13 Jan 2014 Has ObamaCare Reduced Medicare Spending? Part 2

Last Friday I examined Jason Furman’s claim that Obamacare has reduced Medicare spending since 2010.  Furman, chairman of the White House Council of Economic Advisors, attributed the slower Medicare growth rate to “innovations” contained in Obamacare like penalizing hospitals for patient readmissions and promoting Affordable Care Organizations.

Furman’s claim doesn’t hold water since neither of those innovations had any impact on Medicare finances in 2010-2011 because they didn’t begin until 2012.  Further, the amount of money those changes saved in 2012 was too small to have much of an impact on Medicare’s growth rate.

Rather, what has slowed Medicare’s growth are reductions in the Medicare Advantage program, the program that pays private plans to provide Medicare benefits to beneficiaries.  The first cuts to Medicare Advantage were instituted in 2009 and came into effect in 2010, prior to ObamaCare.  Obamacare was supposed to cut about $13.9 billion from Medicare Advantage between 2011 and 2012 according to the Congressional Budget Office (see page 30).  But as President Obama headed into the 2012 election, he didn’t want to risk the ire of the millions of seniors in Medicare Advantage plans, so he infused Medicare Advantage with about $8 billion in additional funding which the Administration laughingly called a “Quality Bonus Program.”

Still, that wasn’t enough to offset the full cuts to Medicare Advantage in 2011 and 2012, and so the growth rate per enrollee dropped, as seen in this table:

So it’s clear that funding in Medicare Advantage has dropped, but does it account for the slowdown in total Medicare spending? To answer that, I assumed that from 2010 to 2012 Medicare Advantage grew at the same average rate that it grew from 2007 to 2009, 4.1%.  Medicare Advantage would have spent an additional $18.4 billion in 2010, $25.8 billion in 2011 and $39.8 billion in 2012 with a 4.1% growth rate.  Next, I plugged those numbers into total Medicare spending, and then estimated what the real per enrollee growth would have been.  In the Table below, the blue line represents the actual growth rate.  The red line toward the right shows what the Medicare growth rate would have been from 2010-2012 sans the Medicare Advantage cuts.

Now that’s quite a difference, one that strongly suggests that the cuts in Medicare Advantage are largely responsible for the recent slowdown in the growth of Medicare.  And, to answer the question in the title of this post, yes, Obamacare is partially responsible for the slowdown, since it is responsible for the 2011 and 2012 Medicare Advantage cuts.

However, it is misleading for Obamacare apologists like Furman to claim that innovations in the law are reducing Medicare’s growth rate.  In the end, it comes down to old fashion spending cuts.