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Washington Examiner


Obamacare Doesn't Work in the Real World

August 11, 2010

By Paul Howard

During last year’s health care debate, the Obama administration used a convincing catchphrase to push wavering legislators to pass the Patient Protection and Affordable Care Act (ACA): “Healthcare reform is entitlement reform.” In a nutshell, the administration argued that the new law would rein in unsustainable Medicare spending, improve Medicare’s long-term fiscal outlook, lower the budget deficit, and free up hundreds of billions to spend on expanding health insurance coverage.

It was, in short, the policy equivalent of a grand slam.

On one level, the recently released 2010 Medicare Trustees Report appears to vindicate the president’s strategy. It notes that ACA will extend Medicare’s hospital insurance trust fund an additional 12 years (from 2017 to 2029) and cut trillions from long-term Medicare expenditures. If everything plays out according to how the law is written, total Medicare expenditures as a percentage of GDP would dip to 3.91 percent in 2020 (versus 4.53 percent before ACA) and to 6.37 percent by 2080 (versus 11.18 percent before ACA). These would be huge improvements.

However, the Trustees’ report contains crucial caveats. The Trustees are required to describe Medicare’s finances based on current law--even if the ACA and other current law (like the mandated cuts to physician payments under Medicare) will never be implemented as written. Medicare Chief Actuary Richard Foster concedes as much in an appendix to the report, where he bluntly notes:

“...[T]he financial projections shown in this report for Medicare do not represent a reasonable expectation for actual program operations in either the short range (as a result of the unsustainable reductions in physician payment rates) or the long range (because of the strong likelihood that the statutory reductions in price updates for most categories of Medicare provider services will not be viable.” [Emphasis added]

ACA also creates substantial new government subsidies for private insurance coverage and a large new Medicaid expansion--to the tune of about $400 billion over the next ten years. If the new law doesn’t play out as expected, there is a sharp risk of higher federal deficits in the short and long term - making real reform that much harder.

Let’s stipulate that finding ways to effectively and gradually reduce health care spending can free up funds for other critical priorities - like expanding health care coverage to the uninsured. But the ACA as written simply assumes large reductions in Medicare spending. Neither the president nor his congressional allies explain how these reductions can be implemented without catastrophic impact on seniors’ access to care.

This leads Foster to his central argument: rather than face the draconian consequences of its decisions, Congress will step in to prevent the cuts and restore services.

Foster singles out two areas where scheduled cuts are likely to prove unsustainable: First, Medicare payments to physicians under the “sustainable growth rate formula” are scheduled to be slashed by 30 percent over the next three years, starting with a whopping 23 percent reduction on December 1. Legislative history suggests that this will not happen; Congress has postponed those cuts every year since 2002. Nonetheless, those reductions are still included in the Part B savings for physicians’ services in the Trustees report.

Next, the ACA specifies that all payment updates for hospitals and nursing homes will be reduced by a non-farm productivity factor “beginning as early as 2011.” The problem, (noted in a memo from the Office of the Actuary) is that, historically, productivity gains in health care lag far behind gains in the rest of the economy because of the “labor intensive nature of health services, and the individual customization of treatments required in many instances.”

Over time, these automatic reductions will widen the gap between what Medicare pays and the costs providers actually face. The Office of the Actuary estimates that by 2019, Medicare payment rates would be lower than those currently paid for Medicaid (which already pays much less than private insurance).

In the long run, Medicare payments would dip to “one-third of the relative current private health insurance prices and half of those for Medicaid,” according to the actuaries’ memorandum. “Medicare beneficiaries,” their memo notes, “would almost certainly face increasingly severe problems with access to care.” Increasing numbers of Medicare providers would be driven into the red by these payment cuts, with 15 percent becoming unprofitable by 2019, 25 percent by 2030, and 40 percent by 2050.

The Office of the Actuary consulted with several prominent health economists and reports that “all of them believed that the payment reductions were unsustainable.” To measure the difference between current law and what is likely to happen, Medicare actuaries created an “illustrative alternative scenario” in which the Medicare physician cuts are permanently overridden (as many expect them to be) and the ACA payment adjustments are phased out over 15 years, starting in 2019.

The result: the ACA looks much less effective at holding down Medicare spending. In this alternative (and more likely) scenario, expenditures are significantly higher: 4.28 percent in 2020, and 10.70 percent by 2080. In short, “most of the significant change in the projected level of Medicare expenditures between the 2010 Trustees Report and last year’s report would go away under the alternative projections.”

Make no mistake: even under the alternative scenario, ACA will improve Medicare’s finances. However, this improvement has to be evaluated in the context of everything else that ACA does: it creates a new health care entitlement and expands Medicaid. New revenues (like the Medicare payroll tax increase for high incomes) and Medicare savings are redirected to new federal health care spending. Health care pressures on the federal budget remain brutal - and thus the real reforms we need are apt to be even more difficult and painful to achieve.

The ACA was sold to Congress as an act of fiscal prudence. It is beginning to look more like an exercise in profligate spending.

Original Source:



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