Since Medicare is such an important program for our members who are over the age of 65 or those who are eligible for its coverage due to a disability, we are devoting this edition to the proposed changes in Medicare.  Please note that the descriptions of proposed changes are those found in the House bill.  The Senate committee that holds jurisdiction over Medicare, the Finance Committee, has not released its proposal  

Medicare beneficiaries have been the target of a campaign that characterizes the proposed Medicare changes in H.R. 3200 as Medicare cuts.  Those making the claim say that the bill would take a large amount of money from Medicare.  They indicate that this is unwise since Medicare faces bankruptcy in 2017.   

H.R. 3200 does not eliminate any Medicare services.  It does not limit access to any services.  It does place limits on the reimbursement rates for some services and on overpayments made to Medicare Advantage plans.  And it would make some improvements in Medicare.

The Basics of Medicare Financing

To evaluate the claims being made about the impact that H.R. 3200 will have on Medicare, it is important to review the fundamentals of Medicare financing. 

The Medicare Hospital Insurance Trust Fund (HITF) finances Medicare Part A hospital costs.  The HITF is financed from 1) payroll deductions, 2) income taxes paid by Social Security beneficiaries with incomes above $34,000 for a single person and $44,000 for a couple, and 3) interest earned on trust fund assets.  

The 2009 Annual Report of the Social Security and Medicare Boards of Trustees projected that, given the current patterns of expenditures and collections, the Hospital Insurance Trust Fund will be depleted by 2017.  Congressional action will be necessary to ensure uninterrupted coverage of hospital services beyond 2017.  Here is a link to the trustees' report.   http://www.ssa.gov/OACT/TRSUM/index.html   

According to the report, Part B, which pays doctors' bills and other outpatient expenses, and Part D, which pays for prescription drug coverage, are "both projected to remain adequately financed into the indefinite future."  Part B and Part D costs are not financed through the Hospital Insurance Trust Fund.  Part B is financed through premiums paid by beneficiaries (25% of cost) and general fund (75%).  Part D is financed through premiums paid by beneficiaries (25.5%) and general fund (74.5%).  The report does indicate that the trustees expect increasing Part B and Part D costs will place significant stress on beneficiaries who pay Part B and D premiums and taxpayers who pay the general fund portion of Part B and Part D.

How Would H.R. 3200 Affect Medicare?

The Medicare proposals in H.R. 3200 would not affect funds flowing into the Hospital Insurance Trust Fund.  No money will be diverted from the trust fund.  H.R. 3200 would place limits on Medicare reimbursement rates for several covered services.  The reimbursement constraints are consistent with the recommendations of the March 17, 2009 report of the Medicare Payment Advisory Commission (MedPAC).  Here is a link to that report. http://www.medpac.gov/documents/Mar09_March%20report%20testimony_WM%20FINAL.pdf   

Here are descriptions of some of the proposals that have been included in the House bill along with some background from the MedPAC report.

SKILLED NURSING FACILITIES -- Adjustments in payments to skilled nursing facilities would result in spending reduction of $32 billion over ten years.  The MedPAC report section on skilled nursing facilities states, "Our indicators of the adequacy of Skilled Nursing Facility (SNF) payments are generally positive.  These indicators include a stable supply of providers, a slight increase in service volume, and growth in Medicare margins."  The report states that the average Medicare margin for freestanding SNFs was 14.5% in 2007, making this the seventh consecutive year that the average Medicare margin was above 10%.  

HOME HEALTH SERVICES -- Payments to home health agencies would be reduced under the terms of H.R. 3200 by about $57 billion over ten years.  Here is what the MedPAC report says about home health agencies.  "Access, volume and supply of agencies remained stable or increased, suggesting that Medicare beneficiaries have adequate access to care...Home health agencies continue to be paid significantly more than cost, with average margins of 16.6% in 2007."  

MEDICARE ADVANTAGE -- The largest proposed reduction in H.R. 3200 comes from a gradual reduction in payments to insurance companies offering Medicare Advantage plans so that they align with the cost of providing coverage through the regular Medicare program.  The proposed change would save $156 billion over ten years.  The MedPAC report indicates that, as currently constituted, Medicare Advantage (MA) is a disproportionate drain on Medicare resources.  "MA payments are projected to be 114% of comparable (Medicare) spending for 2009."  The report notes that MA plans provide enhanced benefits for enrollees, but that these enhanced benefits are financed out of the Medicare program and other beneficiaries at a high cost.  The report notes that each dollar's worth of enhanced benefits provided by MA plans that are classified as private fee-for-service plans costs Medicare three dollars.  The private fee-for-service MA plans are also the most expensive at a cost of 118% of comparable Medicare spending.  

PRODUCTIVITY UPDATES -- H.R. 3200 would factor in productivity adjustments into the reimbursement rate formulas for some services that do not currently use them.  An existing productivity measure would be incorporated into the formula used to set rates for hospitals, skilled nursing facilities, long-term care hospitals, inpatient rehabilitation facilities, psychiatric hospitals, and hospice rates in Part A and outpatient services, ambulance, ambulatory surgical centers, laboratory services, and durable medical equipment in Part B.  This change is expected to reduce Medicare spending by $102 billion for Part A services and $40 billion for Part B services over a ten-year period.  A productivity factor is currently included in the formula used to develop reimbursement rates for physicians.

The Effect of H.R. 3200 on Medicare   

H.R. 3200 does not eliminate any Medicare services.  It does not limit access to any services.  It would not disrupt the funds flowing into the Hospital Insurance Trust Fund, which is the component of Medicare that is projected to be insolvent by 2017.   It would limit reimbursement for some services and curb the overpayments that are being made to Medicare Advantage plans.   

With regards to the solvency of the Hospital Insurance Trust Fund, the net effect of the bill would be to extend the period of time that the trust fund will be solvent by an additional five years to 2022.  

H.R. 3200 includes several improvements for beneficiaries.  Those improvements include:

• elimination, over a period of years, of the Part D coverage gap, commonly known as the "donut hole";
• improved access to physicians as a result of better physician reimbursement; 
• enhanced access to the Part D low-income subsidy;
• coverage of preventive services and waiver of cost sharing for those services;
• expanded access to vaccines.  

The reductions in Medicare spending are directed towards reimbursement rates for providers that, as a group, have been found to have healthy margins.  In addition to these reimbursement reductions, there are several improvements in Medicare that will assure continued access to physician care and reduce out-of-pocket costs for many beneficiaries.