“Keep your hands off my Medicare.”
There is perhaps no quote more memorable – nor more contentious – from the battle over the Affordable Care Act. During the debate, reform critics warned that the ailing Medicare system would be further weakened by government efforts to restructure it. Reform supporters countered that although the program was critical to millions of Medicare-eligible Americans, it could not continue without dramatic restructuring.
In the end, the Affordable Care Act prevailed, and the federal government quickly prepared to unroll a raft of changes and improvements to Medicare. A federal summary of the changes reveals a long list of reforms intended to contain Medicare costs while increasing revenue, improving and streamlining its delivery systems, and even increasing services to the program.
Cost savings through Medicare Advantage
The ACA is gradually cutting costs by restructuring payments to Medicare Advantage, based on the fact that the government was spending more money per enrollee for Medicare Advantage than for Original Medicare. But implementing the cuts has been a bit of an uphill battle.
In 2011, the law froze the benchmark at 2010 levels for the maximum amount paid for MA plans in each county. Then, in 2012, the government began phasing in payment reductions to Medicare Advantage in an effort to bring Medicare Advantage spending in line with the fee-for-service program (Original Medicare).
For 2017 and 2018, however, there were slight increases in payments to Medicare Advantage plans. And this comes on the heels of similar increases in 2014, 2015, and 2016 – despite the fact that in all three years, payment cuts had been proposed and then essentially reversed or off-set with payment increases.
However, insurers said that their average payment amounts decreased by about 6 percent in 2014, and by about 3 or 4 percent in 2015 – clearly, not everyone agrees on the impact of the budgetary changes from one year to the next.
There was concern that Medicare Advantage enrollment would drop because the payment cuts would trigger benefit reductions and premium increases that would drive enrollees away from Medicare Advantage plans. In 2011, U.S. Representative and Chairman of the House Budget Committee, Paul Ryan, derided the cuts to Medicare Advantage by citing CBO and CMS projections that Medicare Advantage enrollment would be as low as 7.4 million by 2017 – a 50 percent reduction over the level that they would have otherwise anticipated without the ACA’s cuts.
However, those concerns have turned out to be unfounded. In 2017, there are 19 million Medicare Advantage enrollees – the highest the program has ever had; Medicare Advantage now accounts for 33 percent of all Medicare beneficiaries.
Although the payment reform has forced Medicare Advantage plans to be more efficient, utilize smaller networks, and offer more plans with higher out-of-pocket costs, the popularity of the program has grown significantly in the seven years since the ACA was signed into law. Average premiums in the Medicare Advantage program were projected to decrease by about 4 percent from 2016 to 2017, and most seniors have access to at least one zero-premium Medicare Advantage plan.
Medicare Advantage takes the place of Medicare A and B. For most seniors, Medicare A is free, but Medicare B has a premium of about $109/month for most seniors in 2017, and $134/month for some seniors; it’s important to understand that Medicare Advantage enrollees have to pay their Medicare Part B premium in addition to whatever premium they owe for the Medicare Advantage plan, so a zero-premium plan would mean that the person just has to pay the Part B premium.
In 2012, the government also began rewarding Medicare Advantage plans with higher quality ratings. A 5 percent bonus is paid to plans with a rating of 4, 4.5, or 5 stars (here’s a list of plans that have 5-star ratings in 2017). In 2014, plans with 3 and 3.5 star ratings were eligible for the bonus as well, but that’s no longer the case. However, the incentive appears to be working, and the number of enrollees in 4-star+ plans has been steadily rising. In 2017, more than two-thirds of Medicare Advantage enrollees are in plans with ratings of at least four stars.
And starting in 2014, Medicare Advantage plans were required to maintain a medical loss ratio – the percent of premiums that actually goes back to care of customers – of 85 percent. This is the same medical loss ratio that was imposed on the private large group health insurance market starting in 2011, and most Medicare Advantage plans were already conforming to this requirement; in 2011, the average medical loss ratio for Medicare Advantage plans was 86.3 percent.
Focus on prescription drugs
One of the most feared financial drains on enrollees is Medicare’s prescription drug “donut hole.” The issue was addressed immediately by the ACA, which began phasing in coverage so that enrollees will pay only 25 percent of “donut hole” expenses by 2020, compared to 100 percent in 2010 and before.
Within months of the bill signing, Medicare began sending $250 rebate checks to anyone caught in the “donut hole.” Then, starting in 2011, seniors began to get a break on the cost of drugs while in the donut hole. In 2011, Medicare D enrollees were only responsible for 50 percent of the cost of brand name drugs in the donut hole.
By 2017, that has decreased to 40 percent (51 percent for generic drugs), but 90 percent of the plan cost for the drug is applied to the out-of-pocket maximum, meaning that people don’t have to spend the full “out-of-pocket” themselves in order to get out of the donut hole and qualify for catastrophic coverage set by Medicare Part D. By 2020, Medicare D enrollees will pay just 25 percent of the cost of brand name and generic drugs while in the donut hole.
When Medicare Part D was created in 2003, part of the legislation specifically forbid the government from negotiating drug prices with manufacturers, and that has continued to be the case. There has been some discussion about changing this rule, but it has met with continued pushback from the pharmaceutical lobby.
Higher premiums for higher-income enrollees
Although most Medicare Part B enrollees pay about $109/month per month for Medicare Part B in 2017 (and some enrollees pay $134/month), beneficiaries with higher incomes pay additional amounts – up to $428.60 for those with the highest incomes (individuals with income above $214,000, and couples above $428,000).
Medicare D premiums are also higher for enrollees with higher incomes (but in 2013, only 4 percent of Part D enrollees, and 5 percent of Part B enrollees, paid additional premiums based on their income; most seniors tend to have low or moderate incomes, rather than high incomes).
Higher Part B and D premiums for high-income beneficiaries will continue to apply in 2018, but there will be some changes to the income brackets that determine how part of the Medicare payment solution that Congress enacted in 2015 to solve the “doc fix” problem, new income brackets were created to determine Part B premiums for high-income Medicare enrollees, and they’ll take effect in 2018.
The high-income brackets start at $85,001 for a single individual, and $170,001 for a married couple, and that will continue to be the case in 2018. Enrollees with income between $85,001 and $107,000 ($170,001 and $214,000 for a married couple) won’t see any changes to their bracket.
But some enrollees with income above those limits might be bumped into a higher bracket in 2018, which means their premiums could jump considerably. The highest bracket — which corresponds to the highest Part B and Part D premiums — will start to apply to those with income above $160,000 ($320,000 for a married couple) in 2018, whereas the highest bracket didn’t apply in 2017 until an enrollee’s income reached $241,000 ($428,000 for a married couple). Medicare Part B premiums for 2018 have not yet been set, but slightly less wealthy Medicare enrollees will begin paying the highest prices for Medicare Part B in 2018.
Free preventive services
There’s good news for those who believe in an “ounce of prevention.” Since 2011, Medicare beneficiaries have had access to free preventive care, with free “annual wellness visits,” personalized prevention plans, and some screenings, including mammograms – all thanks to the ACA.
New funding for Medicare
The ACA also changed the tax code as a way to increase revenue for the Medicare program. Starting in 2013, the Medicare payroll tax increased by 0.9 percent (from 1.45 to 2.35 percent) for individuals earning more than $200,000 and for married couples with income above $250,000 and who file jointly. The extra tax only impacts the wealthiest fraction of the country – less than three percent of couples earn $250,000 or more. Repealing this tax was one of the objectives of the various ACA repeal bills that Republican lawmakers pushed in 2017, but as of September 2017, none of the repeal bills had passed the Senate (the House passed the American Health Care Act in May 2017, but the Senate’s version failed in July; senators were reconsidering another repeal bill as of September).
When Medicare D was created, it included a provision to provide a subsidy to employers who continued to offer prescription drug coverage to their retirees, as long as the drug covered was at least as good as Medicare D. The subsidy amounts to 28 percent of what the employer spends on retiree drug costs. But although that meant that eligible employers were effectively only paying 72 percent of their total drug costs, they were still able to deduct 100 percent of those costs.
A general rule of thumb with tax law is that deductions cannot be taken for expenses that are reimbursed, and the subsidy plus deduction aspect of the retiree drug subsidy program wasn’t in line with that concept. Starting in 2013, the ACA eliminated the tax deduction for the subsidized amount that employers receive under the retiree drug subsidy program. The subsidy is still available, and employers can still deduct the amount that they actually pay after accounting for the subsidy (i.e., 72 percent of the costs, not 100 percent).
A Kaiser Family Foundation study predicted a relatively sharp drop in the number of Medicare beneficiaries who will be covered under retiree drug programs in the coming years, due partly to the fact that employers won’t be receiving such strong incentives to keep their retiree drug programs in place.
Expanding access to care in underserved areas
The Medicare Modernization Act of 2003 included a provision to pay 10 percent bonuses to Medicare physicians who work in health professional shortage areas (HPSAs). The ACA expanded this program to include general surgeons, from 2011 to the end of 2015.
The ACA includes numerous cost-containment provisions that have been implemented over the years since the law was passed. Many of the provisions involve incentives to health care providers, including payment adjustments to facilities based on productivity, quality outcomes, and use of electronic medical records, along with incentives for providers who demonstrate lowered Medicare spending.
In 2014, about 20 percent of Original Medicare payments were made through a value-oriented system (based on quality and value rather than simply paying providers on a per-procedure basis). HHS has set a goal of increasing that to 50 percent by 2018, and they’re also focusing on value-based payment systems in Medicare Advantage and Part D. In addition, Medicare has formed a Center for Medicare and Medicaid Innovation, which tests payment methods and delivery systems that lower costs and improve quality in the system.
Starting in 2012 (for hospital discharges after October 1, 2012), Medicare began reducing payments to hospitals with high numbers of preventable hospital readmissions. And starting in 2015, hospitals with a high rate of preventable hospital-acquired conditions are also subject to reduced payments under a provision of the ACA. Both of these measures encourage patient safety and quality control in hospitals, along with better utilization of the tax dollars that fund Medicare.
Beginning in 2014, the ACA began phasing out payments to disproportionate share hospitals (DSH), which treat significant populations of indigent patients. The payments are scheduled to be eliminated by 2020, because the idea was that the Medicaid expansion provision in the ACA would eliminate much of the uncompensated care that hospitals had been providing. Because 19 states have not yet expanded Medicaid (as of 2017), hospitals in those states are starting to feel a financial squeeze – their DSH payments are being cut, but Medicaid is not yet available to many of their poorest patients.
The legislation also prevents new physician-owned hospitals from contracting with Medicare, and prohibits current physician-owned hospitals (that work with Medicare) from expanding. This was implemented with the intent of limiting possible conflicts of interest and practices that would put heavier burdens on traditional hospitals, but it has not been without controversy.
Louise Norris is an individual health insurance broker who has been writing about health insurance and health reform since 2006. She has written dozens of opinions and educational pieces about the Affordable Care Act for healthinsurance.org. Her state health exchange updates are regularly cited by media who cover health reform and by other health insurance experts.