Don’t Double Count the Medicare Savings in Health Reform

In order to pay for coverage expansions (and other spending increases), the Senate health bill includes a mix of tax increases and spending reductions. Notable among these are several provisions that would reduce future Medicare spending and increase Medicare revenues.

Some opponents of the bill have argued that the spending reductions would eventually drive providers from the program and thus hurt Medicare beneficiaries. In response, some proponents of the bill have made an interesting argument: that the spending reductions and revenue increases would actually strengthen Medicare by extending the life of its Hospital Insurance (HI) trust fund, which pays for Part A of the program.

That argument is interesting for two reasons. First, it is absolutely correct within the narrow confines of trust fund accounting. The Medicare spending reductions and revenue increases in the Patient Protection and Affordable Care Act (PPACA) would indeed extend the life of the HI trust fund, thereby allowing Part A payments to continue further into the future. Second, that logic implies that many of the budget savings from the Senate health bill will eventually be used to pay for further Medicare benefits. As a result, those savings won’t be available to pay for the coverage expansions and other spending increases in the bill. In short, if you believe that the bill will strengthen Medicare, you shouldn’t believe that the Part A spending reductions and revenue increases are helping to pay for health reform.

The Congressional Budget Office makes exactly this point in a helpful note published today. The note explains the mechanics of trust fund accounting and their relation to usual budget accounting and then delivers the money quote:

The key point is that the savings to the HI trust fund under the PPACA would be received by the government only once, so they cannot be set aside to pay for future Medicare spending and, at the same time, pay for current spending on other parts of the legislation or on other programs.

That conclusion echoes a similar finding by Rick Foster, the Chief Actuary of CMS (the folks who oversee Medicare and Medicaid). Back on December 10, he noted:

In practice, the improved part A financing [resulting from the Senate health bill] cannot be simultaneously used to finance other Federal outlays (such as the coverage expansions under the PPACA) and to extend the trust fund, despite the appearance of this result from the respective accounting conventions.

Bottom line: Don’t double count the Medicare spending reductions and revenue increases in the Senate health bill.

About Donald Marron 294 Articles

Donald Marron is an economist in the Washington, DC area. He currently speaks, writes, and consults about economic, budget, and financial issues.

From 2002 to early 2009, he served in various senior positions in the White House and Congress including: * Member of the President’s Council of Economic Advisers (CEA) * Acting Director of the Congressional Budget Office (CBO) * Executive Director of Congress’s Joint Economic Committee (JEC)

Before his government service, Donald had a varied career as a professor, consultant, and entrepreneur. In the mid-1990s, he taught economics and finance at the University of Chicago Graduate School of Business. He then spent about a year-and-a-half managing large antitrust cases (e.g., Pepsi vs. Coke) at Charles River Associates in Washington, DC. After that, he took the plunge into the world of new ventures, serving as Chief Financial Officer of a health care software start-up in Austin, TX. After that fascinating experience, he started his career in public service.

Donald received his Ph.D. in Economics from the Massachusetts Institute of Technology and his B.A. in Mathematics a couple miles down the road at Harvard.

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