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How Does the New Health Care Law Save Money?

The new health reform law wrings $390 billion in savings from Medicare over the next decade to help pay for health care reforms—but spending on the program will continue to rise.

How can the new legislation reduce Medicare costs and still spend millions more dollars on improvements like closing the gap in drug coverage and offering free preventive care? Here’s a quick lesson in Medicare math.

These are cuts in future increases, not cuts in services, experts explain.

Medicare spending has grown about 8 percent annually over 20 years, according to the Congressional Budget Office, an independent arm of Congress. The law could slow down the annual increase in spending to about 6 percent over the next 20 years, the CBO has reported.

For example, of the projected $390 billion in savings—the latest estimate from Congressional Research Service—$196 billion comes from smaller increases in payments to hospitals, nursing homes, home health workers and other medical providers. But physicians who work in primary care will be rewarded with a 10 percent bonus. Hospitals that prevent readmissions or hospital-acquired infections will be paid more than those that do not. The American Hospital Association and the American Medical Association were among the many health care organizations that backed the legislation, along with advocacy groups.

Medicare Advantage Another piece of the $390 billion savings, about $136 billion, comes from reductions in subsidies paid to private health insurance plans, called Medicare Advantage, that provide medical and drug coverage to about one of four people in Medicare. Currently, Medicare pays the private plans an average of 14 percent more to care for a member than it would cost if that person remained in traditional Medicare.

In 2012, the government will start lowering these overpayments to Medicare Advantage plans. Insurers contend they will be forced to cut benefits. But the law prohibits plans from reducing or eliminating essential guaranteed Medicare benefits. It also protects plan members by requiring that at least 85 cents of every dollar insurers receive is spent on benefits.

Guarantees The law also requires Medicare to spend more wisely. For example, a new independent Medicare advisory board is expected to save the program $16 billion over 10 years. Cracking down on fraud and waste will save an estimated $7 billion. Even bonus payments and innovations aimed at improving patient care are intended to produce a long-term payoff: People who get more effective treatment can recover more quickly from medical setbacks, and that saves Medicare money, too.

Finally, the law comes with a Medicare warranty in Section 3601: Nothing in the law can cut current Medicare benefits, and the Medicare savings it achieves “shall extend the solvency of the Medicare trust funds, reduce Medicare premiums and other cost-sharing for beneficiaries, and improve or expand guaranteed Medicare benefits and protect access to Medicare providers.”

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