The New Health Care Law and Extending the Life of Medicare While Saving Money

Your questions answered

by: Susan Jaffe, from: AARP Bulletin, August 30, 2010

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Q. Medicare will be cut by billions of dollars under health care reform, so why do people say the law will keep Medicare afloat longer? Did they flunk math?

A. No.

According to Medicare's latest financial report card, released this month, the new law extends the financial soundness of the program by 12 years, to 2029. The annual report, produced by the program's trustees, explains how Medicare can afford to offer benefits longer and produce savings at the same time.

First, the cuts you mention are not cuts in guaranteed benefits or eligibility. No one will lose Medicare coverage. The program isn't shrinking—just the opposite. Medicare spent $509 billion in 2009 and is expected to spend $895 billion by 2019. Enrollment is expected to grow from 47 million beneficiaries to 62 million during that decade. Health care reform even adds some new benefits to Medicare, including free preventive health care, and closes the doughnut hole in prescription drug coverage.

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The savings come from slowing down Medicare's increase in spending, so it goes up an average of 5.8 percent a year over the next decade, instead of 8.5 percent.

"We are still spending more each year, but not as much as we thought," says James Horney, director of federal fiscal policy at the Center on Budget and Policy Priorities, an independent budget and tax research group in Washington.

For example, while hospitals, nursing homes and most other health care providers will get a pay raise, it will be about 1.1 percent lower, according to the trustees report.

Health care reform also ensures that Medicare dollars buy better quality health care. Hospitals with fewer cases of hospital-acquired infections, for example, will be paid more than hospitals with higher rates. The law slowly reduces overpayments to Medicare Advantage plans, saving about $135 billion by 2019, and cracks down on fraud and waste.

In all, the new law saves about $400 billion for Medicare through 2019. The law requires those savings to stay in Medicare—to help lower beneficiaries' costs, improve benefits, ensure access to health care providers and extend the life of the program.

But there is one thing the trustees didn't figure into their estimates. They assume that doctors who treat Medicare patients will get a 23 percent pay cut in December, as federal law currently requires even though Congress is likely to block it. Without the pay cut, future doctor bills will be higher. Health care reform did not tackle that problem.

Susan Jaffe of Washington, D.C., covers health and aging issues and writes the Bulletin's weekly column Health Care Reform Explained: Your Questions Answered.