latest budget and the Administration has made clear that it now opposes them.  Since the Supreme Court made the Medicaid expansion a state option, the Administration recognized that such proposals could deter states from adopting the expansion — and it has now reaffirmed the federal government’s commitment to financing nearly all expansion costs under health reform without new cost shifts to states.

Ironically, some of the same members of Congress who oppose the Affordable Care Act (ACA) and would like to repeal it — or, if they can’t achieve that goal, impede and limit it — are proposing cost-shift proposals of their own.  Last week, House Energy and Commerce Chairman Fred Upton and Senator Orrin Hatch, the Finance Committee’s top Republican, proposed a “per capita cap” on federal Medicaid funding, which would limit each state to a fixed dollar amount per beneficiary.  As we explain in a new Center analysis, federal funds under this proposal would likely become increasingly inadequate over time.  States would either have to devote more of their own funds to Medicaid or, as is more likely, cut their Medicaid programs deeply.  Earlier, as part of his budget plan, Chairman Ryan himself proposed to convert Medicaid into a block grant and cut federal funding for states by nearly one-third by 2023, in addition to proposing health reform’s repeal.

From the standpoint of their proponents, these proposals to significantly scale back Medicaid would advance two goals.  First, they would help secure major federal savings by cutting federal programs (especially programs targeted on people of modest means, who have only modest political influence) without having to scale back any tax breaks for high-income households.  Second, they would undermine a key element of health reform.

State officials should view the Upton-Hatch and Ryan Medicaid proposals in this light.  And, they should understand that such proposals face intense opposition — they cannot secure 60 votes in the Senate or a presidential signature.

The federal commitment to fund nearly all of the costs of the Medicaid expansion — as the ACA promises — stands.

As expected, President Obama’s new budget does not include two Medicaid savings proposals that would shift costs to states and which the Administration has previously supported.  This should put to rest health reform opponents’ claims that federal deficit reduction efforts will require states to pay a greater share of the expansion costs than health reform requires now — and their conclusion that states must thus pass up the opportunity to expand the program to millions more uninsured and underinsured low-income individuals and families.

Last year’s Supreme Court decision upholding health reform (the Affordable Care Act, or ACA) gave states the choice of whether to implement the Medicaid expansion.  The expansion is a very good financial deal for states.  The federal government will pay nearly all of the expansion costs — 93 percent over the first nine years (2014-2022), according to Congressional Budget Office estimates from last year.  That’s because the federal government will pick up 100 percent of the cost of the expansion to newly eligible individuals for the first three years and no less than 90 percent of the cost on a permanent basis.

Some state policymakers who oppose their state taking the expansion contend that the federal government will renege on its financial commitment by shifting costs to states and effectively increase how much states will have to pay.  As evidence, they cited two Administration deficit reduction proposals:  to establish a “blended rate” for Medicaid and the Children’s Health Insurance Program, and another to restrict states’ use of provider taxes to finance their Medicaid programs — both of which would raise state Medicaid costs.

The Administration, however, first proposed these measures in 2011, when the Medicaid expansion was required of all states and well before the Supreme Court decision made it an option.  By dropping these proposals from this year’s budget, the Administration is appropriately taking into account how deficit-reduction proposals could deter states from adopting the Medicaid expansion and affirming the federal government’s commitment to financing nearly all expansion costs under health reform.  (The budget includes about $22 billion in Medicaid savings over the next 10 years in the areas of prescription drugs, durable medical equipment and fraud and abuse, but none of those savings result from cost shifts to states.)

As National Economic Council Director Gene Sperling stated in January, states should expand Medicaid “with the understanding that the rug will not be pulled out from underneath them” and that “[w]e are not willing to accept even the Medicaid savings that we had once put on the table … Medicaid savings, Medicaid cuts, for this administration, are not on the table.”

The federal government announced on April 1 its final 2014 payment rates and policies for private “Medicare Advantage” plans that serve some Medicare beneficiaries.  Because this announcement from the Centers for Medicare and Medicaid Services (CMS) may be portrayed as reversing new cuts to Medicare Advantage plans (in addition to the cuts that health reform requires) that the Administration previously proposed, we should understand what the Administration had proposed and what it later decided.

• As we previously explained, the Obama Administration (through CMS) actually didn’t propose any new Medicare Advantage payment cuts in its preliminary February 15 announcement.  It merely applied existing law, reflecting how health reform and the historical slowdown in Medicare costs would affect Medicare Advantage payment rates.  Some factors that help determine Medicare Advantage payments in a particular county for the coming year are generally based on the estimated per-beneficiary cost of furnishing Medicare-covered services.  Because spending per beneficiary grew slower than originally estimated in recent years and is now expected to grow slower in subsequent years than previously projected, the preliminary overall payment rates to Medicare Advantage plans were lower than what insurers had been forecasting.
• The final April 1 payment announcement did not change the underlying formula for calculating these factors.  It did, however, change the timing of how Medicare Advantage payment rates are adjusted to reflect Congressional action that prevents cuts in physician payments under the “Sustainable Growth Rate” (SGR) formula.  Under its longstanding practice, CMS assumes, in setting Medicare Advantage payment rates for the following year, that the SGR cuts will take effect as required under law.  If the Administration and Congress subsequently take steps to prevent the cuts from taking effect (as they have repeatedly done, including for 2013), CMS adjusts the next year’s Medicare Advantage rates to take that into account retrospectively.

The final announcement moves up the timing of these SGR adjustments.  It now assumes that no SGR cuts will occur in 2014, which means CMS will not need to make a SGR adjustment for preliminary 2015 rates when it announces them early next year.  (By moving the 2013 SGR adjustment and the 2014 SGR adjustment into a single plan year — 2014 — the final announcement now institutes a one-time, larger-than-expected increase in payment rates.  Insurers should not expect this effect in the 2015 rates.)

Despite the attention that this year’s payment announcements received, we should remember that while health reform began scaling back Medicare Advantage overpayments last year, it will continue to cost Medicare more, on average, to cover comparable beneficiaries in private plans than in traditional Medicare even when health reform’s Medicare Advantage provisions are fully implemented.

Moreover, even if Congress went further and required that Medicare Advantage plans be paid no more than what fee-for-service Medicare costs, they would still receive excessive payments.  That’s because such plans continue to enroll healthier-than-average, and hence lower-cost, beneficiaries and Medicare’s “risk adjustment” mechanism cannot fully account for these differences in health status in determining plans’ payment rates.

Nevertheless, insurers are aggressively lobbying to repeal or scale back health reform’s Medicare Advantage payment provisions.  These provisions are sound, however, and the Administration and Congress should resist efforts to undermine them.

House Budget Committee Chairman Paul Ryan’s new budget again proposes to radically restructure Medicaid by converting it into a block grant and slash federal Medicaid funding by $810 billion over the next decade.  He would also repeal health reform’s Medicaid expansion.  All told, it would add tens of millions of Americans to the ranks of the uninsured and underinsured.

Repealing the Affordable Care Act’s Medicaid expansion means that up to 17 million people would no longer gain Medicaid coverage (17 million is the Congressional Budget Office’s estimate of the number of people who would gain coverage if all states adopted the expansion).  In addition, the large and growing cut in federal Medicaid funding that would result from the block grant would almost certainly force states to sharply scale back or eliminate Medicaid coverage for millions of low-income people who rely on it today.

Under the Ryan plan, the federal government would no longer pay a fixed share of states’ Medicaid costs.  Instead, states would get a fixed dollar amount that would rise annually only with inflation and population growth.

• The block grant would cut federal Medicaid spending by $810 billion over the next ten years, from 2014-2023, according to Ryan’s budget plan.  (It is conceivable that a small share of these cuts could come from the Children’s Health Insurance Program (CHIP), which the Ryan budget would merge into its new Medicaid block grant.)  This would be an estimated cut to federal Medicaid and CHIP funding of about 21 percent over ten years compared to current law and doesn’t count the loss of the large amount of additional funding that states would receive to expand Medicaid, as well as of the funding provided under a two-year extension of CHIP, in health reform.

• Block grant funding amounts would fall further and further behind state needs each year.  The annual increase in the block grant amounts would average about three percentage points less than Medicaid’s currently projected growth rate over the next ten years, which accounts for factors like rising health care costs and an aging population.  Federal Medicaid and CHIP spending in 2023 would be $150 billion less — or 31 percent less — than what states would receive under current law, according to the Ryan budget (see graph).  And the cuts would keep growing after 2023.

• The loss of federal funding would be even greater in years when enrollment or per-beneficiary health care costs rose faster than expected, such as during a recession or after the introduction of a new, breakthrough health care technology or treatment that improved patients’ health but increased cost.  Currently, the federal government and the states share in those unanticipated costs; under the Ryan plan, states alone would pay them.

As CBO concluded when it analyzed the similar Medicaid block grant proposal from last year’s Ryan budget plan, “the magnitude of the reduction in spending . . . means that states would need to increase their spending on these programs, make considerable cutbacks in them, or both.  Cutbacks might involve reduced eligibility . . ., coverage of fewer services, lower payments to providers, or increased cost-sharing by beneficiaries — all of which would reduce access to care.”

In making these cuts, states would likely use the expansive new flexibility that the Ryan plan would give them.  For example, the plan would likely let states cap Medicaid enrollment and turn eligible people away from the program; under current law, states must accept all eligible individuals who apply.  It also would likely let states drop certain benefits that people with disabilities or other special health problems need.

The Urban Institute estimated that Chairman Ryan’s block grant proposal of last year would lead states to drop between 14.3 million and 20.5 million people from Medicaid by 2022 (outside of the effects of repealing health reform’s Medicaid expansion).  That would result in cuts in enrollment of between 25 percent and 35 percent.  The Urban Institute also estimated that the block grant likely would have resulted in cuts in reimbursements to health care providers of more than 30 percent by 2022.  There is no reason to think that this year’s proposal would result in cuts that are any less draconian.