Medicare Myths, Debunked

At the moment, the hot issue of the 2012 presidential campaign is Medicare, with the Obama and Romney campaigns trading charges and counter-charges over the health-insurance program for the elderly. Since we at the Prospect love clarifying the muddy and making the complex understandable, we thought we'd unpack the arguments the two sides are making and provide some context so we can all grasp this a bit better. We'll start with the campaigns' claims.


Does Mitt Romney actually want to "end Medicare as we know it"?

That's the charge Democrats are now making; here's a video the Obama campaign just released:

Is it true? The answer depends on your definition of "as we know it." There is no question that Romney would fundamentally transform the Medicare program from what it is now—a single-payer insurer that guarantees coverage to all American seniors—into a "premium support" program in which the government gives seniors vouchers they can use to buy private insurance or stay in traditional Medicare. Perhaps the key feature of Romney's plan, though, is that it wouldn't actually take any particular steps to bring down health-care costs. It simply assumes that market competition will do the job: "With insurers competing against each other to provide the best value to customers, efficiency and quality will improve and costs will decline."

The only problem is that there's no reason to think that will actually happen. There is already competition in today's private insurance market for non-seniors, and costs continue to rise—and rise at a faster rate than costs in Medicare. We also have the experience of Medicare Advantage, which is very similar to what Romney proposes. For some time, Medicare beneficiaries have been able to have their benefits administered by private plans. This was supposed to bring down costs through the market competition Romney touts. It hasn't; Medicare Advantage plans are significantly more expensive than traditional Medicare.

But even if the market magic in Romney's plan doesn't work, it does bring down the cost of the program, if not the actual cost of health care. How? By simply making seniors pay more. The value of the voucher will rise slowly, and if the cost of insurance rises at a faster rate (which is highly likely), then more and more of the cost of insurance would be shifted onto seniors themselves. So unlike current Medicare, where you always have a guarantee of care, under Romney's plan you do not.

There's one important caveat: Romney would only make this change for people who are now under age 55, meaning current beneficiaries and those soon to get it would be able to keep the Medicare they love so much. You might ask why, if Romney's program is so terrific, he wouldn't want today's seniors to enjoy it in all its splendor. But everyone knows that the 55-and-over provision is a solution not to a policy problem but a political problem: the fact that seniors don't want anyone messing with their Medicare. Which brings us to the attack Romney is making on the Obama administration.



Who's "cutting Medicare," and by how much? Did President Obama really cut Medicare by $716 billion?

The argument about what constitutes a "cut" in Medicare is an old one, and in the past it has come from both sides. In 1996, for instance, Bill Clinton pummeled Bob Dole with ads saying Dole wanted to cut Medicare by $270 billion. What Dole actually proposed was to slow the rate of Medicare's growth, which is just what both Barack Obama and Paul Ryan have proposed. A slowdown in the rate of growth could be a "cut" if it means that per capita spending is lower, since in coming years there will be many more beneficiaries. But the real question is how you spend less, and whether doing so harms each individual beneficiary. If Medicare spent slightly less next year because the office in Washington switched to a cheaper vendor for their laser printer toner, that wouldn't be the kind of "cut" that should make Medicare recipients worried. Both sides argue that the other would impose the more painful kind of cut, the kind that affects the actual benefits a Medicare beneficiary receives.

Mitt Romney is now telling seniors that President Obama took $716 billion out of their Medicare and gave it to somebody else, probably some undeserving no-good punk who'll steal your car after he gets high on your Lipitor. I'm exaggerating only slightly:

"Now the money you paid for your guaranteed health care is going to a massive new government program that's not for you." Sounds a lot like they want seniors to believe that their guaranteed health care is not going to be guaranteed anymore. Which is ridiculous, of course. But what is actually the story with the cuts?

The Affordable Care Act did in fact reduce spending on Medicare. It did so through a variety of means both large and small, but the two biggest savings came through an end to the overpayments taxpayers were giving to private insurance companies through Medicare Advantage, and reduced payments to hospitals. The hospitals agreed to those reductions in large part because the fact that the ACA insures so many more people means that they'll make up the income elsewhere, by not having to treat so many uninsured patients who can't pay. Those two items make up about two-thirds of the Medicare savings in the ACA; the rest comes from a measures like reduced payments to some other providers and a crackdown on Medicare fraud. But none of the savings involve taking anything away from beneficiaries.

Not only that, the opposite is true. Romney is partly right that the money from these savings is going to people other than seniors, since some of it does go toward expanding coverage for people who aren't on Medicare. But some of those savings also goes to pay for increased benefits for Medicare beneficiaries. The ACA provides preventive care for seniors with no cost-sharing (i.e., no co-pays or deductibles), which the government says 16 million seniors took advantage of in the first half of this year. It also closed the prescription drug "doughnut hole," saving many beneficiaries hundreds of dollars in drug costs. What that means is that under the "cuts" to Medicare from the ACA, seniors now have more benefits than they did before. The savings have also extended the life of the Medicare trust fund.

So while the ACA did cut Medicare, it did so in ways that didn't reduce benefits for seniors, and increased those benefits in other ways. Romney is now saying he'll "restore" the money to Medicare by repealing the entire Affordable Care Act, which actually means imposing more costs on seniors (re-opening the doughnut hole, bringing back cost-sharing in preventive care).

In sum, Romney is arguing three things simultaneously: First, we absolutely have to restrain Medicare spending. Second, only he has a "plan" to do it, while Obama doesn't. Third, how dare Obama have restrained Medicare spending through all the reforms he made to Medicare under the Affordable Care Act! You can call this ironic or hypocritical or appalling, but that's what he's saying.


Why is Medicare so expensive? And is it really going to eat the entire federal budget?

While conservatives might have you believe that Medicare is expensive because it's a bloated big-government socialistic program, that isn't actually true. In fact, Medicare is remarkably efficient, precisely because it's a big-government program. Unlike private insurance companies, Medicare doesn't have to spend millions on marketing, underwriting (figuring out who not to cover) and big salaries for executives. So only around 2 percent of Medicare's costs go to things other than actual health care, compared to private companies that spend 15 percent, 20 percent or more. And the fact that it's big means it has tremendous negotiating power, so it is able to keep many costs low. If you're a physician or a hospital, you have to accept Medicare's reimbursement rates or just not serve Medicare patients. As you can imagine, doctors don't like this very much, but it serves the taxpayer. So while Medicare's costs have been increasing along with health care costs more generally, over the last decade and a half they have risen at a slower rate than the cost of private insurance.

Nevertheless, Medicare does cost a lot overall, for two reasons: First, the population it serves is the most expensive one. Old people get sick a lot, and they get sick in very expensive ways. Second, that population is growing as the baby boomers head toward retirement. There are a lot of scary projections about the rising cost of Medicare, and they're produced by the fact that the program is going to have to accommodate millions of new beneficiaries. Medicare served 48.7 million seniors last year; the number is projected to rise to 81 million by 2030, when the last of the baby boomers retire. As you can see in the chart below (the data are from the Medicare trustees' latest report), the number of projected beneficiaries climbs faster between now and 2030, and then returns to its former slope. The annual percentage increase actually slows down considerably after the first wave of baby boomers arrives, but the absolute number of beneficiaries continues to rise.

All these new beneficiaries cost a lot of money, but determining exactly how much requires making a lot of assumptions about what the American health care system is going to look like 10 or 20 years from now. Last year Medicare cost $485 billion, which was 13.5 percent of the federal budget, or 3.67 percent of GDP. The Centers for Medicare and Medicaid Services projects that number will rise to 6 percent of GDP by 2040. That does, without question, present a serious funding challenge. But keep in mind that this outlook is already much improved over what it was because of the reforms in the Affordable Care Act. If Mitt Romney were to succeed in repealing the ACA, Medicare's cost problem would worsen considerably. His answer is that we can solve the problem by 1) waiting for the market to bring down costs, and 2) forcing seniors to pay more for whatever the market doesn't take care of.


Republicans know that they come to this issue with a natural disadvantage. They opposed Medicare when it was enacted in 1965, and they've tried in various ways to undermine it ever since. Voters understand this, and as a result they tend to give Democrats the benefit of the doubt on the issue. But Republicans believe they have found a formula to fight Democrats to a draw on the issue: avoid words like "privatize," insist they want to "defend" and "strengthen" Medicare, then attack Democrats for trying to cut it.

Mitt Romney is following these instructions to a T, and it just might work. But all of the back-and-forth about who really wants to cut Medicare obscures a fundamental philosophical divide. Liberals see Medicare as one of the great policy successes of the last century, proof that vigorous government action can solve a difficult problem and provide enormous benefits to millions of people. Republicans don't much like Medicare at all, and they'd like it a lot better if it was less of a government program and more of a private one. This difference colors their respective analyses of the challenge we face. Conservatives say we have a Medicare spending problem, and the way to solve it is to spend less on Medicare. Liberals say we have a health care spending problem, and the way to solve it is to bring down the cost of health care.

You could easily just spend less on Medicare–give every senior a voucher for a couple of thousand dollars and be done with it. But that would do nothing to solve the larger health care problem, and would entail a spectacular cost in human suffering as millions of seniors go without health care in the way they did before 1965. That's why liberals want to use Medicare, the biggest player (and payer) within the health care system, to bring about system-wide changes that will bring down costs for everyone.

That then leads to the most significant practical difference in the approaches taken by Obama and Romney. Through the Affordable Care Act, Obama uses a variety of means–dozens of them, actually–to attempt to bring down costs within the existing program. But he does it while retaining Medicare's guarantee of coverage. Romney, on the other hand, explicitly refuses to entertain changes within Medicare itself. He doesn't propose changing the way Medicare pays for care, or suggest any pilot programs or any incentives to lower costs. Instead, he hopes that that competition with private insurers is all that's necessary to bring those costs down. If that doesn't work, his plan will shift more and more of the expense onto the seniors themselves. One approach says we can shape this program to make it work as well as possible and use it to leverage the kind of changes we'd all like to see in the broader health care market. The other says if we just get government out of the way, the market will produce optimal results on its own. The Obama approach includes some uncertainty; improving on a large and complex government program isn't easy, and it's likely that some of the reforms in the ACA will work better than others. So it's possible it won't succeed. But if Romney was right, the private insurance market would already be outperforming Medicare. And we know that hasn't happened.

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