Are There Real Cuts in Medicare to Fund Obamacare?

August 30th, 2012 | Healthcare Reform

The answer to this question is an unqualified yes.  In fact, the bulk of the cost of Obamacare’s mandated coverage and Medicaid expansion is paid for by cutting Medicare payments to healthcare providers, primarily hospitals, with an original estimate by the nonpartisan Office of the Chief Actuary at CMS at $500 billion.  Unlike the typical, so-called “cuts” in government programs that are usually no more than reductions in expected growth of program outlays, Obamacare’s cuts are real reductions in what is paid for the cost of senior care.  The primary cuts are payments to hospitals.

For many years, hospitals have received annual increases in their rates from Medicare based on a specific measure of inflation known as a “market basket” of cost inputs specifically selected for hospitals.  Thus, hospitals were more or less guaranteed that their Medicare rates would keep pace with inflation which, in turn, allowed them to do such things as increase nursing, medical technician and other staff wages every year.

The primary funding mechanism of Obamacare is to reduce the annual inflation increase for hospitals each year according to the following schedule:

  • FY 2010-2011 market basket update reduced by 0.25 percent (Effective April 1, 2010)
  • FY 2012-2013 market basket update reduced by 0.10 percentFY 2014 market basket update reduced by 0.30 percent
  • FY 2015-2016 market basket update reduced by 0.20 percent
  • FY 2017-2019 market basket update reduced by 0.75 percent

These may seem like small cuts but for many hospitals that operate at breakeven or even at a loss in some years, these cuts represent the difference between providing quality care or having to cut back or even close service lines or go out of business.  The class of hospital most affected by these cuts is the “safety net” hospitals that provide care to the poor and indigent, many of whom live in the inner city.  The Chief Actuary believes that a number of these hospitals may be forced to close.

In contrast to the safety net hospitals, those hospitals that are part of larger health systems including physicians, or that are wealthy teaching hospitals, have a means of passing the Medicare cuts onto the insured non-Medicare population.  This common practice, a phenomenon well known in industry contracting circles, is based upon the relative negotiating strength of those systems vis a’ vis the health insurers operating in their market areas.  Thus, the financial consequences of the cuts in Medicare fall disproportionately on two principle groups: economically disadvantaged seniors, particularly the “dual eligibles”[1] covered by both Medicare (because they are elderly or disabled) and Medicaid (because they are poor); and the non-Medicare population and their employers who are already subject to draconian rates for their health insurance.  This latter fact is one of the “hidden taxes” in Obamacare and accounts for the projections of greater increases in the cost of health insurance in many parts of the country.

Other elements of the reductions in payments to healthcare providers used to fund Obamacare are a series of complex changes to the manner that Medicare pays hospitals and physicians.  The principle one of these changes is Accountable Care Organizations or ACOs, which are a means of making providers responsible for the costs they incur in taking care of patients.  The regulations implementing ACOs contain a number of protections for Medicare beneficiaries, but this program will not succeed unless substantial cuts are made in the cost of providing care.  Other changes include a mandatory “productivity adjustment” that will be built into hospital rates over and above the market basket cuts, requiring hospitals to become more efficient in the way they provide care.  Here again, the nonpartisan Chief Actuary said this provision simply will not work, as it is pegged to overall productivity gains in the broad economy that an overhead and labor intensive hospital could not attain.


[1] It should be noted that there are separate incentives and programs in the legislation aimed at the cost of care of dual eligibles, who account for a vastly disproportionate amount of spending in both programs.

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