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Health care reform does not cut Medicare benefits. In fact, health care reform expands Medicare coverage, by eliminating cost-sharing for preventive services, adding a yearly wellness visit, limiting some cost-sharing in private Medicare plans, and closing the Part D "Donut Hole." It also improves the solvency of the Medicare program itself. Reform does, however, change some Medicare payment policies. Some misstated reports of these changes have resulted in exaggerating public fear of cuts to Medicare benefits. This Alert summarizes the changes in certain Medicare payments in order to clarify that the Medicare reforms do not reduce Medicare’s guaranteed benefits.

The Affordable Care Act[i] achieves savings in the Medicare program through a series of payment reforms, service delivery innovations, and increased efforts to reduce fraud, waste, and abuse. The actual projected reduction in Medicare spending is $428 billion over 10 years, after $105 billion in new Medicare spending is taken into consideration.[ii] These projections actually extend the life of the Medicare trust fund by about a decade. It is important to stress that none of the payment reforms affect Medicare's guaranteed benefit packages. The law specifically states that the guaranteed benefits in Medicare Part A and Part B will not be reduced or eliminated as a result of changes to the Medicare program.[iii]

Most Medicare Cuts Are to Private Insurance Plans

The greatest amount of savings in Medicare, about $130 billion over 10 years, [iv] will be achieved by reducing overpayments to private Medicare Advantage (MA) plans. These are the insurance plans that contract with the Centers for Medicare & Medicaid Services (CMS) under Medicare Part C to provide benefits to those who voluntarily enroll. MA plans must provide all of the guaranteed benefits under Part A and Part B; they may provide additional benefits with moneys they receive in excess of the cost of providing the guaranteed benefits.

Under the funding mechanism in effect before enactment of the Affordable Care Act, MA plans were paid, on average, 9 – 13% more than the traditional Medicare program to provide the same coverage. These extra payments resulted in Medicare Part B premiums being $3.35 higher per month for all beneficiaries in 2009, and resulted in the federal government (and taxpayers) spending $14 billion more than it would have had Medicare Advantage plan enrollees remained in the traditional Medicare program.[v]

The Affordable Care Act phases in changes to the MA overpayments, starting with a freeze in payments to MA plans for 2011. Payments will be based on national county benchmarks, with plans being paid a fixed percentage of traditional Medicare costs. As a result of this payment formula, plans in some lower-paid counties, generally rural and suburban areas, will continue to receive payments that exceed the traditional Medicare amount, while plans in higher paid counties, many of them large cities, may see substantial reductions.[vi] Rebates (an amount plans receive if they bid less than the county benchmark) will also be reduced. The new payment structure also provides for an increase in payments by up to 5% for plans that receive four or more stars on the CMS star rating system.[vii]

Medicare Advantage Options Remain Robust for 2011

Many people in the health care industry predicted that the change in MA payments would result in fewer MA plans contracting with CMS, higher premiums, and reduced benefit packages. CMS announced at the end of September 2010, however, that these predictions were not accurate. According to CMS, MA plan premiums for 2011 will be, on average, $1 less than in 2010, and most beneficiaries will have choices of Medicare Advantage plans.[viii] Many MA plans that chose to leave the Medicare market in 2011 did so as a result of changes made by the Medicare Improvement for Patients and Providers Act of 2008 (MIPPA)[ix] and NOT because of the Affordable Care Act.

Those who point to the cuts in the overpayments to MA plans as proof that Medicare benefits were reduced by health care reform legislation fail to acknowledge that the Affordable Care Act improves benefits offered by MA plans. For example, the new law sets limits on the amount of cost-sharing plans can charge for chemotherapy administration services, renal dialysis services, and skilled nursing care services.[x] Further, starting in 2014, 85% of MA plan revenues must go towards benefits, not profits, or plans may be subject to sanctions.[xi]

Changes in Payments to Providers

Many of health care reform's payment reforms consist of changes in the methodology used to calculate payment updates for hospitals, skilled nursing facilities, home health agencies, and ambulance services, among others. Payment updates for these providers are based on an update to the "market basket" specific to the provider type that reflects the increased cost in doing business. In general terms, the Affordable Care Act reduces the annual market basket increase by a specific productivity adjustment that is phased in over a set statutory time frame.[xii] Thus, the new law does not reduce payments from 2010 level, but only reduces the amount of payment increases.

Changes in Payments to Physicians

Payments to physicians are based on a formula, the sustainable growth rate or SGR, that was enacted as part of the Balanced Budget Act of 1997.[xiii] Because application of the formula would have resulted in negative updates to physician payments, Congress has enacted delays to its implementation since 2003. The Affordable Care Act did not make any revisions to the physician payment formula. Unless Congress continues its practice of enacting a temporary "doc fix," or, more unlikely, reforms the method for calculating doctor reimbursement,[xiv] a reduction in payment to physicians will go into effect on December 1, 2010. The cuts remain a potential threat to access to doctors for Medicare beneficiaries.

Linking Payment to Quality Outcomes

In an earlier Alert[xv] we reported, how the Affordable Care Act moves in the direction of linking payment to quality outcomes for entities that provide services to Medicare beneficiaries. Congress has placed emphasis on efforts to measure quality and to provide payment for only those services and procedures that meet certain quality of care standards. As stated above, Medicare Advantage plans may be entitled to bonus payments if they score highly on quality measures. In addition, hospitals will be given incentives to reduce hospital acquired conditions with respect to hospital discharges starting in 2015.[xvi]

Payments also may be reduced to certain providers in the future if they do not provide high quality health care. For example, beginning in 2012, hospital payments may be reduced if a hospital is determined to have excessive readmissions for identified conditions or procedures that are high volume or high cost and for which the readmission rate is high. A readmission is defined as a return to the same or a different hospital for the same condition within a time frame to be specified by the Secretary of Health and Human Services (HHS).[xvii]

Independent Payment Advisory Board (IPAB)

The Independent Payment Advisory Board (IPAB) is a new quasi-governmental body which will take over from Congress the function of establishing Medicare payment policies. Policy makers anticipate that the IPAB, which is to commence operations in 2014, will be able to achieve another $15.5 billion in savings to the Medicare program from 2014-2019.[xviii]

The 15-member Board will be appointed by the president and confirmed by Congress; members will serve full-time. The IPAB will be advised by a 10-member consumer advisory council. The Affordable Care Act includes strict parameters for IPAB activity. It must submit proposals to Congress to reduce Medicare spending if statutorily-defined parameters are met. These proposals will go into effect if Congress does not act.

Importantly, the law prohibits the IPAB from changing eligibility or benefits, reducing the Part D low-income subsidy, or rationing care.[xix]


The Affordable Care Act slows the growth in future Medicare spending by reducing overpayments to private Medicare Advantage plans, by restructuring up-dates in payments to many providers, and by tying payments to improved quality of care. Health care reform does not reduce Medicare benefits.

[i]The health care reform law: Pub.L.111-148, the Patient Protection and Affordability Care Act of 2010 (PPACA), on March 23, 2010, and Pub. L. 111-152, the Health Care and Education Reconciliation Act of 2010 (HCERA), on March 30, 2010.
[ii]CBO March 20, 2010; Joint Committee on Taxation Revenue Estimates, JCX-17-10 (March 20, 2010).
[iii]PPACA (Pub. L. 111-148), § 3602
[iv]CBO March 20, 2010; Joint Committee on Taxation Revenue Estimates, JCX-17-10 (March 20, 2010)
[v]Report to Congress, Medicare Payment Policy (March 2010);
[vi]For a discussion of the effects of the new payment structure on different communities, see, B.Biles, G. Arnold, Medicare Advantage Payment Provisions (G.W.U. March 2010), available at
[vii]HCERA § 1102
[viii]“Medicare Advantage Premiums Fall, Enrollment Rises, Benefits Similar Compared To 2010 Wide Range Of Medicare Health And Drug Plan Options Continues In 2011” ( CMS Sept. 21, 2010);
[ix]Section 162 of the Medicare Improvements for Patients and Providers Act of 2008, Pub. L. 110-225 required private fee for service Medicare Advantage plans to have provider networks in most areas of the country, effective January 1, 2011
[x]PPACA §33203.
[xi]HCERA §1103. A plan's contract must be terminated if the plan fails to have a Medical Loss Ratio of 85% for 5 consecutive years.
[xii]PPACA §§ 3401, 10319; HCERA §§ 1105
[xiii]Balanced Budget Act of 1997 (BBA), Pub. L. 105-33 (Aug. 5, 1997).
[xiv]One estimate places the cost at $276 billion over the next 10 years. Health Policy Brief: Paying Physicians for Medicare Services (June 25, 2010); available at
[xv]See, Health Reform: Linking Medicare Payment to Quality Outcomes (June 25, 2010), available at
[xvi]PPACA §3008, amending 42 U.S.C. §1395ww.
[xvii]PPACA § 3025. Beneficiary advocates will watch implementation of this provision closely to ensure that hospitals do not try to avoid payment cuts and quality improvement by placing patients in “observation status” rather than admitting them as inpatients. See, “Observation Services: What Can Beneficiaries and Advocates Do?” (Feb. 18, 2010),
[xviii]CBO March 20, 2010; Joint Committee on Taxation Revenue Estimates, JCX-17-10 (March 20, 2010).

[xix]PPACA § 3403(c), adding Section 1899 of the Social Security Act.

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