Candidates Square Off on Medicare Spending

EDITOR'S NOTE: This article was originally published in the October 2012 issue of Kiplinger's Retirement Report. To subscribe, click here.

If you take the attacks in the presidential campaign at face value, you'd think that both parties are out to eviscerate Medicare. Let's ignore the heated rhetoric: Neither President Obama nor challenger Mitt Romney proposes cutting support for Medicare below current levels.

Instead, plans offered by both candidates aim to slow the rate of growth in spending. "When you cut through all the smoke and mirrors, both Obama and Romney want to significantly reduce the growth in Medicare spending over time to about the same levels," says David Walker, former director of the Government Accountability Office, the investigative arm of Congress.

Subscribe to Kiplinger’s Personal Finance

Be a smarter, better informed investor.

Save up to 74%

Sign up for Kiplinger’s Free E-Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Sign up

Still, the two candidates -- and their political parties -- are engaging in a public debate over controlling Medicare costs that has preoccupied policymakers for years. They have "very different opinions on how to get there," says Walker, founder of the Comeback America Initiative, which promotes fiscal responsibility.

If beneficiaries receive a fixed payment that they could use to buy health care coverage, Republicans believe that competition among insurers will drive down costs. The Democrats expect that payment pressures on physicians and hospitals will spur innovative, cost-efficient service delivery. Both plans would cap the annual growth in Medicare spending to the growth in gross domestic product plus 0.5%, which is less than the historic annual growth in health care costs.

Obama's Medicare plan was part of the 2010 Patient Protection and Affordable Care Act. Romney has adopted the Medicare provisions in a budget proposal developed by running mate Representative Paul Ryan (R-Wis.), chairman of the House Budget Committee. Ryan released his latest proposal, "The Path to Prosperity: A Blueprint for American Renewal," in March.

Obama would maintain Medicare's current structure. Beneficiaries would continue to pay a premium to obtain medical coverage from either the traditional fee-for-service program or private Medicare Advantage plans. The new law also shrinks the Part D prescription-drug "doughnut hole" and mandates an array of free preventive-care services.

Romney charges that the new law "robbed" $716 billion from Medicare benefits. But the $716 billion spending reduction over ten years would not cut the program's basic benefits package, according to the Congressional Budget Office. Instead, it would reduce the future growth of payments to some providers.

Some cuts will come from skilled nursing and home health services, while insurers and drug and device manufacturers will pay new fees. Also taking a hit are hospitals, which agreed to the cuts because they will likely see many new paying patients under the law's insurance expansion.

Payments to Advantage plans will be reduced as well. The private-market program has consistently cost more than traditional Medicare. "The plans will continue to provide all medical benefits, but some may need to cut extra benefits, such as gym memberships or vision care," says Tricia Neuman, senior vice-president of the nonpartisan Kaiser Family Foundation.

Obama also hopes to reduce unnecessary care, and thus lower costs, by exploring new provider payment systems. For example, the law would offer incentives for physicians to coordinate patient care, improve quality and reduce unnecessary hospitalizations.

Vouchers to Buy Coverage

Meanwhile, the Romney-Ryan plan would provide beneficiaries with a "premium support" payment, or voucher, that they could use to buy coverage. Beneficiaries could use their voucher to purchase traditional Medicare or one of several competing insurance plans in new local Medicare exchanges.

The payment would be pegged to the cost of traditional Medicare or the second-lowest-cost private plan in a community -- whichever is lower. If the subsidy is too small to cover the premium of the plan a beneficiary chooses, he or she would have to cover the difference. If the subsidy is larger, the beneficiary could pocket the excess. In areas where traditional Medicare is more expensive than the second-cheapest plan, Neuman says, "people would have to pay more to be with traditional Medicare."

The voucher system would apply to all new beneficiaries starting in 2023. The Medicare eligibility age would gradually rise until it reaches 67 in 2034. But current beneficiaries would not be immune: Romney says he would repeal the Affordable Care Act, thus abolishing the doughnut-hole protection and the free preventive-care screenings.

A CBO analysis last year found that under the Ryan plan, the average 65-year-old beneficiary would pay twice as much out of pocket for a private plan when the voucher program begins -- or $6,000 more -- than the senior would pay for traditional Medicare. A major reason, the CBO noted: Private plans, because of higher administrative costs and payments to providers, would cost more than traditional Medicare. Ryan has made some changes to his proposal since then, and the CBO has yet to update its analysis.

Until recently, Ryan's budget plan included the same $716 billion in cuts as the health care law. But Romney has since said he opposes those cuts.

Marilyn Moon, senior vice-president of the American Institutes for Research, a nonpartisan think tank, estimates that repealing the $716 billion in savings would increase Part B premiums and beneficiary co-payments by an average $342 a year over the next decade. Part B pays for outpatient services. "The premium pays for 25% of the cost of Part B, so when costs go up, the premium goes up," Moon says.

Romney would leave it up to Congress to cut spending if costs exceed his plan's growth caps. Obama's law created a 15-member advisory board that would make recommendations to Congress on curbing Medicare spending if costs are higher than expected. If Congress doesn't like the recommendations, it must come up with alternatives of the same size.

Under the Romney-Ryan plan, if program costs exceed the spending cap, the government could reduce federal spending by ratcheting down the subsidy or not raising it to keep pace with rising costs, many analysts say. "The question is how the government will determine the level of the premium support, how it will be indexed and whether it will lead to more cost shifting onto beneficiaries," Walker says.

Also, while Romney would keep traditional Medicare as an option, it may be doomed to unravel under a premium-support system, says Paul Van de Water, a senior fellow at the Center on Budget and Policy Priorities, a research group. Van de Water argues that the second-lowest-cost plan on which the voucher would be based would likely be a private managed-care network with a limited choice of providers. Such private plans would attract healthier beneficiaries, he says.

Meanwhile, sicker beneficiaries who would want a wider range of physicians would enroll in traditional Medicare. Eventually, to pay for its sicker beneficiary pool, Van de Water says, "traditional Medicare would have to raise premiums, further discouraging healthy people from enrolling." It's unlikely that extra payments to plans that cover sicker patients would stem this downward spiral, he says.

Some critics believe Obama's plan will hurt beneficiaries. If innovations in medical-care delivery don't drive down costs, his advisory board will likely target provider payments to physicians, drug companies and other providers, says Mary Grealy, president of the Healthcare Leadership Council, a coalition of corporate executives representing insurers, drug makers and other providers. As payments get squeezed, providers may drop Medicare patients, she says. "If you are cutting providers' payments, you are affecting beneficiaries and access," she says.

Indeed, Medicare beneficiaries could be harmed no matter which candidate wins, notes the CBO in an April 2011 report. Cuts in provider payments could lead to lower-quality services and less access. But if subsidies under the GOP plan are too low and beneficiaries need to seek cheaper health care services, the CBO says, the introduction of "new but possibly beneficial technologies" could be stifled.

Haven't yet filed for Social Security? Create a personalized strategy to maximize your lifetime income from Social Security. Order Kiplinger's Social Security Solutions today.