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(And Related Health Care Issues)

Medicare has become a key partisan issue recently, as the result of votes by Republicans in Congress to try to end the current Medicare program for those now under 55 years of age.

Republicans in the House of Representatives passed a plan to replace the current government Medicare insurance program with a proposal to essentially privatize the program by providing vouchers to senior citizens and the disabled to pay a portion of the cost to purchase health care insurance from private insurance companies.

Although both parties have recognized the need to make changes in Medicare to reduce the rate of increases in costs to the government, this new Republican proposal is a continuation of a long-standing Republican goal to privatize Medicare and Social Security.

Some Basic Facts About Medicare

Before discussing the issue further, here are a few facts about Medicare. It is essentially four different programs, as follows:

- Medicare Part A, Hospital Insurance (including certain home health care, nursing facilities and hospice care), is funded by your Medicare payroll tax. Employees have been paying 1.45 percent of their payroll, matched by 1.45 percent by employers, to fund this program. Medicare Part A is a mandatory program (in that all employees and employers must contribute to the trust fund), and there were 47.1 million enrollees in the program in 2010, including the aged and the disabled. The Medicare payroll tax has been higher than needed to meet current funding requirements, in order to build up a surplus to help fund the baby boom surge in the next few years. The Hospital Insurance trust fund had a surplus of $244 billion at the end of 2011. If no changes are made to the program, it is projected that the trust fund will spend its current surplus by 2024, after which it would be forced to reduce benefits payments, initially to about 87 percent of full benefits, with the shortfall increasing over time if health care costs continue to increase.

- Medicare Part B, Supplementary Medical Insurance, which pays doctors' bills and some outpatient expenses, is not funded by the payroll tax. This is a voluntary program, but about 93% of eligible aged and disabled participate in the program. Most services under Part B are subject to an annual deductible and coinsurance. Participants pay a premium which now averages about 25% of program costs. Individuals with incomes exceeding $85,000 pay premiums covering 35, 50, 65, or 80 percent of the average program cost for aged beneficiaries, depending on their income level. Since only about 25% of the cost of Part B is covered by premiums paid by beneficiaries, most of the remaining cost is paid from the Federal government's general revenues. In 2010 this Part B program obtained $153.5 billion from general revenues, which ultimately is paid for by all taxpayers.

- Medicare Part C, the Medicare Advantage program, funds private insurance plans that provide hospital and medical coverage for those who opt to choose such a private plan. The costs to Medicare of these private plans are paid from Part A or Part B funds and are not funded separately. In 2010, 24.6% of Medicare enrollees were in a Medicare Advantage plan rather than the original Part A and Part B programs. The Advantage program was enacted by Republicans in 2003 to expand the earlier Medicare Choice program. It was part of their goal to privatize Medicare. They claimed that the program would reduce the costs of Medicare as well as give more choices to seniors. The new program provided for payment of a fixed amount per plan participant, and such payment could be higher than the average per capita cost under traditional Medicare. This resulted in a rapid growth in the number of enrollees. But the private plans did not result in lower Medicare costs; rather they resulted in an increase of about 15% in the per capita cost for those in the Advantage program compared to the traditional Medicare.

- Medicare Part D, Prescription Drug Coverage, subsidizes the purchase of private insurance to help cover the cost of prescription drugs. This Part also is not paid for from the payroll tax, and is voluntary. Like Part B, there is a premium that escalates with income, as well as a deductible and copay. In 2010, about 73% of those eligible participated in the program. In 2010, those who joined the program paid premiums which covered only about 10.5% of the costs of the program, with the remainder paid from general revenues, which cost the Federal government $51.1 billion. This prescription drug program was proposed and enacted by Republicans in 2003, as part of the Republican spending spree.

Problems With These Programs

Each of these four Parts to Medicare present issues to be resolved to ensure long term viability:

- Part A, Hospital Insurance, needs to be modified to provide adequate funding after 2024, which could be solved with relatively modest changes, such as a small increase in the Medicare tax, some changes in cost sharing by enrollees, and/or better control of hospital cost increases.

- Part B, for doctors' bills, is a larger problem, because of its impact on the Federal budget, which is now covering 75% of the growing Part B costs. When the program started in 1966 it was planned that the premiums would cover half of the costs of the program, with taxpayers paying the rest. However, changes in the legislation, including a "hold-harmless" provision that limits the premium increase to the amount of the annual increase in Social Security benefits for cost of living (so that the Social Security check does not get reduced to cover the Part B premium), have resulted in a decline in the percentage covered by premiums to only 25%. The Part B costs to the Federal government last year were $153.5 billion, or about 4.4% of total Federal spending in 2010, and these costs are projected to increase to about $280 billion by 2020 due to expected increased enrollment as the baby boomers reach age 65, and expected continued increases in medical costs. Longer term projections indicate that Part B expenses will continue to grow for many years after 2020, taking a growing percentage of the Federal budget.

- Part C, for the private insurance plans of the Advantage program, has not met its goal of reducing the Federal budget costs of Medicare, and in most cases it has not resulted in more choice for seniors. Private health insurance plans have failed to provide coverage at a lower price, and worse, they have cost about 15 percent more per enrollee than is paid under the original Medicare. As discussed below, action has been taken to reduce the added cost of the Advantage program, but the cost of the private plans are expected to continue to increase at a rate similar to traditional Medicare costs, thereby increasing the demand for general revenue funds.

- Part D, for prescription drug insurance plans, also presents a growing problem for the Federal budget. Costs for this Part are growing the most rapidly, with average annual expenditures expected to increase at a rate of 9.7% from 2010 to 2020. Total expenditures for this program are projected to increase from $62 billion in 2010 to over $155 billion in 2020. The current program provides very little flexibility to the government to reduce costs because the costs of the plans are set by bids from private insurance companies, and the legislation passed by Republicans specifically prohibits the government from attempting to negotiate with pharmaceutical firms for lower prices for drugs paid for under the program.

Democrats' Actions to Ensure Viability of Medicare

The health insurance reform legislation that was passed by Congress and signed by President Obama in 2010 (the Affordable Care Act) included several provisions designed to reduce the rate of cost increases for Medicare.

A primary focus of this legislation was to stop the unsustainable increase in health care costs in the United States. This is an issue that impacts Medicare directly, but even more importantly it impacts the ability of the rest of the population to receive affordable health care. And it affects the competitive position of American companies in the world market because per capita health care costs in America are much higher than in the rest of the world. The Organization for Economic Co-operation and Development (OECD) report on Health Data in member countries shows the problem:
* In 2007, the total spending for health care in the United States accounted for 16% of the country's GDP, the highest share among the OECD and almost double the OECD average;
* On a per capita basis the U.S. spent by far the highest with a total of $7,290, which is two-and-half times the OECD average;
* Despite the high medical expenditures, life expectancy in the U.S. is worse than in many other countries, including Japan, Switzerland, Canada and Australia.

One of the features of the Affordable Care Act is to tie the prices paid by Medicare for almost all non-physician expenses to the rate of growth in economy-wide productivity (about 1.1 percent per year). It challenges the health care industry to increase its own productivity to at least match the average increase in productivity of the rest of non- farm business. And it ties physician payment rates to the rate of per capita growth of the GDP, to help ensure a reasonable balance between physician earnings and the well- being of the entire economy.

The Act promotes an aggressive research and development program to encourage implementation of payment and delivery system reforms to help constrain cost growth.

The Act includes a strong incentive for everyone to purchase health insurance. When individuals are uninsured, hospitals and doctors frequently are forced to absorb the costs of service for these individuals, and then they need to inflate their charges to those covered by private insurance or Medicare in order to recover the unreimbursed care of the uninsured. For many years states have required automobile owners to have liability insurance so that insured motorists or the taxpayers don't get stuck paying for the damage done by uninsured motorists. The same principle applies to health care insurance. (It is worth noting that at one time Republicans championed this idea of requiring everyone to have health insurance, but that was back when Republicans did not have a knee-jerk negative reaction to anything proposed by President Obama.)

The Act will reduce the higher rates of payment for the Medicare Advantage program, to bring the costs for these private plans in line with the original Medicare Parts A & B coverage. This change was aggressively opposed by Republicans, and they now vow to repeal the entire Act, to ensure that the cost of the Advantage program will increase.

The Act establishes an Independent Payment Advisory Board, composed of health care experts, which will have the responsibility to make recommendations to control health care costs to meet a target ceiling on the rate of growth in Medicare spending. The Board's recommendations would automatically go into effect unless overruled by Congress. This will make it easier for members of Congress to avoid voting for unpopular changes.

The Obama Administration also is studying other actions that might be taken to ensure the financial viability of Medicare in the long term, while bringing the Federal budget into balance.

The Republican Proposal

The Budget Plan passed by the Republicans in the House of Representatives has two major provisions affecting Medicare:

1. It would repeal the Affordable Care Act enacted in 2010, to bring to an end all government efforts to reduce the growing cost of health care in America.

2. It would replace Medicare with a program of vouchers for the elderly and the disabled to be used to pay a portion of the cost of purchasing a health insurance plan from a private insurance company. This would take effect for those now under 55 years of age, when they reach age 65 in 2022 (assuming the legislation would be passed in 2012). The proposal states that "the Medicare premium- support payment would be adjusted so that wealthier beneficiaries would receive a lower subsidy, the sick would receive a higher payment if their conditions worsened, and lower-income seniors would receive additional assistance to cover out-of-pocket costs."

The Republican proposal claims that health care costs can be controlled if we just let competition in the marketplace work.

They claim that the Affordable Care Act is a failure because it has not yet reduced health care costs.

They claim that the proposal will reduce Federal spending for Medicare and that there is an urgent need to take action because of the growing Federal debt.

They claim that the proposal will take power away from Federal bureaucrats and give seniors and the disabled the ability to make their own decisions about health care.

The Reality

Republicans offer no evidence that price competition will control health care costs. Experience shows the contrary; hospitals and doctors do not compete for patients based on the price of their services. And insurance companies have not been able to constrain increased hospital and doctor costs - they have passed those increases along to the insured through increased premiums (or they found ways to avoid paying benefits to patients, such as dropping patients with high costs or claiming that the costs were not covered due to pre-existing conditions). For the past 60+ years hospitals and doctors and insurance companies have had ample opportunity to compete for the business of individuals and employers, and the cost of health care has just kept going up at a rate far exceeding cost increases in other industries.

The Medicare Advantage program has offered private health insurance organizations ample opportunity to demonstrate that they can provide health care at a lower cost than traditional Medicare, and they have failed to do so. This new Republican proposal would basically be just an expansion of the Advantage program to cover all of Medicare, but with the Federal government paying a declining portion of the costs.

Republicans argue that the Affordable Care Act is a failure because it has not yet reduced health care costs, ignoring the fact that most of the provisions of the Act have not yet been implemented, and key provisions will not become effective until 2014.

Republicans maintain that their proposal will reduce Federal spending for Medicare, but an analysis by the independent Congressional Budget Office concludes that the voucher proposal and the repeal of the Affordable Care Act will actually increase costs to the Federal government.

Republicans argue that they are proposing to privatize Medicare because of the urgent need to reduce Federal spending, but their proposal does nothing to reduce Medicare costs for the next ten years when those baby boomers born in 1947 through 1957 will join Medicare, and all those boomers will stay on Medicare the rest of their lives during which the Republicans would prevent any government actions to constrain the cost growth of Medicare.

Republicans claim that their proposal with give seniors greater choice in obtaining their health care, but the experience of the Medicare Advantage program shows that the private health care plans reduce choice of health care providers, because the plans require enrollees to choose from a restricted list of doctors and hospitals.

Republicans complain about government bureaucrats controlling our health care decisions, but somehow it is fine to have insurance company bureaucrats controlling our health care decisions. As citizens we have some ability to change government through our election process, but we have no ability to change insurance company behavior in a non-competitive market.

It is clear that the only way this proposal to privatize Medicare will reduce Federal spending is by passing more of the costs of health care on to the elderly and the disabled by setting the amount of the voucher at a level well below full costs of the insurance.

It is clear that this Republican proposal is not about reducing the Federal debt. They are using the fear of rising Federal debt to try to dismantle the government's health insurance program and turn it over to private insurance companies. And the elderly and disabled will pay the price.