Medicare Backgrounder

The Patient Protection and Affordable Care Act (“PPACA”) contains a number of provisions affecting Medicare, a government health insurance program. See generally Pub. L. No. 111-148, 124 Stat. 119 (2010).

Medicare provides health benefits to people aged 65 years or older, and people with disabilities. See 42 U.S.C. § 1395c. Medicare is a collection of four different sets of benefits, each falling into a separate lettered part. Part A provides for insurance for inpatient care at hospitals, hospice, and home health services. See 42 U.S.C. §§ 1395c to 1395i-5. Part B provides supplemental medical insurance for outpatient and preventive care with doctors or other health providers. See 42 U.S.C. §§ 1395j to 1385w-5. Part C, known as Medicare Advantage, provides an option for beneficiaries to receive the benefits covered by Parts A and B from a private insurer of their choice. See 42 U.S.C. §§ 1395w-21 to 1395w-29. Part D provides a prescription drug benefit for individuals receiving benefits under the other parts of Medicare. See 42 U.S.C. §§ 1395w-101 to 1395w-152.

Medicare benefits are paid from the assets and interest on two separate trust funds, the Federal Health Insurance Trust Fund and the Federal Supplementary Medical Insurance Trust Fund. See 2011 Annual Report of the Board of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds [hereinafter 2011 Annual Trustees Report], at 1. The Medicare Board of Trustees manages both funds. See id. As of July 2010, Medicare covered over 47.5 million people, and paid a total of $516 billion in benefits. See id. at 4. The Medicare Board of Trustees expects the number of eligible beneficiaries to double within the next 35 years, primarily due to the large numbers of ”baby boomers” (people born between the end of World War II and the mid-1960s) reaching the eligibility age. See id. at 49–50.

Cutting Overhead Costs and Improving Services

Many of the Medicare-related provisions of the PPACA target administrative problems within the Medicare system, and aim to help cut costs and increase quality of service. See generally, Pub. L. No. 111-148, Title III. PPACA attempts to accomplish these goals through reductions in payments to insurers, ceilings on the allowed administrative costs for Medicare Advantage plans, and funding to promote experimental payment systems to identify lower cost alternatives to the existing fee-for-service system. See id.; see also Department of Health and Human Services, Strengthening Medicare (Jan. 24, 2012); Congressional Budget Office, CBO’s Analysis of the Major Healthcare Legislation Enacted in March 2010; Congressional Research Service, Medicare Provisions in the Patient Protection and Affordable Care Act (PPACA): Summary and Timeline.

However, a report by the Heritage Foundation claims that, because of the reductions called for in the PPACA (particularly with respect to Medicare Advantage), insurers may not generate sufficient profits to continue offering or administering health plans to Medicare beneficiaries. See R.A. Book & JC Capretta, Reductions in Medicare Advantage Payments: The Impact on Seniors by Region (Sept 14, 2010). The report further asserts that the ultimate effect of these changes to Medicare will be reduced value in Medicare benefits and higher out-of-pocket costs to beneficiaries. See id.

Addressing Medicare Fraud, Waste, and Abuse

The Congressional Research Service (“CRS”) states that, while the actual monetary losses from health care fraud, waste, and abuse are unknown, estimates place the amount in the billions of dollars, representing between 3% and 10% of health care spending. See CRS Rep. R41196, Medicare Provisions in PPACA (P.L. 111-148) at 15. The PPACA allocates funds to prevent and combat Medicare fraud, with the aim of decreasing the costs of administering the program. See generally, Pub. L. No. 111-148, Title VI.

New Preventive Health and Prescription Drug Benefits

The PPACA adds a range of preventive medicine benefits to the existing Medicare system, most of which are without charge to beneficiaries. See Department of Health and Human Services, Medicare Preventative Services (Jan. 24, 2012). Medicare recipients may receive coverage under the new law for annual wellness visits, tobacco cessation counseling, flu shots, and various health screenings. See generally, Pub. L. No. 111-148, Title IV.

The PPACA also attempts to remedy a current gap in the Part D prescription drug coverage system, known as the donut hole. See generally, Pub. L. No. 111-148, Title III, Subtitle D. Medicare recipients currently impacted by the donut hole will receive discounts on brand name and generic drugs, with the cost to the beneficiary decreasing each year until the gap is closed. See Department of Health and Human Services, Medicare Drug Discounts (Jan. 24, 2012).

However, these additional benefits are not without costs, and will reduce the savings provided by the other provisions. See Estimated Financial Effects of the “Patient Protection and Affordable Care Act,” as Amended [hereinafter “CMS Actuarial Report”], at 8 (April 22, 2010). The Office of the Actuary for the Centers for Medicare & Medicaid Services (“CMS”) estimates that the additional Medicare benefits will increase Medicare expenditures by $24 billion over the next 10 years. See id.

Overall Financial Impact of Medicare Provisions in the PPACA

Shortly after the PPACA became law, the Office of the Actuary for the CMS reported that the Medicare provisions of PPACA will save $575 billion total between fiscal years 2010 and 2019. See CMS Actuarial Report at 8 (April 22, 2010). The CMS report attributed most of these savings to reduced annual increases in payments to providers and lowered average payments under Medicare Advantage. See id. However, the report also notes that some of these savings may be unrealistic over the long term, as Medicare payments may grow slower compared to the cost of providing medical services. See id. at 9–10. The report cites simulations conducted by the Office of the Actuary that suggests 15 percent of providers under Part A will be unprofitable by 2019. See id. at 10. Further, while CMS originally indicated that PPACA will extend the life of the Hospital Insurance Trust Fund by an additional 12 years, the latest report on the Trust Funds indicate that the fund will exhaust its remaining assets in 2024, five years earlier than the 2010 estimates projected. See 2011 Annual Trustees Report at 70–71.

Prepared by: Brandon Bodnar