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Families USA

February 10, 2011

Families USA is a national nonprofit, nonpartisan organization for health care consumers. Our mission is to ensure that all Americans have access to high-quality, affordable health care. Families USA has a strong interest in the protection of Medicare beneficiaries. We submit these comments to the House Committee on Ways and Means with regard to the Hearing on the Health Care Law’s Impact on the Medicare Program and Its Beneficiaries.

For more than a year, opponents of the Patient Protection and Affordable Care Act (Affordable Care Act) have erroneously charged that health reform was enacted at the expense of Medicare and its beneficiaries. This is simply not true. Medicare’s benefits are improved under the Affordable Care Act. And although Medicare’s future spending is lower under the health law than it was projected to be prior to enactment, this reduction is not the result of across-the-board reductions in payments or from reductions in benefits. The savings come from making Medicare work better by improving the way health care providers deliver care; modernizing how Medicare pays for services; and eliminating waste, fraud, and abuse.

Improving Medicare Benefits

Closing the Doughnut Hole

When the Medicare Part D prescription drug program was created in 2003, it included a gap in coverage known as the doughnut hole. When in the coverage gap, a beneficiary had to pay 100 percent of the cost of the prescription drugs purchased. In 2010, the coverage gap began once the beneficiary paid $2,830 for prescription drugs and ended once prescription drug costs reached $6,440. This meant that a beneficiary with significant prescription drug needs was responsible for $3,610 in out-of-pocket costs before catastrophic coverage started.

The Affordable Care Act closes that gap, saving beneficiaries money and improving access to needed medications. In 2010, any beneficiary who fell into the coverage gap received $250 to help defray the cost of medications. In 2011, once a beneficiary spends $2,840, he or she reaches the doughnut hole. However, beneficiaries will no longer pay 100 percent of the cost of drugs. Now, beneficiaries will pay 50 percent of the cost of brand-name prescription drugs and 93 percent of the cost for generic drugs. Each year until 2020, the discount provided will increase, until the coverage gap is closed.

Improving Access to Preventive Services

Prior to the Affordable Care Act, Medicare beneficiaries were liable for deductibles and co-insurance for some preventive services, even if those services were covered by Medicare. If Medicare did not cover the service, such as an annual physical exam, the beneficiary had to pay the full cost of the service. Since these costs could be unaffordable for Medicare beneficiaries, they may have foregone these services.

The Affordable Care Act recognizes the importance of preventive health care, both in terms of how it can improve people’s health and in terms of the savings it can create for the health care system. That’s why, for the first time in the history of the Medicare program, as of January 1, 2011, beneficiaries will no longer have to pay out of their own pockets for preventive services like cancer screenings or mammograms. Medicare will also be able to add coverage in the future for new preventive services that are found to be effective.

The Act also gives beneficiaries the option to spend more time with their doctor at their annual physical (or wellness visit) to develop a personalized prevention plan together. These plans include information about the beneficiary’s current health status and a schedule for preventive services that the beneficiary should get over the next five to 10 years. These changes mark an important shift in Medicare’s approach toward helping beneficiaries stay well, rather than only treating them when they are sick.

Moderating Premiums

Most Medicare beneficiaries will see slower growth in their Medicare Part B premiums than they would have seen if the Affordable Care Act had not passed. By 2018, Medicare Part B premiums for most beneficiaries are estimated to be $200 less per year than they otherwise would have been.

Improving Medicare’s Financial Outlook

Technological advances in health care services have caused care to become more expensive, and as a result, Medicare spending continues to increase. To ensure the sustainability of the program, it is necessary to make changes that improve and modernize the way services are paid for. In 2009, the Medicare Trustees estimated that the Medicare trust fund would be insolvent by 2017, meaning that, after that date, the trust fund wouldn’t have sufficient money to cover all of Medicare’s estimated costs. In order to extend the life of the trust fund and to improve benefits for people with Medicare, the Affordable Care Act makes carefully targeted changes to the program to achieve $418 billion in savings between now and 2019.[1] These changes extend the life of the Medicare trust fund by 12 years to 2029.

While $418 billion over 10 years is a considerable spending reduction, it is important to understand that the savings are only a small amount compared to the total spending that will occur in the program over the same period of time. Over the next 10 years, Medicare will still spend about $6.7 trillion (down from a projected $7.1 trillion before the law was passed).[2] While the annual growth in spending will decrease from 6.8 percent to 5.5 percent, the program’s spending will still grow by more than 5 percent per year over the next 10 years. In other words, the Medicare program will spend more in 10 years than it does now (the rate of growth will just be slower), meaning that it will continue to be able to meet the needs of beneficiaries today and in the future.

Historically, spending reductions are not unusual, and compared to other legislation, the reductions in the Affordable Care Act are modest.[3] For example, in 1997, faced with a forecast that the Medicare trust fund would become insolvent by 2001, Congress enacted substantial changes to the Medicare program, which were estimated to reduce future Medicare spending by 12 percent over 10 years.[4] By contrast, the Affordable Care Act is projected to reduce Medicare spending by about 5 to 7 percent over 10 years.

Achieving Cost Savings

So how are these cost savings in Medicare achieved? The savings are achieved by giving health care providers incentives to work together to provide high-quality, efficient care and by eliminating waste, fraud, and abuse. These measures not only save money, but they also improve care for beneficiaries.

Encouraging Coordination among Health Care Providers

Under Medicare’s current fee-for-service payment system, health care providers are paid for each individual service they provide to a patient. This means that the more services they provide, the more money they are paid. This incentive to provide more care is a major contributor to increasing health care costs. The Affordable Care Act begins the process of moving away from the fee-for-service payment system and toward a value-based system, where health care providers are paid based on the value of the care they provide.

All providers can lower costs and improve the quality of care, thereby improving the value of that care, by working together to coordinate patient care. One of the new payment mechanisms created by the Affordable Care Act allows doctors, hospitals, and other health care providers to join together to form accountable care organizations (ACOs). Providers in an accountable care organization will take responsibility for the cost and quality of the health care delivered. If the accountable care organization delivers high-quality care at lower costs, the providers in the accountable care organization can share in the savings they generate. For example, by working together, health care providers can avoid duplicating tests and can monitor a patient’s prescription drugs to make sure the patient is not taking medications that interact poorly, among other things. This new payment approach will create an estimated $5 billion in savings for the Medicare program. Just as importantly, it will improve the quality of the care that beneficiaries receive and lay the groundwork for more substantial savings and improvements in the future.

Eliminating Waste, Fraud, and Abuse

The Affordable Care Act takes significant steps to protect Medicare by cracking down on waste, fraud, and abuse. The law provides relevant agencies with an additional $350 million over the next decade to hire more investigative personnel to aggressively monitor and prevent waste, fraud, and abuse in the system.

The health reform law will require Medicare providers to go through stricter screenings, such as background checks and site visits, to ensure that fraudsters, such as a doctor who bills for services he or she never provided, never enter the program to begin with. In addition, the Affordable Care Act imposes harsher fines and penalties on Medicare participants who submit false information on applications and claims. With stronger penalties, “bad actors” should be deterred from committing fraud and abusing the system. 

The nonpartisan Congressional Budget Office (CBO) estimates that every $1 that is invested to fight fraud results in $1.75 in savings. The provisions in the law to fight waste, fraud, and abuse are expected to save the Medicare program about $5 billion over the next 10 years.

Paying for High-Quality Care

Among the ways that the health reform law begins to rein in unnecessary spending while also improving the care beneficiaries receive is by encouraging hospitals to prevent avoidable readmissions and hospital-acquired conditions. Once these changes are fully implemented, they will save the Medicare program more than $11 billion.

Sometimes it is necessary for a patient to be readmitted to the hospital shortly after being discharged—for example, if the patient must have multiple surgeries to treat his or her condition. But sometimes, a patient must be readmitted for a reason that could have been avoided, such as complications from not taking medication properly because no one explained how the medication would need to be taken.[5] Hospitals can decrease the number of avoidable readmissions by providing better care when the patient is in the hospital and by improving communication with patients (and their caregivers) and other health care providers who care for the patient. That way, patients know how to care for themselves when they leave the hospital and their doctors know, for example, what tests were performed while the patient was in the hospital and the medications the patient is taking.

Beginning in 2013, hospitals that have high rates of readmissions for certain health conditions will see their Medicare payment rates reduced. To avoid a reduction in their payments, hospitals will need to implement programs to improve the quality of care that patients receive while in the hospital and ensure that patients, caregivers, and health care providers receive proper information when patients are discharged from the hospital.

The Affordable Care Act also builds on existing efforts to improve care and save money when patients are still in the hospital. Since October 2008, Medicare has imposed a financial penalty on hospitals each time a patient experiences certain hospital-acquired conditions, such as an injury from falling, bedsores, or an object being left in a patient during surgery. The Affordable Care Act takes this a step further. Starting in 2014, each hospital’s record for hospital-acquired conditions will be posted online publicly at In addition, if a hospital has a high rate of certain hospital-acquired conditions, its total Medicare payment will be reduced by 1 percent.

Modernizing Medicare’s Payment System

The majority of Medicare savings under the Affordable Care Act come from altering the way hospitals, nursing homes, and other health care facilities are paid. Traditionally, Medicare increases payments to hospitals and other health care facilities each year using a complicated formula. Each hospital gets this increase regardless of whether it is providing good-quality, efficient care. The health reform law changes this.

The Affordable Care Act reduces these annual adjustments over the next 10 years. The purpose of this change is to encourage hospitals and other health care facilities to improve their productivity through increased efficiency. Each year, other industries increase their productivity by improving their efficiency so that they provide more for less, which lowers costs for consumers. The health reform law applies this same principle to the health care industry, which will save the Medicare program $205 billion over 10 years.

Some people have questioned whether hospitals will be able to continue to operate after these payment reductions take effect. But the hospital industry agreed to these payment reductions, acknowledging that they will gain from the millions of newly insured people and that savings can be achieved through improved efficiencies, such as preventing duplications of tests by using electronic health records to monitor the care that a patient has already received.[6] Also, hospitals will be able to avoid some of the payment reductions by providing high-quality care. Beginning in 2012, hospitals that meet certain performance levels will receive higher Medicare payments. 

Leveling the Playing Field between Original Medicare and Medicare Advantage

In recent years, overpayments to Medicare Advantage plans have been identified as a substantial source of waste within the Medicare system. These plans were established in the 1980s with the expectation that they would lower Medicare costs by providing coverage more efficiently. Instead, Medicare Advantage plans have been paid an average of 14 percent more than it would have cost to treat the same beneficiaries in original Medicare. In 2009, that was equal to about $1,138 per beneficiary, for a total of $11.4 billion in overpayments. As a result of this increased cost, Medicare Part B premiums are about $3.00 more per month than they otherwise would be for all Medicare beneficiaries, not just those in these private plans. While these overpayments generated considerable profits for the private insurance companies, they did not benefit the Medicare trust fund. Instead, they moved up the insolvency of the trust fund by 18 months.

In 2011, under the Affordable Care Act, payment rates for Medicare Advantage plans are frozen at 2010 levels. Despite this freeze in payments, analysis of the Medicare Advantage market for 2011 shows that Medicare beneficiaries were able to choose among, on average, 24 Medicare Advantage plans by county. Premiums remained essentially stable from 2010 to 2011, which is a significant difference from 2009 to 2010, when premiums increased by 22 percent.[7] In addition, estimates show that Medicare Advantage will experience a 5 percent increase in enrollment in 2011.[8] Beginning in 2012, rates will be reduced over a three to seven-year period so that costs are closer to those of original Medicare. High-quality plans will receive bonus payments of 5 to 10 percent. These changes will save the Medicare program $145 billion.

Opponents of health reform claimed that these changes would result in beneficiaries who are enrolled in Medicare Advantage plans losing their coverage. In fact, Medicare beneficiaries will not lose coverage for Medicare’s guaranteed benefits, which include hospital inpatient coverage and doctor visits, among other things. Each private plan will have to make a business decision about how it wants to operate under the new payment system. Plans that are not able to provide health coverage efficiently may reduce coverage or withdraw from Medicare. But high-quality, efficient plans will continue to offer coverage, and the new quality bonuses may make these plans more attractive.[9] Furthermore, everyone with Medicare will always have the option of getting coverage through original Medicare if they no longer like their Medicare Advantage plan. 


As the health care system advances and new, more expensive treatments become available, the Medicare program must also adjust to meet the changing needs of beneficiaries. It must ensure that it can continue to offer the coverage that millions of seniors and people with disabilities have come to rely on. The Affordable Care Act takes important steps to ensure that Medicare is there for Americans in the future, while improving benefits for tens of millions of beneficiaries, improving their access to care while lowering their out of pocket costs.


[1] Centers for Medicare and Medicaid Services, Affordable Care Act Update: Implementing Medicare Cost Savings, (Washington: August 2010), available online at

[2] Kaiser Family Foundation, Medicare Spending and Financing Fact Sheet (Washington: August 2010), available online at

[3] Jennifer O’Sullivan, Medicare: History of Part A Trust Fund Insolvency Projections (Washington: Congressional Research Service, March 28, 2008), available online at

[4] Kaiser Family Foundation, Medicare Savings in Perspective: A Comparison of 2009 Health Reform Legislation and Other Laws in the Last 15 Years (Washington: December 2009), available online at

[5] The Medicare Payment Advisory Commission (MedPAC), in its 2007 report to Congress, estimated that about 18 percent of patients were readmitted to the hospital within 30 days of being discharged, and of that, about 13 percent were potentially avoidable. MedPAC estimated the cost to Medicare for potentially avoidable readmissions within 30 days of discharge was $12 billion. Available online at

[6] Ceci Connolly and Michael Shear, Hospitals Reach Deal with Administration, The Washington Post, July 7, 2009, available online at

[7] Marsha Gold, Gretchen Jacobson, Anthony Damico, and Tricia Neuman, Medicare Advantage 2011 Data Spotlight: Plan Availability and Premiums (Washington: Kaiser Family Foundation, October 2010), available at

[8] Centers for Medicare and Medicaid Services, Medicare Advantage Premiums Fall, Enrollment Rises, Benefits Similar Compared to 2010 (Washington: September 21, 2010), available online at

[9] Humana Inc. President and CEO Michael B. McCallister “told industry analysts during a conference call to discuss quarterly earnings that Medicare Advantage remains a tremendous opportunity and acknowledged that he’s been surprised that more competitors haven’t ventured into the market.” “On the Call: Humana CEO Michael McCallister,” Associated Press/BloombergBusinessWeek, August 2, 2010, available online at