Has Healthcare Reform Lowered Medicare Expenditures?

Kevin Schulman, MD


September 30, 2014

In This Article

The Challenges With Medicare Part B

Medicare Part B, or medical insurance, is paid 25% from premium payments by beneficiaries and 75% from federal tax receipts. In other words, the federal government pays 75% of the costs of Medicare Part B each year as part of its spending. For Part B, only people who pay a premium are eligible for a benefit. Part B includes physician payments for professional services, and payments for physician-administered medications.

Major challenges in Part B include the separate provider-based clinic reimbursement, and a formula to contain the growth of Medicare Part B enacted in 1997, called the sustainable growth rate (SGR). Under this formula, physician fees are to be adjusted upward or downward as utilization changes compared with demographic growth of the Medicare population. Because physician services have grown faster than this benchmark, physician fees are to be reduced under the law to provide a check on growth of expenses in the program.

Over the past several years, Congress has postponed implementation of the SGR payment cuts, often at the last minute. Congress cannot repeal the SGR program, however, without adding substantially to the projected federal deficit or cutting spending elsewhere.

Medicare Part D, the drug benefit, was implemented in 2003. Part D is supported about 14% by premium payments from beneficiaries to the federal government, 13% by the states (for dual-eligible Medicaid patients), and 73% from federal tax receipts. As with Part B, these federal payments come from federal spending. Medicare Part D has been implemented through contractors called prescription drug plans (PDPs), or through Medicare Advantage plans.

The federal government is prohibited by statute from negotiating directly with pharmaceutical companies under this plan. Medicare Part D has been touted as a huge financial success compared with the projected cost of the program when it was implemented. However, more recent analyses suggest that the program has benefited greatly from patent expirations that have occurred over the past decade, which have reduced the growth of drug spending overall in the United States.

On a side note: Medicare spending is considered to be mandatory spending. In other words, Congress does not have to pass a budget to fund Medicare each year, and the Medicare program continues even if the federal government is shut down. In other words, the annual debate over the Congressional budget does not include Medicare spending. Medicare spending is discussed under the guise of entitlement reform.


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