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.

Health care cost growth has slowed substantially, as the latest projections from the Congressional Budget Office (CBO) make clear  Since late 2010, CBO has reduced its projection of cumulative Medicare and Medicaid spending over the 2011-2020 period by $900 billion (or nearly 10 percent over that period).

That date’s important because it was in late 2010 — and based on CBO’s August 2010 projections — when fiscal commission co-chairs Erskine Bowles and Alan Simpson issued their original budget proposal, which called for over $300 billion in Medicare cuts and nearly $60 billion in Medicaid savings through 2020. The original Bowles-Simpson proposal is often considered an appropriate benchmark for evaluating other deficit-reduction plans.

The figure below compares CBO’s Medicare and Medicaid projections from August 2010 with the projections that CBO released last week.  (The note to the figure explains adjustments that we have made to provide comparability.)  Medicaid spending is $311 billion lower, and Medicare outlays have come down by $590 billion — far more than the savings that Bowles-Simpson recommended.

No one knows how long this good news will continue.  Some analysts conclude that fundamental changes in the health care system are responsible for most of the slowdown in cost growth.  Others find that the recession is the primary factor, with systemic changes less important.

Even if cost growth remains moderate, however, Medicare and Medicaid spending will keep rising as more baby boomers become eligible for benefits.  Making the U.S. health care system more efficient thus remains a major budget challenge.

But CBO’s new projections provide further evidence that Medicare and Medicaid are not in crisis.  Responsible reforms, such as those in President Obama’s budget (which would produce $400 billion in health care entitlement savings in the next ten years and $1trillion in savings in the subsequent decade), can help restore fiscal responsibility without shifting costs to vulnerable beneficiaries or states.  There is no need for sweeping and misguided changes, such as establishing a per capita cap in Medicaid or raising the age of eligibility for Medicare.

The House is expected to vote today, for the 37^th time, to repeal part or all of health reform.  Nevertheless, in the nearly two and a half years since the first such vote, health reform has made significant progress in achieving its basic goals: helping more Americans get affordable coverage, protecting consumers, and slowing cost growth across the health care system, both public and private.

Here’s a look at some of health reform’s accomplishments to date:

• Health insurance for millions of young adults. Before health reform, young adults were more likely to be uninsured than any other age group. To help address this problem, health reform requires insurers and employers that offer dependent coverage to allow parents to include children up to age 26 on their insurance plans.  That’s a big reason why 3.1 million more young adults had health insurance in December 2011 than in September 2010, according to the Department of Health and Human Services (HHS).

• Free preventive care for tens of millions of Americans. Insurance companies now have to cover preventive care services at no charge, and Medicare provides preventive services without cost sharing, too.  As a result, nearly 105 million Americans received free preventive health care in 2011 and 2012, according to HHS.

  Preventive care includes screenings for chronic illnesses like diabetes and cancer, routine vaccines for adults and children, and other recommended care for kids, such as regular doctor visits.

  Better access to preventive care will help millions of families with their budgets and likely produce other benefits, such as fewer unnecessary deaths from disease, less spending on costly and avoidable illnesses, and a healthier population overall.

• Protections for children and adults with serious illnesses. Health reform bars insurers from denying coverage to children with pre-existing health conditions like cancer, autism, or diabetes.  As a result, for the first time in most states, families with children with serious illnesses, chronic conditions, or special health care needs can buy coverage for their children in the individual health insurance market.

  Also, health reform’s ban on “lifetime limits” on health benefits means that people who get a serious illness won’t have to worry that their benefits will run out or that expensive treatments will push them into bankruptcy — or worse, that coverage limits will prevent them from getting lifesaving care.

• More affordable prescriptions for more than 6 million seniors. Health reform has begun to close the “doughnut hole,” the gap in Medicare prescription drug coverage that many seniors experience once their annual drug costs exceed $2,930.

  Before health reform, seniors had no additional coverage until their costs hit about $6,600.  Now, seniors receive a 52.5 percent discount on brand-name drugs and a 21 percent discount on generic prescription drugs while they are in the coverage gap.

  More than 6 million Medicare beneficiaries have saved more than $6.1 billion as a result of these changes, according to HHS.

• Initial steps to help slow health care costs. Some of health reform’s cost-control provisions, such as cutting overpayments to the private insurance plans that participate in Medicare, are already producing savings.  Other steps are underway to make the health care system more efficient by rewarding effective, high-value health care, although they may not yield results for several years.

  For example, Medicare is cutting payments to hospitals with high readmission rates in order to encourage them to prevent more avoidable readmissions.  Also, many physician-led “accountable care organizations” are up and running.  These organizations are structured to encourage health care providers to take responsibility for the cost and quality of care they deliver, potentially reining in costs.

Related Posts:

• User-Friendly Applications Will Help Uninsured Gain Coverage
• Exchanges Will Offer Consumers Better Choices in Every State
• Want More Low-Income Workers to Have Health Coverage? Expand Medicaid.

In a new commentary, CBPP President Robert Greenstein explains that the President’s proposed changes affecting Medicare beneficiaries would produce much larger savings than many observers recognize.  For example:

• The President’s new budget would save $400 billion in health care entitlements in the first ten years but over $1 trillion in the second ten years, according to the Office of Management and Budget (OMB).

• The budget would save more from Medicare in both the first decade and the second decade than the House-passed Ryan budget — yet virtually no one criticizes the Ryan budget for not doing enough regarding Medicare.

• OMB estimates that, even without the Independent Payment Advisory Board, which can generate further proposals to constrain Medicare costs, those costs under Obama’s budget would grow only slightly more on a per beneficiary basis over the next ten years than the growth rate in gross domestic product (GDP) per capita plus 0.5 percentage points — a target considered virtually unattainable just a few years ago.

As the commentary explains, some of the budget’s Medicare changes — including all of its changes affecting beneficiaries — phase in slowly and secure the bulk of their savings after the first ten years, when we will need them most because budget deficits are projected to then start widening again.  These slow phase-ins also are likely to be essential to ensuring that the changes are both politically acceptable and sustainable.

Click here for the full commentary.

To complement our statement on the President’s fiscal year 2014 budget, we’ve issued a report on its key elements.  Here’s the opening:

The President’s 2014 budget is presented in two parts.  One part includes the package of deficit- reduction policies that the President included in his last offer to Speaker Boehner during the “fiscal cliff” negotiations in December 2012.  This package would reduce the deficit by $1.8 trillion over the next decade and go somewhat beyond stabilizing the debt as a share of the economy, setting it on a slight downward path.  When coupled with the deficit-reduction steps that the President and congressional leaders already have enacted, this package would bring total deficit reduction achieved to $4.5 trillion over the decade.

The Administration has said that Congress could consider this deficit-reduction offer separately from the other proposals in the President’s 2014 budget.

While much attention in the coming weeks will focus on the deficit-reduction package, the rest of the President’s budget includes important proposals that also deserve serious consideration.  These include proposals to expand access to high-quality early education, funding to upgrade the nation’s transportation infrastructure, and measures such as the “Pathways Back to Work” fund to help people struggling in today’s labor market to prepare for and find jobs.  Taken together, the proposals are fully paid for and actually reduce the deficit slightly.

Click here for the full report.