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$716 Billion is A Lot of Money to Waste

$716 Billion is A Lot of Money to Waste

Americans generally agree that $716 billion is a lot of money to waste. Yet that is the total amount of money that the Republican presidential ticket believes should be returned to the Medicare budget. Contrary to everyday experience, returning these funds to Medicare would actually be a waste of money: shortening Medicare’s period of fiscal solvency and increasing costs to beneficiaries of the program.


Medicare was established by Congress in 1965. Original Medicare consists of two parts: Part A covers hospitalization and other institutional care, while Part B covers payments to physicians and other care providers. The Medicare payroll tax provides the funding for Medicare Part A for anyone age 65 and older who has paid the tax for 40 quarters or more. Non-employed spouses are covered based on their employed spouse’s work and payroll tax payment history. Persons over 65 who do not qualify for coverage based on employment history may participate in Medicare Part A by paying an annual premium — just as they would for any other insurance plan.

Part B Medicare is funded by premium payments made by beneficiaries. These premiums rise over time and, like any insurance plan’s premiums, are based on the cost of providing care. When the cost to the federal government to pay for non-institutional-based medical services rises, beneficiary premiums rise as well.

Both Part A and Part B Medicare include deductibles. The Part A deductible can be incurred multiple times in a year by any individual beneficiary who has multiple hospitalizations. The Part B deductible is only incurred once per year. Additionally, Medicare beneficiaries pay a fixed percentage of the cost of care received, based on the prices set for services by the federal government.

Original Medicare did not include coverage for outpatient prescriptions. Preventive care and exams were subject to the annual Part B deductible. No coverage was included for vision, hearing, dental, long term care and other health related services. Nevertheless, the program was extremely successful in ensuring that Senior Citizens (those age 65 and older) did not have to face their “Golden years” without assurance of affordable health care.

Cost, Quality, and Access Issues

For the federal government, the story was not so bright. In order to keep prices reasonable, premiums could not be as high as the private sector insurers would charge for the same benefit package. Retired people would not be able to afford the insurance if it were. But the cost of providing the care kept rising. Payroll taxes could not politically be raised high enough to fund the entire program. Cost containment efforts became essential. Economies of scale were employed to reduce costs wherever possible. Fee schedules were established setting payment amounts for medical conditions that would be paid by the federal government to any and all Medicare providers. Limits were placed on amounts that providers could charge beneficiaries in addition to the basic Medicare payment. Medicare fee schedules had the effect of reducing the amounts paid by insurers across the board to health care providers, since private insurers adopted Medicare’s payment schedule as the basis for their own payment schedules.

One idea to contain costs was to use Health Maintenance Organizations (HMOs) as Medicare providers. Beginning in the early 1970s, HMOs set up plans for their older members, accepting fixed payments (capitation) per member from the government for providing necessary care. HMOs provided higher levels of preventive care and services to their members as a means of keeping costs under control. Sick members require more care than healthy ones!

Medicare Part C

Still, the cost of health care in general continued to rise in the following decades and Medicare was not exempt from the increases. In 1997, a new idea was proposed and passed by a Republican Congress (House and Senate). The private insurance option would be offered on a broader scale to Medicare beneficiaries. This was expected to introduce free market competition and result in lower cost of care. Part C Medicare, Medicare + Choice, was opened to participation by non-HMO insurance companies.

Part C plans completely replace original Medicare for beneficiaries. The member pays the Part B premium (and Part A if he or she is required to do so), but the federal government passes the funds for Parts A and B directly to the insurance companies. Private insurers are required to provide plans that are at least as good as original Medicare. They are also allowed to offer other benefits as well.

Most Part C plans were designed as managed care plans, either Preferred Provider Organizations (PPOs) or HMOs, though some private fee-for-service plans (PFFS) were also established. Managed care plans require their members to use network providers to obtain the best prices for care. A complex calculation was established to determine whether an additional premium would be required of members to pay for the extra services/benefits offered by any particular Part C plan. Plans were not required to charge any additional premium, but they could offer more benefits to their members if they chose to do so. Many plans did include additional benefits to enhance the health and well-being of their members, thereby helping to control costs.

Part C plans worked well in urban areas, as seen with the Medicare HMOs, but rural areas were under-served and costs didn’t come down as hoped. So as early as 1997, Congress made the decision to subsidize the insurers so they would offer the plans in rural areas too. An additional payment, over and above the cost of original fee-for-service Medicare (Parts A & B), was paid for each person covered by a Part C plan. Insurers loved it. The cost of care and of Medicare, however, continued to rise.

By 2008, the subsidy reached 12.4% above the A and B premiums and it was clear that the subsidies and public/private partnership were not effective in restraining the cost of Medicare to the federal budget. It was decided to phase out the subsidy payments gradually, beginning in 2010 and continuing until they would be completely eliminated by 2019. The estimated savings in 2019 alone for doing this would be $136 billion.

The Affordable Care Act Incorporates this Plan

When the Affordable Care Act was passed in 2010, the program of phasing out the subsidies to private insurers for the Advantage plans was included as part of the money-saving provisions that would help free-up resources for providing basic preventive care services at no cost to all beneficiaries. Funds saved would also help close “the donut hole” of the Medicare Part D (Prescription Drug plans). In 2010, the savings were estimated to be $500 billion over 10 years. By 2012, with the higher cost of care and more beneficiaries, the 10 year savings estimate has risen to $716 billion.

Part of the $716 billion savings is also due to reductions in the payments made to institutional providers (hospitals and other facilities). Both the private insurance companies and provider groups agreed to these reductions based on the fact that adding an additional 30-40 million paying customers would outweigh the costs to their bottom lines. More people purchasing insurance allows lower average prices for all by spreading the risk of a loss more broadly. Having insured patients cuts costs for uncompensated care incurred by providers who, under today’s system, must charge everyone else more to recoup the costs of the “charity care” they are required by law to provide for people who arrive at emergency rooms suffering a life-threatening emergency but without insurance or ability to pay for their care. (If it’s not defined as life-threatening, and if there’s no insurance or means of paying in advance, no care has to be provided.)

Cutting the Funding to Save the Program?

The $716 billion, if returned to Medicare and its current use, would simply line the pockets of hospitals and private insurance companies. It would be a continuation of the subsidies that increase the cost of Medicare A & B for all beneficiaries, leading to increased Part B premiums, higher Part A and B deductibles, and a shortened period of solvency for the Medicare program.

And so, after looking at the history of Medicare, we arrive at a counter-intuitive end: the best way to assure the long term survival of Medicare and to keep costs to beneficiaries and the federal government under control is to remove $716 billion from Medicare Part A and Part B payments to private insurers for Part C (Medicare Advantage) plans.

Note: the history of Medicare Supplement plans and of Medicare Part D (established in 2003) is not addressed here. They have their own complex stories and will be addressed in other posts.


The Continuing Cost of Privatization

How will the Medicare Advantage Cuts Affect Me?

The Henry Kaiser Family Foundation: Explaining Health Reform — Key Changes in the Medicare Advantage Program





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