Today, the Trustees who keep an eye on Social Security and Medicare trust funds issued a summary of their 2011 Annual Report. Predictably, headline writers rushed to announce that Medicare will be “going broke” in 2024. This isn’t true. 

What the report actually says is that in 2024, money flowing into the Medicare Hospital Insurance (HI) Trust will “be sufficient to pay [just] 90 percent of the trust fund’s costs.” In other words the money flowing into the Medicare fund that covers hospital stays will be 10 percent less than money flowing out.

Looking ahead another sixty years, the Trustees project that the Trust fund’s ability to pay all of its bills with revenues dedicated to HI is projected “to decline slowly to 75 percent in 2045, and then to rise slowly, reaching 88 percent in 2085.”  In other words, in 2085 Medicare still will be able to cover 88 percent of hospital costs–which means that, in theory, the other 12 percent would come out of general revenues. But that is not likely to happen.

Over the next ten years, we will no doubt find ways to strengthen health care reform legislation to make up for the shortfall. President Obama already has suggested that we consider letting Medicare negotiate for discounts from pharmaceutical companies while purchasing drugs in bulk. And I wouldn’t be surprised if Congress eventually creates a public option that would compete with private insurers. Because a public option would enjoy lower administrative costs, it should be able to offer comprehensive insurance at a lower price. Both proposals would be popular with the majority of the public.

Meanwhile, the Affordable Care Act (ACA) already has helped keep the Trust Fund in the black. Before Congress passed the ACA, Medicare’s trustees had predicted that the Health Insurance Fund would begin running out of money in 2016 — just five years from now. After President Obama signed the legislation in March of 2010, the Trustees announced that thanks to cost savings and new money raised by the Affordable Care Act, the HI fund wouldn’t begin to run short until 2029.

Today Medicare's Trustees reported that a “slower than assumed economic recovery” has taken a toll on revenues, and they moved the turning point up to 2024. This still means that reform legislation has given the Fund an extra eight years.

Today the Trustees affirmed that “projected Medicare costs over 75 years are about 25 percent lower because of provisions in the Patient Protection and Affordable Care Act.”  The Trustees  highlight one plank in the ACA that will save tens of billions by reducing “the annual payment updates for most Medicare services (other than physicians’ services and drugs.)”

Here, the Trustees are referring to the provision in the legislation that shaves Medicare’s annual increases in payments to hospitals, skilled nursing facilities, home health agencies, and other institutions by 1 percent a year, for ten years, with the goal of spurring them to become more efficient. This means that if, in a given year, hospitals normally would receive an adjustment from Medicare  that raised reimbursements by 3%, under the new law their reimbursements would climb by just 2%.  (Note: this provision does not apply to doctors, only Medicare Part A providers.) Over the decade, the Congressional Budget Office estimates that this change will save $196 billion.

Finally, the 2011 Trustee’s Report acknowledges that “cost projections for Medicare are much less certain than for Social Security over both the short and long term. . .  Assumptions regarding the growth of health care costs  . . . are inevitably highly uncertain. New technologies and interventions will continue to expand the capabilities of medicine and to affect the cost of health care in ways that are difficult to predict. Private stakeholders are redoubling their efforts to curb cost growth, but the extent of their success and the effects of these endeavors on Medicare’s costs are yet to be determined. Also unknown is how effective the significant federal health legislation enacted in 2010 will be at moderating cost growth for Medicare.”

Over the past three decades, the levitating cost of new medical technology has been driving health care inflation. The ACA is designed to reign in unnecessary tests and treatents that expose patients to  risks without benefits.

Just how much wil the Affordable Care Act save? Last year, the trustees noted that the ACA “contains roughly 165 provisions affecting the Medicare program by reducing costs, increasing revenues, improving certain benefits, combating fraud and abuse, and initiating a major program of research and development for alternative provider payment mechanisms, health care delivery systems, and other changes intended to improve the quality of health care and/or reduce its costs to Medicare.”

Little wonder that no one can put a number to just how much those 165 reforms will save. What we do know is that the Congressional Budget Office has concluded that the legislation will  pay for itself, provide coverage for some 32 million uninsured Americans, and trim the federal budget deficit by $210 billion over the ten years ending in 2021.

Meanwhile, as Medicare’s Trustees pointed out in last year’s report: the ACA “substantially improves the financial outlook for Medicare,” without shifting costs to seniors, reducing medical benefits, or making across-the-board cuts to physicians’ pay.

According to the CBO, revenue and savings realized under the Affordable Care Act add up to  over $950 billion. And this includes only the reforms that CBO could “score.”

If you take a close look at that $950 billion, you find that the bulk of the money raised comes from fees that drug-makers, device-makers and insurers will be shelling out, as well as new Medicare taxes that will affect only those at the very top of the income ladder (the top 2 percent). Savings include cutting subsidies to hospitals that will no longer need them because the hospitals will no longer be absorbing the cost of caring for some 32 million uninsured; reducing overpayments to Medicare Advantage insurers that are not providing good value for Medicare dollars; closing tax loopholes; eliminating a tax credit for something called “black oil;” and using financial carrots and sticks to motivate hospitals to reduce preventable errors. This is just a short list of the many provisions in the Affordable Care Act that the CBO says will rein in health care inflation.

The legislation also calls for unprecedented structural reforms in how we pay for care and how it is delivered. Because these reforms have never been tried on a national scale, CBO didn’t try to project how much they will yield.  But  local projects that have been tried in various parts of the country reveal that billions of wasted dollars can be squeezed out of  Medicare spending if we replace the perverse incentives of fee-for-service reimbursements (which reward “volume”) and move to payment systems which rewards“value”—i.e., better outcomes at a lower cost.

In part 2 of this post, I will itemize the more than $950 billion in reforms that CBO could score, including the $196 billion that analysts project can be captured by trimming annual updates to hospitals and other heatlh care insitutions by 1 percent.  In that context, I’ll discuss the amount of waste in our hospitals and nursing homes, and the need for better “systems” that support health care workers so that they can become more productive.

 In Part 2, I also will describe the  structural reforms that CBO could not score  with confidence, but that, inevitably, will save billions. Over the long term, what cannot be counted is likely to count most. These are the changes that will turn a fragmented cottage industry into a coordinated, patient-centered health care system.