Health reform and the $716 billion lie

The Affordable Care Act (ACA), called “Obamacare” by opponents and supporters alike, has been maligned and misrepresented countless times over the last few years. The most recent claim—which has turned up in a recent Mitt Romney ad but has been a staple of GOP talking points since the Paul Ryan pick for vice president—is, “You paid into Medicare for years … but now when you need it, Obama has cut $716 billion from Medicare … to pay for Obamacare.” In other words, ACA took money out of the Medicare system for use elsewhere.

This is a pretty big lie. To take money “out of the Medicare system,” one would have to actually divert revenues away from the program. But ACA doesn’t do this at all—instead, it reduces how much Medicare will have to spend over the next 10 years by $716 billion. It does this without actually cutting benefits, instead deriving savings from three areas:

  1. Reducing reimbursements Medicare currently makes to hospitals—but by less than the gain hospitals would receive from newly-insured patients  purchasing hospital services in coming decades.
  2. Reforming the separate Medicare Advantage program, which was supposed to save money, but ended up being more expensive.
  3. Reducing a variety of other payments to providers, such as those designed to offset the cost of providing uncompensated care for the uninsured (unnecessary because now more patients will have insurance and hence the amount of this uncompensated care will plummet).

Other provisions of ACA, such as the filling of the prescription drug “donut hole,” would actually expand benefits for seniors.

In other words, instead of reducing Medicare’s revenues (or “money in the system”), ACA reduces Medicare’s spending (or “money flowing out of Medicare”). One would hope that, as a businessman, Romney would know the difference between revenues and spending. Yet ACA’s Medicare savings actually lengthened the period over which the program is actuarially solvent, pretty much the opposite of what Romney is suggesting.

This claim that health reform should be criticized for reducing Medicare’s cost is also ironic. Romney, after all, has proposed his own cuts to Medicare, in the form of raising the Medicare eligibility age and transforming the entire system into a voucher program with a cap. It’s true he hasn’t been specific about the cap—his running mate Ryan proposed a GDP+0.5 percent growth cap, but Romney has been characteristically vague. But he has also promised the proposal would achieve solvency, which you can’t do unless you’re cutting some spending. So he also proposes cutting Medicare, period. Furthermore, Ryan actually supports the specific $716 billion Medicare cuts in the ACA, going so far as to include them in his budget.

As we have shown before, rising health care costs are the long-run deficit problem. And as we have also shown, solving the problem they pose through cost-shifting won’t work—it will just shift rising health care costs from the government’s budget directly onto household budgets. The ACA on Medicare takes a stab at controlling costs without engaging in simple cost-shifting. However this works out politically, it is simply smart economics.


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