Why Obamacare May End Up Raising Medicare Costs

Lately the news about Medicare costs has been surprisingly good. Congress recently made a deal to spare some beneficiaries what would have been steep 50% hikes in Part B premiums (for doctor and outpatient services) next year. Even better, data from the Medicare Trustees Report show, the five-year-old Affordable Care Act (ACA), aka Obamacare, has helped slow the rise in health care costs.

But these welcome short-term gains may not be sustainable, according to a new report by the Boston College Center for Retirement Research. That's because the cost savings are being funded in part by reduced payments to doctors and hospitals, who could stop accepting Medicare patients if lower reimbursements continue. It goes without saying that raising their payments would substantially boost Medicare’s longer-term price tag—indeed, the movement to higher payments already has begun.

Earlier this year, the so-called “doc fix” law was enacted to help compensate doctors for nearly 20 years of inadequate Medicare payments. It will cost at least $200 billion over the next 10 years and most of this spending is not supported by higher fees or taxes. In 20 years, one taxpayer watchdog group estimates, this single bill will add half a trillion dollars to the federal debt all by itself.

Current Cost Savings

That would be a big step backwards, given how ACA has helped control health care expenses so far. Prior to passage of the ACA in 2010, runaway out-of-pocket Medicare expenses were projected to eventually eat up 70% of the average beneficiary’s Social Security payment. This share hit 26% in 2011 but dropped to 23% last year. It will begin rising again, the Center’s report said, but provisions of the ACA will keep that ratio to well below 40% of average Social Security payments.

Government spending on health care was reduced as well. Comparing Medicare’s official cost projections made in 2009 (before ACA went into effect) and in 2015, show that the program’s share of the gross domestic product in the year 2035 has dropped from 7.2% to 5.4%.

Higher Expenses for Higher Earners

To help offset expenditures, the new law raised Medicare payroll taxes on wealthier wage earners from 1.45% to 2.35% for individuals earning more than $200,000 ($250,000 for joint returns). The law also added surcharges to premiums for Part D prescription drug plans for those with higher incomes. And it removed annual inflation-related increases in these higher-income brackets until the year 2020, so more people have to pay steeper Part D premiums.

The doc fix law will further boost high-income Medicare payments beginning in 2018. Medicare beneficiaries earning less than $85,000 a year ($170,000 on joint returns) have to pay Medicare premiums that cover only about 25% of the government’s cost to fund Medicare Part B expenses for doctors, outpatient and medical equipment. Higher-income beneficiaries, however, must pay 35% to 80% of these expenses.

Headed for Trouble

While the ACA’s early savings projections are proving largely accurate, the Center’s report raises worrisome questions about what would happen if the law’s reduction in physician and hospital Medicare payments needs to be raised to keep providers in the program.

Medicare payments to doctors—now only about 80% of private insurance payments—are projected to fall even more. “If physician compensation lags significantly,” the report said, “access to Medicare physicians could become a serious problem, which would likely result in significant pressure to raise the rates.” That trend may be worsened given the doctor shortages that are already occurring in some areas and for some specialties. Payments to hospitals also face shortfalls.

In 2020, the official Medicare reports show that spending on Parts A (hospital) and B of Medicare would total 3.24% of GDP, rising to 4.64% in 2040 and 4.59% in 2060. These reports assume that payment rates to doctors and hospitals would continue to decline.

However, if these rates are increased, which is widely expected, the spending for Parts A and B would be sharply higher—5.17% in 2040 and 6.04% by 2060.

That would be a huge challenge for retirees, who already face daunting medical costs. So make sure to build in extra savings for health care expenses in retirement—this calculator can help you figure out your needs. And shop carefully for the most cost-effective coverage.

Philip Moeller is an expert on retirement, aging, and health. He is co-author of The New York Times bestseller, “Get What’s Yours: The Secrets to Maxing Out Your Social Security,” and is working on a companion book about Medicare. Reach him at moeller.philip@gmail.com or @PhilMoeller on Twitter.

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