Bush FY2008 Budget:

Analysis of Medicare Provisions

The President’s budget proposal seeks to save money in Medicare by implementing arbitrary reductions in provider payments and by shifting more costs to beneficiaries. In addition, his proposed budget allows him to reserve the right to cut additional dollars in the future without regard to the effects of these cuts. All of these proposals would substantially weaken Medicare.

The President’s budget contains the following proposals regarding Medicare:

Reduce Provider Payments under Medicare Parts A and B: The budget includes reductions in, or freezes to, Medicare payments for a long list of health care providers. Those providers include hospitals, skilled nursing facilities, home health care providers, inpatient rehabilitation facilities, hospices, and ambulances. In addition, bad debt payments would be phased out, which would further reduce payments to providers.

Budget Impact: Direct reductions in or caps to provider payments plus the bad debt phase-out in Parts A and B would save $2.85 billion over the first year and $49.1 billion over five years.

Make More Beneficiaries Pay Higher Part B Premiums: The budget proposes to change current law and require that a larger number of Medicare beneficiaries pay higher Part B premiums. Under current law, starting in 2007, higher-income Medicare beneficiaries (individuals with annual incomes above $80,000, and couples with annual incomes above $160,000) must pay higher premiums for Medicare Part B. The income threshold that triggers higher premium payments increases annually with inflation. The President’s budget proposes holding the income threshold constant. This means that the trigger for higher premium payments would stay at $80,000 for an individual and $160,000 for a couple, even as beneficiary incomes increase.

Budget Impact: This proposal would save $543 million in the first year and $7.1 billion over five years.

Increase Part D Premiums for Higher-Income Beneficiaries: The budget also proposes to change current law to require that higher-income Medicare beneficiaries pay higher Part D premiums. This provision would extend the rules governing higher Part B premiums to the Part D prescription drug program. The trigger for these higher Part D premiums would also not be indexed to inflation.

Budget Impact: This proposal would generate $357 million in the first year and $3.3 billion over five years.

Impose Automatic Across-the-Board Cuts in Future Years: The budget proposes to automatically cut all provider payments by 0.4 percent whenever more than 45 percent of the Medicare budget is paid for by general revenues. The cuts would increase by 0.4 percent in each subsequent year until the percent of general revenues consumed falls below 45 percent.

Budget Impact: No one-year or five-year figures are given, but if implemented, the Administration estimates this measure would reduce Medicare spending by $4 trillion over 75 years.

Families USA Commentary on the Medicare Proposals

Cuts in provider payments will make participating in Medicare less attractive for many providers, thus reducing beneficiaries’ access to needed care. Providers will likely also respond by reducing services or by passing costs on to beneficiaries and private payers. This is not a constructive step toward addressing the issue of rising health care costs. The end result will be reduced access and lower quality of care or continued rising costs for beneficiaries and employers—or both.

Requiring higher-income beneficiaries to pay more for Part B and Part D premiums will make traditional Medicare less attractive to healthier, wealthier beneficiaries. Eliminating the indexing of the higher-premium thresholds is particularly problematic, as over time, it would lead to a larger and larger number of middle-income beneficiaries being forced to pay higher premiums. This policy could lead to a migration of higher-income beneficiaries to new Medicare Medical Savings Accounts plans (MSAs), which appeared in substantial numbers for the first time in 2007. Like Health Savings Accounts in the private sector, MSAs are high-deductible plans that appeal to healthier and wealthier beneficiaries. Encouraging growth in private MSA plans is in line with the Administration’s effort to move Medicare from a program with a consistent benefit that is available to all beneficiaries to one that requires seniors to navigate numerous private insurance plan options and fend for themselves.

Despite making substantial cuts to provider payments, the budget leaves untouched the massive overpayments to Medicare Advantage (MA) private plans. These overpayments have grown consistently since the enactment of the 2003 Medicare Modernization Act. Recent analysis by the Medicare Payment Advisory Commission (MedPAC), the independent commission that advises Congress on Medicare policy, found that, for every beneficiary in an MA plan, the plan received, on average, 112 percent of what it would cost to provide the same care in traditional Medicare. A separate independent study estimated the cost of these overpayments at $5.2 billion in 2005, and the cost has surely grown since then, as enrollment in MA plans has increased. If the Administration wants to reduce Medicare expenditures, it should look first to these overpayments, rather than promote cuts that threaten the quality and stability of the health care system.

Finally, the budget proposes to give the President authority to implement an across-the-board “sequestration,” or cut, to Medicare of 0.4 percent whenever more than 45 percent of Medicare expenditures are funded by general revenue. This 45 percent threshold or “trigger” is derived from a provision in the 2003 Medicare Modernization Act that requires the President to propose changes to Medicare financing whenever the Medicare trustees determine that, for two consecutive years, general revenues will constitute more than 45 percent of Medicare expenditures within seven years. There are numerous problems with this trigger. For example, estimates of Medicare’s future financial inflows and outflows have varied dramatically over the last 30 years, and a projection of funding seven years into the future is uncertain. Also, the trigger is merely an arbitrary measure of Medicare’s financing sources—there is nothing especially significant about the figure of 45 percent. Moreover, Medicare’s trustees have not yet determined that Medicare financing has met the 45 percent threshold (though they are expected to do so this year). Thus, the Administration’s proposal to deal with Medicare’s future financing is arbitrary—it would simply enact across-the-board reductions without regard to the impact those cuts would have on beneficiaries or the health care system. Nor does his proposal make any serious attempt to address the overall increases in health care costs that are driving much of Medicare’s growth.

[Return to top] [Return to Budget Analysis main page]