The Medicare “Crisis”: A “Shaggy Wolf Story”

Trustees’ Report Much Less Gloomy than Advertised        
Summary: Below, Part 2 of the May 13  post headlined “Medicare Trustees Report that Reform Legislation Cuts Medicare Costs by 25 Percent.”

Conservatives continue to use the annual report recently released by Medicare’s Trustees as evidence that Medicare needs what one conservative pundit calls a “sweeping overhaul.”  In theory, House Budget Chairman Paul Ryan’s plan to privatize Medicare is dead, but somehow, it’s still in the news. Yesterday Newt Gingrich announced that he’s with Ryan, and today Senator John Kerry is calling a press conference to denounce Ryan’s voucher plan.

What has been lost in the debate is the fact that the Trustee’s report is not nearly as gloomy as advertised. Anyone who reads the entire report will find a major disconnect between the headlines and what the trustees actually say. In this post, I quote the Trustees as they express their optimism that Medicare’s challenges can be solved by “building on” the Affordable Care Act (ACA). They also recognize that the ACA calls for structural changes “in how health care is financed and delivered” that could yield substantial savings. Meanwhile, Medicare Actuary Richard Foster has issued a dissenting opinion to the Trustees’ report, arguing that their predictions are based upon unrealistic spending cuts. Foster doesn’t believe that hospitals can become more efficient. In this post I explain that a fair number of hospitals already have proven him wrong, and research by the non-partisan  Medicare Payment Advisory Commission (MedPac) reveals that there is plenty of hazardous waste to be squeezed out of our hospital system.(I call the excess “hazardous” because it includes so many preventable medical errors.)  Finally, at the end of the post, I itemize exactly how and where the ACA saves money and raises new revenues, which, according to the Congressional Budget Office, will total $950 billion over the course of the decade.


You may have seen the  headline: “DIRE FORECAST SPARKS NEW MEDICARE DEBATE TRUSTEES' REPORT USED AS FODDER FOR POLITICAL SALVOS BY BOTH SIDES,” but the date may come as a surprise:  June 6, 1996.

At the time, the Chicago Tribune warned its readers: “Medicare trustees reported Wednesday that the program's financial outlook is getting worse, touching off a new round of debate over the future of the federal health insurance system for the elderly and disabled. According to the trustees, who give the program a fiscal checkup every year, the fund that pays Medicare hospital bills dipped into the red last year and will go broke in early 2001. That's a year earlier than they predicted in 1995.” 

Sound familiar? How about these warnings:

Chicago Tribune July 2, 1969: “The Medicare hospital trust fund faces bankruptcy by 1976 and taxes must either be raised or benefits reduced the senate finance committee was told today.”

Washington Post, April 1, 1986: “The Medicare hospital insurance program faces bankruptcy by 1996, two years earlier than projected last year.”

New York Times, January 20, 1985: In the last few years, when it appeared that the Medicare trust fund would run out of money in 1987-89… But the need seemed less urgent after the Congressional Budget Office issued new estimates last September indicating that the Medicare trust fund would not go bankrupt until 1994.

(Hat tip to Chicago Tribune columnist Eric Zorn who culled eighteen stories from the Tribune, the Washington Post and the New York Times over a period of four decades, each predicting that the Medicare Hospital Insurance Fund was teetering on the brink of disaster.)

But of course Medicare didn’t “run out of money” in 1994, and it won’t go belly-up now, in large part thanks to health care reform legislation.  According to the Congressional Budget Office (CBO), the Affordable Care Act (ACA) raises and saves over $950 billion. (Below, I spell out how the legislation generates those dollars). In the process, as the Medicare Trustees’ Report 2011 points out, the ACA reduces Medicare spending “by 25 percent”—without cutting health benefits, or shifting costs to seniors.

More changes will be needed, but Zorn is relatively optimistic. After citing the many times we have been told that Medicare is careening toward bankruptcy, he recalls the story of “The Boy Who Cried Wolf.” Zorn acknowledges that “just because officials and politicians have been predicting Medicare's imminent bankruptcy for more than 40 years doesn't mean that one day they won't be right, but, more likely,” he suggests, “we will turn the knobs and twiddle the dials in order to keep the overwhelmingly popular program solvent, but not so solvent that, between five and 12 years from now, another set of politicians won't grimly inform us that it's going under in between five and 12 years.”

                       Exaggerating the Size of the Problem

Wait a minute: in the last week both the New York Times and the Wall Street Journal  have warned that in 2024 the Medicare fund that pays hospital bills will be “exhausted.” I checked my dictionary—just to be sure—and it confirmed that when “exhausted” is used in a financial context, it means “to use up or consume completely; expend the whole of: He exhausted a fortune in stock-market speculation.” 
If this is so, how can we possibly fix the problem by “twiddling a few dials”?

We couldn’t.  But the truth is that the Times, the Wall Street Journal, and most of the mainstream media have been, well, exaggerating—telling a tale that the Tribune rightly calls “A shaggy wolf story that’s getting a little long in the tooth.”

Sky fall
Source: Chicago Tribune

As I pointed out in an earlier post on the Trustee’s Report, the Hospital Insurance (HI) fund will not be “exhausted.” It will be “insolvent” which simply means that dedicated revenues will not be sufficient to pay all of its bills.  But in 2024, as the Trustees make clear, the hospital fund will still be able to meet “90 percent” of its commitments. In the years that follow, the Trustees project that the shortfall will slowly widen and then contract, so that in 2085, it will be able to meet 88 percent of its obligations.

Over at GoozNews, Merrill Goozner explains: the hospital trust fund will exhaust its surpluses by 2024, fully five years earlier than projected a year ago. At that point, the health care program for seniors would have to cut reimbursements to hospitals, home health aides and other providers by 10 percent” (or find the needed money elsewhere.)

“Would that prompt a health care crisis in the country?” Goozner asks. “That would depend on one’s perspective. Some proposals by lawmakers and policy groups for solving these entitlement ‘crises’ would institute even larger cuts for future retirees. For instance, the House-passed  Republican “Path to Prosperity” would require future seniors who are 55 or younger (those 40 to 55 now would be 65 to 80 in 2036) to pay an estimated 68 percent of their Medicare costs, up from the current 20 percent, according to a Congressional Budget Office analysis.”

Now, that would be a crisis—especially when you consider the fact that fifty percent of all American seniors rely on income totaling less than $20,000 a year.

I don’t mean to minimize Medicare’s problems. We must slow the growth of Medicare spending, or accept the conservative solution: privatize Medicare, give seniors vouchers and let them do the best they can, adrift in the private insurance market. (When contemplating Ryan’s proposal, I imagine the for-profit insurance industry as an archipelago of ice floats for the elderly.)

But the trustees are not as gloomy as the media suggests. They report that the Affordable Care Act already has given Medicare critical breathing room. Before the ACA was passed, they predicted that the HI Trust Fund would face insolvency in 2016. Now, they credit health reform legislation with moving the date ahead eight years, to 2024. Between now and then the ACA is likely to be strengthened, perhaps by including a provision that lets Medicare negotiate for bulk discounts from drug-makers, just like every other government in the developed world. Indeed, the Trustees stress that reformers should “build on” existing reform legislation.

How the ACA Raises $950 Billion & Positions Medicare to Save More

As it stands, the Congressional Budget Office projects that reform legislation will generate nearly $1 trillion over the next decade. The new revenues and savings fall into three categories.

  • First, Medicare will be shaving annual increases in payments to hospitals, skilled nursing facilities, home health agencies and other institutions by 1 percent a year for 10 years. The legislation explicitly exempts doctors, calling for reductions “in payment updates for most Medical goods and services other than physicians’ services.” The CBO estimates that this provision will save $196 billion.
  • Secondly, the ACA raises another $750 billion, primarily by collecting new fees from the health care industry (which can afford the fees because it will have so many new customers); cutting overpayments to private insurers that are not delivering value for Medicare dollars; raising Medicare taxes for those at the very top of the income ladder; and reducing subsidies to hospitals that will no longer be absorbing the cost of caring for 32 million uninsured. (For those willing to wade into the weeds, see a complete list of these provisions at the end of this post)

Add that $750 billion to the $196 billion trimmed from annual updates to hospitals and other institutions, and CBO projects that the ACA raises enough to 1) provide subsidies for millions of Americans who, today, cannot afford insurance; 2) expand Medicaid and SCHIP; and 3) provide tax credits for small employers.  In other words, reform legislation pays for itself and, according to the CBO, will trim the deficit by some $210 billion over the ten years ending in 2021.

  • In addition, Medicare’s Trustees point out, The Affordable Care Act paves the way for Medicare to cut spending further, by proposing deep structural reforms that could, “transform” U.S.  health care “in both the way that it is delivered and the manner in which it is financed.” The legislation “takes important steps in this direction by initiating programs of research into innovative payment and service delivery models,” the Trustees explain “such as accountable care organizations, patient-centered ‘medical homes,’ improvement in care coordination for individuals with multiple chronic health conditions, improvement in coordination of post-acute care, payment bundling, ‘pay for performance,’ and assistance for individuals in making informed health choices.

This is the third way that reform legislation sets out to “break the curve” of health care inflation. The goal is to replace the perverse incentives of fee-for-service payments—which reward providers for “volume”—by moving to payment systems which instead reward “value” by encouraging integrated, coordinated care that leads to better outcomes at a lower price. Because these are unprecedented reforms that have never been tried on a national scale, CBO did not try to estimate just how much these structural reforms might save, but as is often the case, over the long term what cannot be counted may count most. Note that money saved will be above and beyond the $950 billion that the CBO did score. These are dollars that could be used to cover the 2024 shortfall.

Even Medicare’s wary Trustees grant that “If the new approaches developed through these research initiatives can be demonstrated to improve the quality of health care and/or reduce cost then they can be adopted for Medicare without further legislation.”As the Trustees know, this represents an extraordinary shift of power.

In the past, lobbyists often have persuaded Congress to nix programs that might curb Medicare spending because they would cut into their clients’ revenues. But in their 2011 report, Medicare’s Trustees point out that under the ACA, “tested changes can be adopted nationally without further legislation [i.e. without needing Congressional approval] if: 1) the Secretary of Health and Human Services determines that the expansion is expected to improve quality of care without increasing spending or to reduce spending without reducing the quality of care and (2) the Chief Actuary of the Centers for Medicare & Medicaid Services certifies that expansion would reduce (or would not result in any increase in) net program expenditures.” 


The doomsters are not impressed. They argue that insofar as Medicare tries to save money, it will destroy the program. (Reform’s critics have a perverse habit of complaining about out-of-control “entitlement spending,” while simultaneously rejecting any government attempts to reduce waste.)

Begin with the first way that Medicare plans to curb spending—by clipping  annual updates in reimbursements to hospitals, skilled nursing facilities, and other institutions by 1 percent a year for ten years. If, in a given year, hospitals normally would receive an adjustment that raised reimbursements by 3%, under the new law their reimbursements would rise by just 2%. Medicare Actuary Richard S. Foster has been a critic of this provision from the beginning, and in a recent interview with the New York Times he suggested that, far from being alarmist, the Trustee’s Medicare report was overly optimistic in part because it assumed these cuts would be made:

 “Under the law, Medicare will hold down payments to hospitals and other health care providers to reflect presumed increases in productivity,” the Times explained. “But, Mr. Foster said, if these constraints are kept in place, Medicare payments to providers will eventually be ‘far below the levels paid by private health insurance.’

“‘Well before that point,’ Mr. Foster added, ‘Congress would have to intervene to prevent the withdrawal of providers from the Medicare market and the severe problems with beneficiary access to care that would result.’ This, in turn, would ‘lead to far higher costs for Medicare in the long range than those projected’ in the report, he said.”

Here, by referring to “providers,” Foster seems to be fanning fears that physicians will stop taking Medicare patients. But as noted, the law specifically exempts doctors from these cuts. The “Statement of Actuarial Opinion,” at the end of the Trustees’ report, which is signed by Foster, makes this clear: only “non-physician services” will be affected. (It would have been helpful if the Times reporter included that phrase in his story.)

So when Foster suggests that Medicare patients may have less access to “providers,” he is actually referring to hospitals, skilled nursing facilities and other institutions, not doctors.  At that point his argument falls apart. Try to imagine a hospital that doesn’t take Medicare and Medicaid patients. How would it stay in business?  More than half of hospital revenues come from Medicare and Medicaid.

(Some fear-mongers argue that under reform, the sustained growth rate formula that Congress passed in 1997 finally will be implemented: Medicare will whack reimbursements to physicians, they say, and at that point they will stop taking Medicare patients. The truth is that while Trustees were forced to include the SGR in their analysis because the law is still on the books, their report is clear that physicians have little to fear: “The immediate physician fee reductions are clearly unworkable and are almost certain to be overridden by Congress.”  Moreover, it is important to recognize that when CBO projects that the reform legislation could pay for itself—and slice the deficit—it did not assume that the SGR would be applied.)

Are Cuts in Annual Updates to Hospitals Sustainable?

In his “Statement of Actuarial Opinion” at the end of the Trustees’ Report, Foster offers a second argument. Here, he attacks the idea that “growth in economy-wide productivity” will make it possible to trim “annual price updates for most categories of non-physician health services” each year for ten years. Over the long term, the ten-year plan just isn’t “viable,” Foster argues, because while businesses in other sectors may be able to cut costs while hiking productivity, health care is different. “The best available evidence indicates that most health care providers cannot improve their productivity to this degree—or even approach such a level—as a result of the labor-intensive nature of these services.” In other words, hospitals, skilled nursing facilities and ambulatory surgical centers cannot downsize. Indeed, for-profit hospitals have shown us that when they try to cut their nursing staffs, patients die.

But the ACA is not calling for down-sizing. The legislation suggests reforms that would improve the way things are done, providing better support for health care workers so that the same number can be more productive. When reformers talk about increasing “productivity” they are not talking about asking hospital employees to work harder; they are thinking about creating systems that help them work more efficiently. Mark Graban, a Senior Fellow at the Lean Enterprise Institute and  the author of the book Lean Hospitals: Improving Quality, Patient Safety, and Employee Satisfaction, offers an example of what he learned at a 2009 IHI Forum:

“One of the breakout sessions that had an impact on me was from Kaiser Permanente and Ascension Health about freeing up time for nurses to spend with patients. They cited a 2006 study that showed nurses spent only about 30% of their time in patient rooms due to waste of all varieties.” In looking at the factors that impacted nurse productivity, the studies showed that personal work style was important and also that without good support processes nurses will struggle to provide the right patient care. For example, according to Graban, “The recommendations for improving productivity and patient care included having supplies and equipment available on demand at the point of use and the time of need.

“That sounds so basic and fundamental, doesn’t it? Shocking to those of you from outside of healthcare? One health system did a study of their ‘smart pumps’ and discovered that, due to a lack of organization. . . and lack of standard process, they had over-purchased this one item to the tune of $20 million since the pumps they had often couldn’t be found, so additional ones got purchased. What an easily preventable form of waste and overspending.”

Graban continues: “Nurses often hoard and hide equipment as a workaround to make sure they can provide care to their patients. It might seem selfish, but it’s well-intended in the short-term, yet does nothing to fix the real system. One presenter said the ‘strangest’ place they found a piece of hoarded/hidden equipment was a pulse oximeter found in the ceiling above the tile in a patient room. Nurses and hospital staff shouldn’t have to go to such lengths to ensure they have the tools to do their jobs.”

In this case, increasing productivity means enforcing one simple rule: equipment nurses need should be kept behind the desk at each nurse’s station to be signed out when they take it. (If the equipment a nurse needs is not available at her station because someone is using it, she can borrow it from a different station. The sign-out sheet will ensure that the equipment is returned.)

   Minimizing Waste, Errors and Accidents

According to Foster, simulations done by the Office of the Actuary suggest that if Medicare consistently sliced updates, at the end of a decade “15 percent of Medicare Part A providers would wind up in the red.” Here, he underestimates just how much waste there is in our health care system. Health care experts estimate that up to one-third of our health care dollars are squandered on ineffective, sometimes unwanted and often unproven treatment. Mistakes add to the waste. A study by the American Society of Consultant Pharmacists indicates that the annual cost of medication-related mix-ups in nursing homes led to additional care that cost nearly $4 billion. Other estimates suggest that hospital errors alone add $20 billion to the nation’s annual health care bill. And the same errors occur, week after week, in hospitals across the country. “We don't study routine failures… [but] when we look closely, we recognize the same balls being dropped over and over, even by those of great ability and determination,” writes Dr.Atul Gawande in The Checklist Manifesto. “We know the patterns. We see the costs. It's time to try something else.”

Accidents hike costs. In November, Consumer called attention to a study done by the  Office of the Inspector General of the Department of Health and Human Services that  found that one in seven Medicare patients who are hospitalized each month suffer at least one “adverse event.” That comes to 134,000 people a month or 1.6 million a year. Of those, 15,000 die (180,000 a year)—either as a direct result of the error or because the error contributed to their death.

The high rate of medical mistakes is not a sign that care workers are indifferent or sloppy. Rather, they are working in an industry that has not developed the systems needed to create a safe, efficient work-place.  Just one easy example: in the airline industry, pilots and co-pilots use checklists before taking off. In U.S. hospitals, most surgical teams don’t. Yet we have staggering evidence that lives and dollars could be saved by adopting this one, humble quality-control tool. (The Checklist Manifesto: How to Get Things Right)

Nevertheless, few U.S. hospitals insist that surgical teams use checklists. After all, many star surgeons are “rainmakers” who bring well-insured patients to the medical center, and it is not unusual for them to refuse to use checklists.

“It somehow feels beneath us to use a checklist, an embarrassment,” Gawande, who is himself a surgeon, explains. “It runs counter to deeply held beliefs about how the truly great among us – or those we aspire to be – handle situations of high stakes and complexity. The truly great are daring. They improvise. They do not have protocols and checklists. Maybe our idea of heroism needs updating."
Hospital workers know, better than anyone, how dangerous our hospitals can be. This is why, when asked, ‘would you want the checklist to be used if you were having an operation?’ a full 93% said ‘yes’—even though “20% of hospital staff resist using a checklist.” In his book, Gawande confides that he himself began using checklists in his OR—and was chagrined to discover that he, too, needed the safety net.

Not all errors can be prevented. But the HHS study identified 44 percent of the adverse "events" it identified as “clearly or likely preventable.” Hospitals themselves have demonstrated how many medical errors can be prevented when they make a concerted effort to reduce medical mistakes. For example, a Consumer Reports investigation found that a checklist can prevent nearly all of the central line infections that are responsible for at least 30 percent of the 99,000 annual hospital-infection-related deaths.

Of course the majority of patients don’t die of these infections; they just spend more time in the hospital recovering. This is why adverse advents add to the price of health care—and to hospital costs. Hospitals cannot always recoup the expense of these longer stays. Going forward, it will be even harder:  both Medicare and private insurers will be refusing to pay for the added expense of preventable errors and readmissions. 

      Some Hospitals Have Demonstrated How Much They Can Save

A safety improvement collaborative convened by Premier Inc shows what hospitals committed to change can do. In the first two years of the collaborative’s 3-year project, the 157 participating hospitals saved an estimated 22,164 lives while collectively reducing health care spending by $2.13 billion. During a period when national inpatient costs rose 14 percent, those of the collaborating hospitals increased only 2 percent.

As more caregivers followed evidence-based guidelines, patients were no longer exposed to needless risks, and this no doubt helps explain why both mortality and overall spending dropped. Better care for sepsis, respiratory infections and cardiac conditions also made a difference.

Rural, suburban and urban hospitals in 34 states are involved in the project, and researchers observe that performance variations have narrowed over time among the participants—which suggests that many different types of hospitals become more efficient. Higher labor productivity and lower supply costs also account for much of the savings, with community hospitals showing greater savings than big teaching hospitals.

One might expect that reforms which reduced procedures would mean lower revenues for the hospitals. But as Ken Terry, author of Rx for HealthCare has explained on BNET, as productivity increased and supply costs dropped, the hospitals were able to deliver diagnosis-related-group (DRG) services and hospital days at a lower cost, which meant higher profits because these payments are fixed in advance.  Premiere also points out that the hospitals’ labor costs dropped because they paid less overtime and made better use of temporary workers.If all hospitals could achieve these two year results, they could save $22.6 billion annually.

          Financial Pressure Spurs Productivity

Not all hospital CEOS are committed to reform. What would it take to motivate these top executives to make safer, better coordinated care a top priority?  Empirical evidence suggests that a drop in revenues could force them to become more efficient. This is precisely what Medicare is trying to do by reducing annual updates.

In its June 2010 report, the Medicare Payment Advisory Commission (MedPAC) pointed out that when hospitals are under some financial pressure—either because they have fewer patients, a larger share of Medicaid patients, or because private insurers are paying them less—many do become more productive. In fact, a four-year study showed that when they needed to tighten their belts, these hospitals  became so efficient that they managed to turn a 3.7 percent profit on their Medicare patients. By contrast, hospitals that were under little or no financial pressure because they were making 9 percent on their non-Medicare patients were losing 12 percent on seniors.

This should come as no surprise. Like most other organizations, hospitals tend to spend lavishly when feeling flush, investing in hotel-like amenities, new wings (which often are not needed,) higher salaries for executives, and pricey, if not fully tested cutting-edge equipment. On the other hand, when money is tight, the same institutions are more likely to concentrate on avoiding waste. And in most cases, when hospitals make that effort, the quality of care also improves. Patients do not benefit from waste.

According to the conventional wisdom, Medicare underpays hospitals. But the same MedPAC report reveals that one-third of U.S. hospitals make a profit on Medicare patients. The problem is not so much that Medicare pays hospitals too little, but that private insurers over-pay brand-name hospitals that use their market clout to demand especially high payments for the simplest services. Insurers then pass the cost along as they lift premiums.

It is true that “safety-net hospitals” and other medical centers that treat a large number of uninsured patients have a very hard time staying in the black. But under reform, they will no longer be absorbing the cost of caring for so many uninsured. And, as noted above, under reform, even though 32 million uninsured Americans will be covered, these hospitals will continue to receive 25 percent of the subsidies that they receive today. They still will be caring for those who will not be covered by reform, and they will be treating Medicaid patients—accepting reimbursements that are much lower than the fees Medicare pays for seniors. Over time, as it becomes clear how much help safety-net hospitals need, CMS will need to adjust their subsidies.

The bottom line: under the Affordable Care Act, the vast majority of hospitals should be financially sustainable, even though Medicare reduces their annual updates—as long as they concentrate on reducing waste.

It may be the case that some extremely inefficient hospitals, skilled nursing facilities and home health agencies will be forced to close their doors. But many parts of the country have more hospital beds than are needed. And nursing homes that do little more than warehouse patients and provide sub-par care while defrauding taxpayers should be shuttered. Under reform, many will be replaced by community homes. Vermont has demonstrated how this can be done with a program called SASH (Support and Services at Home) which keeps Medicaid patients out of nursing homes and hospitals by combining affordable housing with integrated care. Jobs lost when subpar institutions are closed can be replaced by new jobs at Community Health Clinics (CHCs) and Community Homes for seniors.

The ACA offers generous funding for (CHCs), expanding their capacity by 50 percent.  When hospitals that can’t or won’t create a safer, more productive workplace are closed, CHCs can pick up the slack—and do a better job of providing continuous care for many patients who now receive their primary care in a hospital’s emergency room. 

                    The Second Way the ACA Raises Money

In addition to the $196 billion that the Congressional Budget Office estimates that the Affordable Care Act saves by trimming updates, CBO itemizes over $750 billion that the ACA generates largely by collecting fees from the health care industry, lifting Medicare taxes for those at the top of the income ladder, cutting waste, and collecting fines from those who choose not to purchase insurance. In October, I wrote at length about these strategies in a post headlined “How Reform Legislation Funds Itself, Strengthens Medicare and Cuts the Deficit.”

 Below, as promised, a list showing exactly where the ACA finds more than $750 billion:

  •  210 billion generated by lifting Medicare taxes for high-income individuals with adjusted gross income above $200,000 and married couples earning over $250, 000;
  •  $132 billion saved, over a period of 10 years, by phasing out over-payments to those private sector Medicare Advantage insurance companies that are not delivering value for health care dollars; 
  • $107 billion in new fees that insurers, drug makers, and medical device companies have agreed to pay;
  •  $69 billion in penalties paid by employers and individuals who choose not to purchase insurance;
  • $36 billion saved by cutting government subsidies to hospitals that will no longer be forced to absorb the cost of treating 32 million uninsured Americans; 
  • $32 billion raised by taxing very expensive (a.k.a.“Cadillac”) health insurance policies that cost more than $27,500 for family coverage, or $10,200 for an individual; 
  • $23.6 billion paid by producers of black liquor’ (the wood pulp byproduct that paper companies use to power their mills), that will no longer be eligible for the cellulosic bio-fuel producer tax credit;
  • $20.7 billion saved by eliminating the Medicare Improvement Fund  (The ACA creates a new Innovation Center within the Centers for Medicare and Medicaid Services, making the Medicare Improvement Fund redundant); 
  • $19.4 billion saved by limiting the use of Medical Savings Accounts (MSAs), Health Savings Accounts (HSAs), Flexible Savings Arrangements (FSAs) and Health Reimbursement Arrangements (HRAs) as tax havens for dollars that may never be used to pay for medical expenses.  
  • $19 billion saved by reforming the student loan program, expanding Pell Grants, while eliminating the federal program which provides guarantees for student loans made by banks, replacing them with loans made directly by the government. 
  • $15.2 billion generated by lifting the threshold for the itemized medical expense deduction from 7.5% of adjusted gross income to 10 percent of AGI; 
  • $10.7 billion saved  by reducing the Medicare Part D premium subsidy for seniors with incomes over $85,000 and couples earning more than  $170,000;
  • $4.5 billion saved by eliminating the tax deduction for employers who receive Medicare Part D retiree drug subsidy payments; 
  • $2.7 billion raised by collecting 10 percent excise tax on indoor tanning services
  • $2.5 billion collected from private insurance plans that will pay a fee equal to $2 for each individual covered to finance the patient-centered outcomes research trust fund;
  • $ 75.1 billion in savings that the right-leaning Tax Foundation describes as  flowing from “Interactions between Medicare programs” ($29.1 billion) and "Associated effects of coverage provisions on revenues” ( $46 billion)." In an e-mail, Tax Foundation economist Mark Robyn explains: “Interactions between Medicare programs” likely has to do with eligibility for certain benefits being partially dependent on other benefits received. So when one changes it can affect the other. The Act lists “interactions” and amounts but they are not very specific about what exactly those interactions are. They list things like “Part D [Medicare’s prescription drug benefit] Interactions” with “Medicare Advantage Provisions" and "Medicare Advantage Interactions.” 

As for the larger sum—“$46 billion in revenues, under the heading of “associated effects”—Robyn says,“CBO notes that ‘Changes in the extent of employment-based health insurance affect federal revenues because most payments for that coverage are tax-preferred. If employers increase or decrease the amount of compensation they provide in the form of health insurance (relative to current-law projections), CBO and the Joint Committee on Taxation assume that offsetting changes will occur in wages and other forms of compensation—which are generally taxable—to hold total compensation roughly the same. Such effects also arise with respect to specific elements of the proposal (such as the tax credits for small employers), and those effects are included within the estimates for those elements.’" 

In other words, as we move away from employer-based insurance, the deduction for that insurance (which many argue is unfair) will be replaced by higher wages which, unlike benefits, will be taxable, adding to payroll tax revenues. 
Note that the hundreds of billions on the list above are not “hoped-for” savings. These estimates are based on known facts and solid historical data. We know how much companies in the health care industry have agreed to contribute in new fees,  and CBO analysts  can project how much changes  in tax law will bring in with some confidence, simply by looking at IRS records.

Granted, CBO’s analysts cannot be sure how many employers and individuals will decide to not to participate and wind up paying penalties. But if the sum collected is smaller than projected, the shortfall will be more than offset by the amount that employers and insurers contribute to the insurance pool.

In Part 3 of this post, I’ll look at the third way that ACA sets out to put a lid on health care inflation—through structural reforms in how we pay for care and how it is delivered. I’ll discuss the Trustees’ doubts on this score, as well as the empirical evidence we have showing that these strategies can create a safer, less wasteful, and more affordable health care system.  Finally I will focus on the ACA’s “fallback”—the Independent Payment Advisory Board. 

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