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That $716 Billion Medicare Cut: One Number, Three Competing Visions

By John Reichard, CQ HealthBeat Editor

August 16, 2012 -- By the time this election season is over, even small children may know how much "Obamacare" cuts Medicare. The figure, $716 billion over 10 years, is the subject of already-intense debate over what the health care law will do to, or for, Medicare. And it shows no signs of letting up before November.

It's a policy fight that reflects three distinctly different visions of how the $716 billion should be used and what it means for the health care that the elderly will receive. How that fight plays out may shape not only the outcome of many election races but also what happens next year in Congress to Medicare and the health care law.

But first, where did the figure come from? Is it accurate? And why is it so much larger than previous estimates?

It's a surprise to many. That's because of how often $500 billion has been cited as the Congressional Budget Office's estimate of Medicare cuts in the health care law (PL 111-148, PL 111-152).

Little noticed initially, $716 billion first surfaced on page 13 of the Congressional Budget Office's recent 22-page letter that analyzed the effects of legislation (HR 6079) repealing the health care overhaul. "Spending for Medicare would increase by an estimated $716 billion over [the] 2013-2022 period," said the July 24 letter to House Speaker John A. Boehner, R-Ohio.

What might have seemed like a mistake at first was not. Sen. Orrin G. Hatch, R-Utah, issued a statement late that day calling attention to the bigger number. An Obama administration official did not dispute the figure, saying it was higher because it spanned a different 10-year period from the original Congressional Budget Office (CBO) estimate. The official also noted that House Republicans voted to cut Medicare by the same amount in approving the budget plan written by Budget Committee Chairman Paul D. Ryan, R-Wis.

The original March 20, 2010, CBO score of the cost of the health care law actually put the level of Medicare cuts at about $450 billion, which people have rounded up to $500 billion ($500 billion is actually about the level of reimbursement cuts in the health care law if Medicaid cuts are added to Medicare cuts). The time frame: the 10 years from 2010 through 2019. The updated estimate covers 2013 through 2022. "The second estimate covers nearly 10 years of the bill's full implementation, versus six to seven years in the first estimate," notes a new analysis by William Galston and Korin Davis of the Brookings Institution.

In other words, the Medicare cuts didn't really kick in for the first few years of the initial estimate. So the hit on Medicare was really larger than analysts first said.

The Obama Vision

Advertising by the Romney-Ryan campaign suggests the $716 billion will badly weaken the services that beneficiaries get under Medicare. But the Obama view is that the cuts are taken from sectors that either were previously overpaid by the government, such as private health plans and big pharmaceutical manufacturers, or that would recoup the money in the form of larger numbers of insured patients. Examples of such providers include hospitals, skilled-nursing facilities and home health agencies. Those health groups will get the money back because the reductions help cover the costs of subsidies for the uninsured to purchase insurance coverage, so their medical costs would be covered.

About one-third of the Medicare cuts are taken from hospitals. The health care law reduces yearly "market basket" payment increases to hospitals by a "productivity adjustment" reflecting gains in efficiency in the overall economy. That generated about $150 billion of the $450 billion in Medicare cuts in the original CBO estimate. Cutting payments to the private health plans that make up the Medicare Advantage program made up close to another third, or $136 billion. Those reductions occur as a result of lower payments to the health plans so that those plans would be paid at the same level as providers in the traditional fee-for-service Medicare program. "Productivity adjustments" in yearly market-basket payment updates to home health agencies and skilled-nursing facilities, along with other reductions, make up about the other third of the cuts.

The White House could point to outside analysts to justify the cuts to private health plans, skilled-nursing facilities and home health agencies. The independent Medicare Payment Advisory Commission had urged reduced increases for the nursing facilities and home health agencies, saying they were overpaid. And it long had urged that payments to Medicare Advantage plans be equal to fee-for-service.
The new $716 billion estimate does not break out sector-specific estimates of the size of Medicare cuts, but presumably they are roughly proportional to those in the original estimate.

The bottom line: The Obama team argued that the Medicare reductions weren't harming Medicare patients. At the same time, they could argue that the reductions helped to cover the costs of drug coverage in the donut hole, as well as enhanced preventive care benefits, such as mammograms and colonoscopies, without co-payments. And because the cuts meant less money coming out of the Medicare Part A hospital insurance trust fund, the reductions added several years of solvency to that financing mechanism.

The Ryan Vision

Before joining presumed presidential nominee Mitt Romney on the Republican ticket, Ryan championed a budget plan based on repealing the coverage provisions of the health care law but keeping its Medicare cuts. That helped to reduce deficit spending and fund other Ryan priorities, such as bigger tax cuts. It also pushed back the insolvency date of the hospital trust fund, as the health care law does, freeing Congress, at least for a while, from having to increase taxes or cut payments to keep the fund in the black.

Ryan presumed that Medicare could take the hit, as did his fellow House Republicans who voted for his budget plan that included the Medicare cuts. Ryan has argued that by avoiding increases in the federal debt, the Medicare cuts strengthen the federal balance sheet and put it in a better position to cope with Medicare financing challenges in future decades. That's far better than using the cuts, as the health care law does, to fund a huge new program to subsidize the purchase of insurance by the uninsured, Ryan argues.

The Romney Vision

Romney, however, has another view. He wants to repeal the health care law, which in effect means keeping the $716 billion in Medicare. That stance allows him to argue that Obamacare delivers a big hit to Medicare that he would not. And it helps him blunt Democratic attacks that the plan he and Ryan favor to convert the Medicare entitlement to a premium support system would badly harm health care for the elderly. The pair can counter that they would not take almost a trillion dollars over 10 years out of the program like the president would.
What is the evidence as to whether the Obama cuts would harm Medicare?

Richard Foster, head of the Office of the Actuary for the Centers for Medicare and Medicaid Services, has predicted that the productivity adjustments reducing payment increases could, over time, lead a significant number of hospitals and skilled-nursing facilities to drop out of Medicare.

Foster has also noted another distinct possibility: that rather than see providers drop out, lawmakers will intervene with new payment increases. That means the health care law would cost more than CBO has projected, which in turn suggests it would no longer be budget-neutral.

Medicare Advantage plans warn that cuts will mean an end to the added benefits they've been able to offer beneficiaries, and that enrollment in the plans will drop and beneficiary out-of-pocket charges will rise.

There are also suggestions that hospitals may cut back on hiring staff because of the health care law cuts, watering down the quality of their care. The Brookings analysts observe that "it's technically correct to say that the Affordable Care Act does not cut benefits. The question is whether reductions in payments to health care providers will impair either access to health care services or the quality of those services. While there are some indications that providers are beginning to pull back from the program and that waiting periods for care may be increasing in some jurisdictions, it is too early to know for sure."

On the other hand, the health care law includes a number of provisions designed to boost the quality of treatment in Medicare. Medicare payments are beginning to financially reward hospitals that score well on clinical performance measures. And the law tests a variety of new forms of health care delivery designed to boost both efficiency and quality.

Defenders of the law also note that Medicare Advantage enrollment continues to grow, contrary to predictions by critics of the law. And they also argue that canceling the cuts would hasten the insolvency of the Medicare hospital trust fund, forcing the Romney team to come up with a new package of Medicare cuts even as they say they oppose such reductions.


How will the debate play out? In a sense, Ryan's vision no longer matters. He says he now supports the position of the man at the top of the ticket. But with deficit reduction a big priority for next year, the idea of cutting Medicare and of using the health care law cuts to reduce deficit spending is hardly off the table.

Because of the complexity of the debate, Democrats and Republicans will have a hard time bringing voters around to their point of view. That suggests that where voters now stand on the health care law and cutting Medicare may not change dramatically. But whoever wins the election will likely argue that their victory is proof that the voters prefer their particular vision.

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