What the ACA Decision Really Means for the Future of Medicare and Medicaid

In the wake of the Supreme Court’s decision on the Affordable Care Act, the future of the two biggest government health insurance programs – Medicare and Medicaid – just became much more interesting.

The Affordable Care Act made significant changes to both programs, and they will change the landscape of federally-financed health care in the future.

Most noteworthy, it closed the Medicare prescription drug donut hole. This is no small matter to the 3.6 million people who benefitted in 2011 alone.  Altogether, they saved $2.1 billion in drug costs, an average of over $600 per person, according to the Center for Medicare and Medicaid Services (CMS).

In addition, Medicare recipients are receiving a whole new set of free preventive services, including annual physicals.  In the first five months of 2012, CMS reported that 14.3 million recipients received at least one free preventive service as a result.

But these benefits didn’t come without a cost.  And even before the passage of ACA, the Medicare Trust Fund was slowly bleeding out its reserves.

The Medicare Part D Drug Benefit program, enacted in the early 2000s, added about $1,870 – or 15% more – to the average benefit a Medicare beneficiary received in 2011.

In part because of this added benefit, according to the 2012 Report of the Medicare Trust Fund Trustees the Medicare Trust Fund lost $19 billion last year.

So Congress did two things to constrain Medicare costs.  The first was to impose a reduction in physician payment rates by 31% beginning in 2013.  The Affordable Care Act savings assumed that this reduction would be put into effect; however, the “doc fix” forestalled this in 2012, as it has in every year for the last decade.

The second – approved in ACA – was to cap rate increases for Medicare providers in the future.

The combination of these two cost saving measures is significant.  Medicare today costs about 3.7% of GDP.  With the cost-saving measures in place, its share of GDP is still expected to grow to 6% by 2040, and to 6.7% by 2085. 

This is pretty high.  Without the cost-saving measures, however, Medicare costs rocket to an almost unsustainable 10.3% of GDP over the next seventy-five years.

Can Medicare be fixed?

The answer is yes.  According to the Trustees’ report, it would take a Medicare tax increase of 0.67% to individuals, and 0.67% to employers, to guarantee the future of Medicare as we know it for the next 75 years.  In other words, for every hundred dollars in Medicare taxes we currently pay, we would need to add 67 cents more.

Is saving Medicare worth those 67 cents to the 80 million of us who will be insured by the program in 2030?

ACA’s changes to the Medicaid program were even more significant.

Medicaid is an important safety net program not just for elders and lower income people, but for most health providers, too.  Medicaid today makes 60% of all payments to nursing homes, and 37% to community health centers, 35% to public hospitals, 26% to behavioral health providers, and 17% to hospitals overall.

ACA increased the eligibility standard for Medicaid to 133% of poverty – approximately $30,000 in yearly income for a family of four today – beginning in 2014.  It also mandated states to do the expansion, which would add 17 million people to the program by 2016, bringing the total number of Medicaid recipients to 52 million.

However, the court ruled the mandatory Medicaid expansion unconstitutional, leaving it up to the states.

“Nothing in our opinion,” Chief Justice Roberts wrote, “precludes Congress from offering funds under the ACA to expand the availability of health care, and requiring that states accepting such funds comply with the conditions on their use. What Congress is not free to do is to penalize States that choose not to participate in that new program by taking away their existing Medicaid funding." (p. 55)

Even though the federal government will pay the entire expansion cost for the first three years, and at least 90% of the annual cost afterwards, Florida led the charge in opposition, arguing in its Supreme Court brief that this expansion amounted to “coercion.”

And within two days of the ruling Florida's governor said that he wouldn't agree to the expansion because it "can't afford it."

But his position is undercut by Florida's own analysis. 

While it forecasted a 900 million dollar Medicaid price tag because of ACA, it acknowledged that most what it was counting - $574 million – was attributable to people who are already eligible for Medicaid under the old pre-ACA rules, but not yet enrolled.

That cost isn’t going away despite the Court’s ruling.

So what’s left for the anti-Medicaid states?  They can opt out of the expansion, but they’ll have to give up the new funding.  It makes little fiscal sense to do so, when the federal government is offering so much money. But stranger things have happened.

This is the fourth in a series of five OHPM columns on the impact of the Supreme Court decision on the Affordable Care Act. Tomorrow: The Post-ACA World: Health, Public Health, and Mental Health Policy in the future.