The Corner

Obamacare and the New Medicare Trustees’ Report

The 2013 Medicare Trustees’ report, released today, is being hailed by Obamacare’s supporters as further evidence that the law is working. In releasing the report, Treasury Secretary Jack Lew said it “demonstrates once again the importance of the Affordable Care Act.”

This is nonsense.

Yes, the date of insolvency for the Medicare Hospital Insurance (HI) trust fund was pushed back by two years, from 2024 to 2026. But this tells us very little about the real financial status of the Medicare program.

Digging a little deeper, one sees that the actual state of affairs is far less rosy.

For starters, Medicare’s unfunded liability remains staggering — a full $43 trillion over the infinite horizon. That’s nearly $7 trillion more than the 2010 report.

Moreover, as was the case in every report from 2010 onward, Medicare’s actuaries have again told us that the real state of Medicare’s financial outlook is far worse than the official projections indicate. That’s because the cuts to Medicare contained in Obamacare are so irrational and blunt that they will almost certainly be reversed. Most especially, the actuaries expect the so-called “productivity improvement factor” will be reversed because of the damage it will do to access to care for seniors. That would be the provision in Obamacare that reduces the inflation update for most non-physician providers of services, especially hospitals. The cuts begin this year and continue every year, in perpetuity. If they are allowed to stand, they will push reimbursement rates for hospitals to levels that are so low they’ll fall below what Medicaid pays by the end of this decade. Medicaid’s rates, meanwhile, are so far below what private insurance pays that the network of hospitals willing to take large numbers of Medicaid patients is quite constrained. The actuaries expect that, by 2030, the cuts would push revenue for 25 percent of the nation’s hospitals below their total costs, leading many of them to withdraw from the Medicare program entirely.

The actuaries are so skeptical that these cuts can be sustained that they have again released an alternative scenario that they believe more accurately reflects the true future path of Medicare expenditures. And under this alternative projection, Medicare’s total expenses would grow from under 4 percent of GDP today to nearly 10 percent by the end of the projection period. Here, the alternative, realistic scenario is the top solid line, while the trustees’ published prediction is the dotted line:

Obamacare’s advocates like to create the impression that the law set in motion a number of reforms that will bring about greater efficiency in the delivery of care. There is absolutely no evidence of this. The only significant reductions to Medicare contained in Obamacare are the across-the-board provider-payment cuts. These cuts, incidentally, generally make no distinctions based on the quality of care provided to patients. They are the same in most cases no matter how well or badly the patients are treated.

So the supposed improvement in the long-run financial outlook for Medicare that Obamacare’s advocates are hailing is entirely dependent on deep and unrealistic reimbursement cuts. In effect, Medicare is now going to pay providers of services a lot less to take care of Medicare patients. The law’s advocates want us to believe these cuts can be imposed without any consequences whatsoever for access or quality of care, which defies basic economics and common sense.

What’s worse, these unrealistic cuts were double counted in Obamcare. They were used to make Medicare’s financial outlook appear better – at least on paper – and to pave the way for Obamacare’s massive entitlement spending expansions, now estimated by the Congressional Budget Office to reach about $1.8 trillion over the coming decade. In other words, the same cuts were spent twice – once on future Medicare claims, and then again on a Medicaid entitlement expansion and premium credits. So, far from improving the nation’s fiscal outlook, Obamacare has made the situation much worse.

In Medicare, Obamacare doubled down on the same kinds of price controls that haven’t worked in the past to improve the efficiency of care delivery. What’s needed instead is a more fundamental reform that relies on consumer choice and market forces to reward high-quality, low-cost systems of care. That’s the way the Medicare drug benefit was designed when passed in 2003, and it is now working far better than anyone ever imagined it would at enactment. The same competitive structure could be adopted in the rest of the Medicare program — with the same favorable financial results as the drug benefit and none of the quality and access problems of Obamacare. 

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