By James D. Agresti
August 20, 2012
In a high-stakes battle for the votes of senior citizens, Romney, Obama, and their respective supporters have been trading barbs about the candidates’ competing plans for Medicare. Obama and his supporters claim that Romney and Ryan want to throw grandma off the proverbial cliff, while Romney and company are saying that Obama is looting Medicare to pay for “a massive new government program that’s not for you”—namely, “Obamacare.” Naturally, the press and internet are abuzz with articles, editorials and fact-checks, many of which contradict each other.
At the root of this debate are some harsh realities about government spending on healthcare. Mandatory federal healthcare programs, which are those that can spend taxpayer money without Congress passing annual spending bills, only consumed 4.7% of federal revenues in 1970. This figure grew to 37% by 2010, and if current polices continue, the Congressional Budget Office has projected that these mandatory programs (Medicare, Medicaid, the Children’s Health Insurance Program, and Affordable Care Act insurance subsidies) will devour 50% of federal revenues by 2030 and 70% by 2050.
Medicare, in particular, faces daunting challenges due to the retirement of baby boomers and the trend of increasing life expectancy. Presently, for every person who is 65 and older, there are 4.4 people in their prime working years (ages 20-64). The Social Security Administration estimates that this ratio will plummet by 39% over the next 20 years, which means that considerably more people will be receiving Medicare benefits and relatively fewer will be paying for them.
Bottom line: even under optimistic assumptions that Medicare’s actuaries say are “not reasonable as an indication of actual future costs,” the program is projected to run a $101,000 actuarial deficit per person for all current participants in the program (both beneficiaries and taxpayers). Using more realistic assumptions, the actuaries estimate that this shortfall may be 50% higher.
Enter two competing visions for Medicare, both of which aim to control the program’s costs: (1) The Affordable Care Act, generally known as Obamacare, which became the law of the land after Democrats passed it through Congress in 2010 while 100% of Republicans in both the House and Senate voted against it. (2) Paul Ryan’s “Path to Prosperity,” which Republicans passed through the House this spring and failed to move through the Senate while all Democrats voted against it in both chambers. The aspects of this plan that pertain to Medicare are mirrored in broad outline on Romney’s website, although Romney has emphasized that his plan differs from Ryancare in that nothing will change for current beneficiaries or those nearing retirement.
The primary means by which the Affordable Care Act attempts to restrain Medicare’s costs is by the use of price controls. For various reasons, healthcare spending per person has increased much faster than the rate of inflation and the growth of the economy over the past 50 years. Obamacare attempts to put the brakes on this by limiting what Medicare will pay for certain healthcare services. As explained by Medicare’s actuaries, the Affordable Care Act incrementally cuts Medicare prices “for hospital, skilled nursing facility, home health, hospice, ambulatory surgical center, diagnostic laboratory, and many other services” over the next 75 years to “less than half of their level under the prior law.”
This price-control approach has significant consequences for Medicare patients. The program’s actuaries project that by 2085, Medicare payment rates for inpatient hospital services will have sunk to 33% of private health insurance payment rates, causing “withdrawal of providers from the Medicare market” and “severe problems with beneficiary access to care….” Yet, even with these cuts, Medicare will run the above-cited $101,000 deficit per person.
Ryancare takes a distinctly different approach to curbing the costs of Medicare. First, it partially compensates for increasing life expectancy by raising the Medicare eligibility age for new enrollees by two months per year between 2023 and 2034. This increases the eligibility age from 65 to 67 over this period, much like a 1983 law does for Social Security. Second, starting in 2023, it gives new enrollees the option to buy private health insurance subsidized by Medicare with the expectation that competition between the insurance companies will help control costs. Third, starting in 2023, it limits how much Medicare will spend on average to insure each new beneficiary, which will be significantly less than spending would have been under current law.
Essentially, Ryancare incentivizes future Medicare beneficiaries to be more frugal consumers of healthcare by making them liable for more of the costs. The CBO estimates that by 2050, spending for new enrollees under this plan will be about 35% less than under existing law. CBO’s economic analysis states that the implications of these cuts are “unclear,” but possible consequences include … reduced access to health care; diminished quality of care; increased efficiency of health care delivery; less investment in new, high-cost technologies; or some combination of those outcomes. In addition, beneficiaries might face higher costs, which could in turn reinforce some of the other effects.”
On the other hand, multiple studies on the consequences of cost sharing have found almost no negative effects on patients’ health, even for older, sickly patients. For example, a 2001 study in the American Journal of Public Health “found no association between cost sharing and health status at baseline or follow-up” for “an older, chronically ill population.” Likewise, from 1974-1982, the Rand Corporation conducted a rigorously controlled study on cost sharing, which found that health insurance beneficiaries with higher copays spend far less with “little or no” negative effect on their health—except for the poorest 6% of the population. Ryan’s plan seemingly anticipates such results by providing added support to low-income seniors.
Beyond the big pictures outlined above, the complexity of the federal healthcare system and Obamacare in particular have made these matters easily prone to spin. A good deal of this confusion can be eradicated by debunking some of the most common fallacies, three of which are detailed below.
The Romney campaign is running an ad called “Paid In,” which states, “You paid into Medicare for years—every paycheck. Now when you need it, Obama has cut $716 billion from Medicare.” The clear message is that Obama is robbing people of what they paid into Medicare, but the truth is that Medicare is highly dependent upon general revenues not financed by Medicare taxes. In 2010, for example, 39% of Medicare funding came from general revenues.
Conversely, PolitiFact and FactCheck.org are claiming that the Affordable Care Act doesn’t actually “cut” Medicare because the program’s spending will rise in its wake, just not as steeply. Such arguments are rooted in a fundamental misconception about how Medicare works. Again, Medicare is a mandatory program, and its funding is generally “authorized by permanent laws” that set spending levels through “eligibility rules and benefit formulas.” Thus, as more people enter Medicare and as the costs of healthcare rise, these formulas automatically adjust spending to compensate for such factors. By changing these formulas, Obamacare cuts Medicare by $716 billion over the next ten years relative to what it would have been otherwise and by far more in years to come.
Some individuals, such as Mark Miller of Reuters, argue that the $716 billion in cuts “are mostly meaningless to patients” because they primarily cut payments to healthcare providers and insurance companies. Miller claims this won’t affect access to healthcare because Medicare patients currently have few problems in this respect. While this is true right now, it may cease to be so if the program cuts payments to healthcare providers. In fact, this is precisely what occurred in the wake of a 1997 law that was intended “to limit growth in spending on physician services to a sustainable rate, roughly in line with the rate of overall economic growth.”
That ill-fated effort lasted for five years, and in 2002, the New York Times reported: “For the first time, significant numbers of doctors are refusing to take new Medicare patients, saying the government now pays them too little to cover the costs of caring for the elderly.” Thus, ever since 2003, various congresses and presidents have legislatively overridden this so-called “sustainable growth rate” to ensure that Medicare patients have access to care. However, instead of removing this provision entirely, lawmakers have temporarily overridden it, which has the effect of skewing Medicare’s financial projections to make it seem as though future costs will be far lower than they actually will be.
When all is said and done, Medicare is facing severe financial problems, and the government’s ability to deal with these is hindered by a swelling national debt. The magnitude of these problems demands solutions that inevitably will require sacrifice, and when politicians, journalists and commentators mislead Americans about these issues, they hinder public support for actions that could genuinely help. This, in turn, makes the situation worse, because as explained by the CBO, “postponing action would substantially increase the size of the policy adjustments needed to put the budget on a sustainable course.”