Medicare Part II: President Obama’s Medicare Plan

August 22, 2012 J

By: Nicole Kaeding

The Patient Protection and Affordable Care Act (PPACA) was passed by Congress and signed by the President in March of 2010. Americans for Prosperity has written extensively about its numerous tax increases, bureaucratic overreaches, disastrous health insurance exchanges  and unconstitutional Medicaid expansion. But also hidden in the pages of PPACA are the President’s so-called reforms to Medicare. Just like the rest of his health care monstrosity, the President seeks to concentrate control in the hands of bureaucrats, leaving seniors with little say in their health care choices.

Curious about how Medicare works? Yesterday, Americans for Prosperity detailed what Medicare is, how it works and its unsustainable path.

The nonpartisan Congressional Budget Office (CBO) estimates that PPACA costs the federal government $1.683 trillion over the next ten years and raises $515 billion in revenue during that time frame leaving over $1.1 trillion in net costs to be financed. The President promised the American people that his health care law would not add to the deficit. Changes to Medicare became an essential funding mechanism to meet this political promise.

PPACA’s “Cuts” to Providers

Medicare, like most insurance plans, pays doctors and hospitals a set amount for each service it provides, known as “fee-for-service” (FFS). Because of the large purchasing power of the government, Medicare dictates prices to providers and does not negotiate like most insurers.  Theoretically, this allows the government to control costs through its vast market power and consumer base, but practically it results in underpayments to doctors. Medicare reimburses about 75% to providers compared to private insurance. This pricing structure also removes doctors’ ability to effectively compete. Regardless of the quality of services or health outcomes achieved, doctors are paid the same amount. Innovation is removed from this payment structure.

As part of PPACA, the President further cuts reimbursement rates to providers.  According to the CBO, PPACA cuts $415 billion–total Medicare cuts amount to $716 billion–over the next ten years from provider payments. It’s important to note that these are not real “cuts” in the way that most Americans understand them, but rather “cuts” compared to Washington, D.C.’s distorted budgeting rules. These “cuts” are decreases in the rate that Washington increases spending.

These “cuts,” however, could have horrific effects on health care for seniors. As providers continue to get squeezed by further reductions in payments, doctors will become less likely to accept Medicare patients. This will turn Medicare into its broken, costly cousin, Medicaid. Medicaid’s reimbursements are so low more than 30% of doctors don’t accept Medicaid patients and in some cases the health outcomes for Medicaid patients are worse than those for uninsured persons. PPACA puts Medicare on this path.

Independent Payment Advisory Board

The Independent Payment Advisory Board (IPAB) is a newly created board of 15 unelected, unaccountable bureaucrats created by PPACA. These health care bureaucrats will have nearly unprecedented power to further control the growth in Medicare spending after provider “cuts” described above occur. Unlike traditional advisory groups in Washington who give recommendations to Congress or the President, IPAB’s role is reversed. Congress must specifically disapprove of IPAB’s annual recommendations with a super-majority vote and find the same amount of cost savings elsewhere within a short four-month timeframe; otherwise IPAB’s recommendations take effect.

PPACA goes out of its way to limit IPAB’s authority, saying that it cannot “include any recommendation to ration health care,” but the law never defines rationing.  IPAB’s only real mechanism to reduce costs is cutting reimbursements to providers, and as those continue to be squeezed, doctors will likely drop out of the system.

Increased Medicare Payroll Taxes

An additional component of the President’s Medicare package is increased Medicare taxes. Medicare is currently funded by a 2.9% payroll tax. Starting in January, individuals making more than $200,000 (and married couples making more than $250,000) will pay an additional 0.9% tax on their earnings. This tax is expected to raise $89 billion by the end of 2019. It is not tied to inflation, so it will hit more and more individuals every year.

New Investment Income Tax

The President’s health care law also created a brand-new tax to further fund Medicare. This is a 3.8% tax that will hit all investment income, like interest, dividends, rents and capital gains, for individuals making more than $200,000 a year. This new tax will raise over $200 billion by the end of the decade. Similar to the Medicare payroll tax, this tax will not be adjusted each year for inflation.

Increased Medicare B Premiums

Medicare B is jointly financed through general government funds and premiums charged to seniors. Premiums are tiered and based on seniors’ income, with those making more than $85,000 paying a larger amount. More specifically, individuals making $85,000 a year will pay 35% of their Medicare B costs, and those making more than $200,000 will pay 80% of their own Part B costs. Historically, the income brackets for premiums increased annually with inflation. The President’s law specifically removes the inflation adjustments as a way to save money through a de-facto tax hike.  More and more will be hit by the increased premiums.

Changes to Medicare Advantage

Medicare Advantage (MA) allows seniors to split the cost with government to purchase private insurance, rather than use traditional single-payer Medicare. Seniors shop and compare various insurance options and chose the plan that best meets their needs.  Almost 25% of seniors utilize this option for their Medicare coverage and its popularity continues to grow.

From the insurers’ perspective, MA allows them to pull resources more effectively and offer more generous benefits than traditional Medicare. A recent study from Harvard University found that due to these unique characteristics, MA is actually 9% more cost-effective than traditional Medicare.

To further fund his health care law, the President slashed $156 billion from the widely successful MA. The President argues that MA is too expensive, ignoring MA’s cost effectiveness. But to help hide these cuts, the Government Accountability Office (GAO) recently released a study saying that HHS is trying to smooth over those cuts with an ineffective grant program.


During the debate for his signature health care law, the President promised not to change Medicare for seniors. We see in hindsight that he failed to keep this promise. To make matters worse, the President used Medicare as a critical vehicle to fund the rest of his vast new entitlement system while leaving bureaucrats in charge for the future.

For more information on Medicare, see part one of this series.

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