Medicare Reform Means Some Seniors Face Benefit Cuts

woman patient doctor office
woman patient doctor office

First, the good news: According to a report released by the White House on Monday, America's new health reform law will generate $575 billion in Medicare cost savings over the next decade, allowing the program to survive until 2029. The report says this will result in lower Medicare premiums of nearly $200 a year by 2018.

Part of those savings, amounting to $5.3 billion by 2011, will come from reduced "overpayments" to Medicare Advantage, a system that allows Medicare recipients to receive benefits via private health insurance providers. The savings associated with Medicare Advantage efficiencies will rise to $145 billion by 2019.

Now for the bad news: Seniors enrolled in Medicare Advantage may soon find their that benefits have been cut. Under changes contained within America's new health reform law, reduced payments to private insurers may lead to a reduction in benefits such as dental coverage and free eyeglasses. That could trigger an exodus from Medicare Advantage plans back to traditional fee-for-service Medicare, though at much higher costs.

Shrinking the Subsidies

Since 2003, when the subsidies offered Medicare Advantage were greatly increased, the number of enrollees in such plans -- which are offered by a number of private insurance companies -- has soared. Roughly one in four Medicare recipients is now on a Medicare Advantage plan because of all the extra benefits that were offered.

The issue has become a central concern to many seniors, because the health reform law passed in March makes deep cuts in the subsidy payments Medicare makes to private Medicare Advantage plans. The Obama administration report says Medicare paid Medicare Advantage plans 14%, or $1,000 per person on average, more for health services than traditional Medicare, with "no measured differences in health outcomes." It is those extra payments that will now be eliminated.

Yet in one change to the rules which has not been widely reported, people enrolled in a Medicare Advantage plan will no longer be able to switch to another Medicare Advantage program. Instead, they will have no option but to join the traditional Medicare program if they decide to leave their current plans because benefits have been reduced under the new law.

Peter Ashkenaz, deputy director of media affairs at the U.S. Health and Human Services department of Medicare and Medicaid services, confirmed that as of Jan. 1, people enrolled in Medicare Advantage will have 45 days of open enrollment "to return to the fee-for-service program." But, he added, users will not be able to switch to another Medicare Advantage plan, as they have been able to do for the past decade.

The Challenge of Change

"Obviously if you're taking away subsidies, then [companies that provide Medicare Advantage] plans will have to review what the doing," says David Certner, legislative director for the AARP, formerly known as the American Association of Retired People. "We're likely to see some changes in some of plans."

The AARP, which supported the heath care reform law, also offers Medicare Advantage and Medigap insurance policies to its members. Certner says AARP's position is that its business side should conform to its policy side, and "that we needed to reduce some of these excess payments, but our plans would continue to operate in whatever the regime was."

Certner says the savings outlined by the Administration means the "financial solvency of Medicare is going to be improved by 12 years – that's pretty significant."

But, he added, there are concerns that projected savings in payments to health care providers like hospitals and nursing homes might limit access to those facilities. "Those are not likely to happen as much in the near term," but over longer periods of time they might have an impact, and "that's certainly something we'll be keeping our eyes on."

Mind the Gaps

Joseph Antos, a health care scholar at the American Enterprise Institute, says this change could prove extremely costly to retirees. That's because most seniors on Medicare Advantage don't have so-called Medigap policies, which are private insurance plans that pay the "gaps" in traditional Medicare coverage such as hospital deductibles and doctor co-payments.

Antos says that when patients switch from Medicare Advantage to traditional Medicare, "they will pay much higher premiums than they ever imagined possible for Medigap insurance." The reason is that most people take out Medigap coverage when they turn 65 and are healthy, while those who are older and in poorer health will now have to pay much more.

Antos said that based on the analysis of Richard S. Foster, the chief actuary of the Medicare service, some large hospitals and nursing homes may withdraw from providing Medicare services because the reimbursements are too low to be cost-effective.