Central to the deficit reduction claims of President Obama's health care law is the assumption that its cuts to Medicare will be implemented and generate massive savings. But on Monday, the Centers for Medicare and Medicaid Services announced that planned cuts to Medicare Advantage had been reversed under pressure from insurance industry lobbyists during an election year. This is a potentially ominous sign for Obamacare.
As I wrote on Monday, Obamacare's expansion of insurance coverage is projected to cost $2 trillion over the next decade, according to the Congressional Budget Office, with the costs covered by a reduction in projected Medicare spending and higher taxes.
Throughout the health care debate, critics questioned whether the Medicare savings being claimed on paper would ever actually materialize. Historically, lawmakers have been pressured into overriding scheduled spending cuts when it actually comes time to make them.
Medicare Advantage is an early test for Obamacare. The program gives beneficiaries the ability to gain private coverage that offers benefits beyond traditional Medicare and currently has nearly 16 million enrollees. A 2012 CBO report finding that that Obamacare reduced deficits by $109 billion over 10 years also found that the bill produced $156 billion in Medicare Advantage savings from cutting payment rates. In other words, under that CBO estimate, doing away with Medicare Advantage savings - with all else being equal - would mean that Obamacare would go from reducing deficits to increasing them.
In February, CMS announced plans to trim Medicare Advantage payments to plans by 1.9 percent in 2015. This unleashed a ferocious lobbying effort by the insurance industry and Democrats had a growing fear of attacks from Republicans over disruption in benefits for senior citizens during an election year. Then, on Monday, CMS reversed course and said they would actually increase payments slightly, by 0.4 percent. This is the overall number, though as Bloomberg's Alex Wayne and Caroline Chen have reported, some major insurers still expect their payments to decrease.
CMS insisted the change was possible due to broader trends within Medicare, but it is curious that such a rapid turnaround was made possible in roughly six weeks between the initial rate announcement and Monday.
Sheryl Skolnick, managing director and senior health care analyst at CRT Capital Group, told Modern Healthcare's Catherine Hollander that while it's important to be cautious in trying to get an early read on such changes, "I'm very suspicious with what I've seen so far on how you get from their estimate of down 1.9 to plus [0.4] when it just so happens to be exactly the kind of overall rate change that the Democrats need to support their election hopes.”
Obamacare’s finances aren’t going to be rocked by this one change to Medicare Advantage in 2015, but if this is indicative of a broader trend in which the health care law doles out benefits while the taxes and spending cuts that were supposed to offset the costs get scaled back, it will make the law difficult to sustain.
According to the Government Accountability Office, if Obamacare's Medicare cuts don't get implemented, instead of decreasing deficits, the law would increase long-term deficits by $6.2 trillion.