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The truth behind the $716 billion in Medicare cuts

One of the real fissures between the presidential candidates is whether to cut $716 billion in Medicare spending over the next 10 years.

One of the real fissures between the presidential candidates is whether to cut $716 billion in Medicare spending over the next 10 years. Mitt Romney is against it while his vice presidential running mate, Paul Ryan, was for it—before he was against it. President Obama incorporated it into the Affordable Care Act to pay for part of health care reform.

While the $716 billion figure has become reified in the rhetorical battle, there has been little analysis of the proposed savings and whether they would hurt Medicare beneficiaries. Although Romney and Ryan have accused the president of “robbing the Medicare program,” the $716 billion in Medicare savings under Obamacare are actually primarily reductions in over-payments to private insurers, hospitals, and other health care providers. Ryan accused the president and vice president of “getting caught with their hand in the cookie jar” —but he, too, had included these very savings in his own House budget.

Let’s start at the top. The largest savings—$260 billion over 10 years—comes from reductions in payments to hospitals. Technically, the amount paid to hospitals won’t actually decrease. The yearly increase in payments will be lower than it otherwise would have been. To put it into context: in 2011, hospitals got $237 billion from Medicare payments.

The rationale for these savings is related to the fact that productivity should be increasing from expanded use of computers, automation and other labor saving technologies. For instance, in the old days—20 or so years ago—many laboratory tests were done by hand. Technicians, for instance, would take a blood sample, smear it out on a slide and count the various kinds of white cells. Today, a machine does this automatically on hundreds of samples. Swapping automation for human labor should increase productivity—and accuracy—while reducing costs.

Similarly, in the old days, it would take CT machines much longer to scan a person and create an image. Machines and the software that converts the scans into pictures have improved and dramatically reduced the time a patient is in the machine. An increase in productivity should lower costs as more patients can be scanned during the day. The reduced payment merely reflects that decrease in scanning time and increase in productivity.

The second big savings—$156 billion over 10 years— comes from managed care companies. For years, these companies were paid more than traditional Medicare and yet their enrollees were healthier than the seniors who stayed in traditional Medicare. Independent assessments conclude that managed care companies were paid at least 13% more than they should have been. Some academic researchers put the amount overpaid much higher: in excess of 22%. Reducing overpayment to insurance companies seems reasonable.

The third big savings—$66 billion—comes from cuts to home health care agencies. What used to be a collection of mom-and-pop small businesses going into patients’ homes has been transformed into much larger corporate entities—into an industry. As a result, the profit margins of the home health care companies have come to rival those of the drug companies and Wall Street, an average of 17%.

In addition, home health care has been a problem. Because the service is delivered in private homes where it is hard to monitor whether patients actually received the care they were supposed to, the industry has been rife with abuse. The proposed savings are meant to get the industry down to more reasonable profit margins.

A fourth area of savings—worth $56 billion—relates to extra payments for providers who care for the uninsured. So-called disproportionate share, or DSH, payments are made by Medicare and Medicaid to hospitals and other providers to offset the costs of the care they deliver to uninsured people who cannot pay.  Under health care reform, the number of uninsured people will decline by nearly two-thirds. As a consequence, the amount of hospital care that is uncompensated will decline and so the rationale is that the DSH payments should decline, too.

These four cuts represent 75% of all the $716 billion in savings. Each one is well justified as correcting an over-payment to insurance companies, hospitals, and home health agencies. None reduces the benefits of seniors and none reduces their access to services.

For people who worry about deficits and the nation’s long-term debt, the $716 billion in savings also represents fiscal responsibility, and should be loudly applauded.

President Obama insisted that health care reform be paid for in full. Half was based on increases in revenue and half was based on savings in current programs. Indeed, by the end of the decade, health care reform will actually reduce the deficit by more than $100 billion. These savings make the system more efficient, make us more fiscally responsible, and most importantly none of these savings result from providing fewer benefits to patients or raising their out of pocket costs.

This is in complete contrast to the way the Republicans paid for—or didn’t pay for—the Medicare drug benefit in 2005. Romney and Ryan’s party neither cut programs nor raised taxes to pay for the new drug program. They simply passed the bill onto future generations through deficit financing—something they now claim they oppose.