The Affordable Care Act and Medicare

How the Law Is Changing the Program and the Challenges That Remain


Medicare at 50This report is the second in a series that traces the evolution of Medicare and its major accomplishments over the past 50 years; examines the Affordable Care Act’s reforms to Medicare and the challenges facing policymakers going forward; and lays out policy options to ensure Medicare’s viability and effectiveness for future beneficiaries.

The Commonwealth Fund’s Medicare at 50 Years series is now available in its entirety for viewing and download as an e-book.

Executive Summary

The aims of the Affordable Care Act (ACA) were to increase health insurance coverage for those under age 65, improve the performance of the health care delivery system, and slow cost growth. Less recognized are the provisions of the law that seek to strengthen the Medicare program.

The ACA addresses gaps in Medicare preventive and prescription drug benefits. It initiates ambitious testing of new payment methods to improve the value of care received by beneficiaries and, indirectly, all Americans. And it substantially extends the solvency of the Medicare Health Insurance Trust Fund by slowing the growth of future Medicare outlays.

By moving Medicare away from fee-for-service payment and by holding health care providers accountable for both the quality and total cost of care, certain ACA reforms have the potential to reshape not just the Medicare program but the entire U.S. health care system. For example, the law’s creation of the Center for Medicare and Medicaid Innovation (CMMI) will enable Medicare to test innovative models of provider payment and service delivery and expand those that demonstrate promise to improve beneficiary outcomes and patient experiences of care or lower cost. The projects initiated by the CMMI are just now beginning to produce results; significant work remains to identify and spread successful payment innovations.

The ACA also makes important changes to the Medicare Advantage (MA) program, through which enrollees can choose to receive their Medicare benefits from private plans. Payment rates to MA plans are to be constrained until those plans are on a par with traditional Medicare, though financial rewards are available for plans achieving high performance ratings. These changes are intended to provide incentives for MA plans to improve quality and patients’ health care experiences and encourage beneficiaries to choose plans with higher quality and lower cost.

While these new policies strengthen Medicare, they were not intended to address some of the serious challenges facing Medicare in the future. Without additional changes, the retirement of the post–World War II generation will cause total Medicare outlays to outpace growth in the economy, claim an increasing share of the federal budget, and exceed the revenues currently dedicated to the Medicare program.

As currently configured, Medicare benefits do not adequately address the financial and health care needs of future beneficiaries—particularly the poorest and sickest among them. Traditional Medicare’s benefit design reflects the fragmented nature of health care delivery, with separate hospital, physician, and prescription drug benefits adding to the complexity, administrative cost, and difficulty of coordinating care. The predominantly fee-for-service provider payment system used by traditional Medicare, and by most MA plans, provides no incentive to eliminate duplicative or ineffective care, coordinate care, or substitute lower-cost care alternatives—and in effect penalizes providers who do so. This mismatch between benefits and needs will be an increasing source of concern as families struggle with out-of-pocket costs, serious health conditions, and inadequate options for caring for family members with physical and cognitive functional impairments.

While the ACA’s reforms hold significant potential to make Medicare more viable and successful in the future, Medicare’s long-term fiscal solvency, complexity, and gaps in coverage remain unaddressed. As millions of Americans age into Medicare, federal budgetary pressures will inevitably focus attention on more fundamental reform of the program.

Read the full report.

Medicare and the ACA

Publication Details

Publication Date:
June 9, 2015
Karen Davis, Stuart Guterman, Farhan Bandeali
Ann B. Gordon
K. Davis, S. Guterman, and F. Bandeali, The Affordable Care Act and Medicare: How the Law Is Changing the Program and the Challenges That Remain, The Commonwealth Fund, June 2015.