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A Mistaken Prognosis for Medicare

Thursday, August 5, 2010

The Obama administration is again claiming that the new healthcare law will strengthen Medicare, this time by conveniently cutting out the uglier findings of an earlier report.

This week the Obama administration released a report claiming that the new healthcare law will strengthen Medicare. This is a familiar theme from an administration that has received low marks from seniors, who instinctively know that cutting Medicare spending by $575 billion over the next decade will probably not do them any good. A cynical mind might also conclude that releasing this self-congratulatory message three days before the annual Medicare Trustees Report was meant to deflect attention from more bad news.

This most recent attempt to convince seniors that healthcare overhaul makes Medicare more responsive to their needs comes from Health and Human Services Secretary Kathleen Sebelius, who presented her report in a press conference on August 2. The report was carefully crafted to present the changes made to Medicare by the new healthcare law, the Patient Protection and Affordable Care Act (PPACA), in their best light.

There is little new in the secretary’s report. In fact, most of it is drawn from an April 22 analysis by Richard Foster, chief actuary for Medicare. But the ugly parts of that earlier study were left out, making the new report G-rated—suitable for gullible audiences only.

A decidedly less optimistic view will be presented by the Medicare Trustees—which includes Sebelius, along with the Secretaries of Labor and the Treasury—in their report, expected on August 5. The Trustees are required by law to issue in their report a prognosis on Medicare’s financial health—and it is failing. The new healthcare law buys some time for Medicare’s hospital insurance (HI) trust fund, which will run out of money in 2029 instead of 2017. But even that improvement is an illusion, and the program's ability to finance healthcare for seniors remains in jeopardy.

Here are some outtakes the administration felt should not be shown to the public:

• The cuts are unsustainable. The PPACA introduces stringent new price controls that set ambitious productivity improvement targets for healthcare providers. The April report observes that providers are unlikely to meet those targets. That means providers will have to absorb more of the cost of serving Medicare patients.

• Access to care for seniors is jeopardized. The April report says that roughly 15 percent of providers under Medicare Part A—that’s hospitals, skilled nursing facilities, home health agencies, and hospices—would become unprofitable over the next decade. Some of those providers could drop out of Medicare rather than continue to take sharp losses.

• Almost 15 million seniors will lose benefits and pay higher costs because of cuts to Medicare Advantage (MA). That’s the number of people who would have enrolled in MA plans in 2017. The April report says that MA benefits will be less generous as a result of $145 billion in cuts through 2019. Consequently, half of those 15 million enrollees will drop their MA plan. The rest will see higher copayments and less coverage for services not covered by traditional Medicare, such as dental care, eyeglasses, and hearing aids. The Congressional Budget Office (CBO) estimates that the loss of benefits in 2019 will average about $800 a year.

• Medicare savings under PPACA will not be used to shore up the program’s finances. Instead, PPACA uses those savings to pay for expansions of Medicaid and new insurance subsidies for people under age 65. The April report observes that the government cannot use the same dollar savings to extend Medicare’s trust fund and finance other federal programs—the CBO says that this is essentially double-counting—but this seems to have been rejected by Sebelius.

• In his April report, the Medicare actuary does not even agree with all of the cuts listed in the new report. The administration wants to promote “accountable care organizations,” which are intended to bring managed care incentives for efficiency to fee-for-service Medicare. The actuary gives no savings for this provision, which is more a concept than a concrete proposal. But the administration’s report simply uses CBO’s estimate of $4.9 billion in savings over the next ten years.

The administration has not leveled with seniors about what the healthcare overhaul could mean for them, and they know it. According to a poll conducted by the Kaiser Family Foundation in July, 48 percent of seniors said they would be worse off under healthcare reform, while only 23 percent said they would be better off.

The fears are very specific: 57 percent of seniors think reform will make it more difficult to find a doctor when they need one, and 45 percent think that reform will weaken Medicare’s financial condition. These may be fears, but they are not irrational.

Ignoring the real problems of the Medicare program, which have been compounded by the healthcare overhaul, will not make them disappear. Seniors know that. Democrats should not hope that they can raise their standing with that important voting bloc in time to save the fall elections.

Joseph Antos is the Wilson H. Taylor Scholar in Health Care and Retirement Policy at the American Enterprise Insitute. Antos is a discussant at an AEI event on August 6 entitled “Medicare after Reform: The 2010 Medicare Trustees Report.”

FURTHER READING: Antos also described “This Is How the Healthcare Overhaul Ends” in February, “Reform Essentials,” “Rethinking Health Reform,” and, with Thomas Miller, “A Better Prescription” for healthcare reform.

Image by Rob Green/Bergman Group.

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