Yes, It's Time to Stop 'Beating' Medicare

When President Biden said, “We finally beat Medicare” in his one and only debate with Donald Trump, it sounded like yet another verbal gaffe. But with the Biden-Harris administration having announced its intention to go ahead with cuts in Medicare payments for doctors, as well as Medicare Advantage plans, it sounds all too accurate.

Moreover, the administration has shown no interest in reversing the scheduled hospital and related payment reductions enacted under the misnamed Affordable Care Act. And so, as the Medicare Trustees put it in their latest report:

“By 2040, simulations suggest that roughly one third of all hospitals and over 50 percent of skilled nursing facilities and home health agencies would have negative total facility margins, raising the possibility of access and quality of care issues for Medicare beneficiaries.”

No kidding. You cannot cut payments for Medicare benefits and services without hurting the patients who depend on those benefits and services.

Medicare payments—really a set of administrative prices and controls—are routinely subject to frenzied special-interest lobbying and political manipulation. And so, more often than not, they’re insulated from the market realities of supply and demand. As a result, Medicare often overpays or underpays for medical benefits and services.

If you harbor any doubt about the real direction of the Biden-Harris administration policy, consider the following measures scheduled to take effect in 2025.

Doctors’ Payment. The Center for Medicare and Medicaid Service (CMS), the powerful bureaucracy running the Medicare program, has recently announced a 2.8 percent cut in Medicare physician payment. This is a cut in the basic component of the congressionally created Medicare fee schedule (called the “conversion factor”), and it will therefore affect the specific reimbursements of every medical specialty.

Note that this latest physician payment cut follows the proposed 3.37 percent cut in the “conversion factor” that the Biden-Harris administration wished to impose this year. They proffered that reduction despite the universally devastating impact of inflation and a relentless increase in physicians’ practice costs. Luckily, Congress intervened and softened the reimbursement reduction, resulting in the imposition of a 1.77 percent cut from the previous year’s base payment. Small relief.

Patchwork congressional interventions can stall or weaken bad administration Medicare policies, but without a serious statutory change, the trajectory of physician payment stays on a straight downward slope. Citing “dangerous implications” for patient care under to the administration’s 2025 payment proposal, the American College of Radiology declared: “The overall conversion factor reduction once again demonstrates that the current Medicare payment system is not sustainable.”

Once again, Medicare patients will suffer from Washington’s insistence on maintaining current law. Thus, as the Medicare Trustees report:

“The specified rate updates could be an issue in years when levels of inflation are high and would be problematic when the cumulative gap between the price updates and physician costs becomes large. Absent a change in the delivery system or the level of update by subsequent legislation, the Trustees expect access to Medicare participating physicians to become a significant issue in the long term.”

Medicare Advantage. Medicare Advantage (MA), a popular and successful system of competing private health plans, covers over half of the total Medicare population, and is the only viable alternative to enrollment in traditional Medicare. Leftist hostility to Medicare Advantage is no secret, however, and unsurprisingly the Biden-Harris administration has decided to “crack down” on the MA plans and cut MA payment rates in 2025.

While the administration states that it is increasing overall government payment to the health plans next year on average by 3.7 percent, the basic “benchmark” payment, the key metric for MA payment, is to be reduced by 0.16 percent. In the face of historic inflation, this is the second such payment cut in a row.

Next year’s MA benchmark payment cut is likely to result in higher Medicare beneficiary premium increases and perhaps reduced access to the program’s supplemental benefits.

The Berkeley Research Group (BRG), a private research firm, quantified the potential reduction in “value” to beneficiaries—in terms of their premiums, costs and benefits—at an average of $33 per month nationwide, with beneficiary monthly costs as high as $60 per month certain Western states.

Before congressional leaders dismiss the BRG study out of hand because it was commissioned by a trade association of private insurers, they should do due diligence and request the Congressional Budget Office (CBO) to provide them with their best assessment of the impact of the administration’s MA benchmark payment reductions on the availability of health plans, benefits, and the higher costs to Medicare patients.

Prescription Drugs. The Medicare Part D program provides drug coverage through competing private health plans, including Medicare Advantage plans. Since the enactment of the program in 2003, drug prices have been set through private-market negotiations between the health plans and drug manufacturers.

Not only did the competitive program deliver drug coverage far below its original projected costs and provide a broad range of medications, but it also achieved high levels of patient satisfaction and affordable premiums. Indeed, the Part D premium performance has been remarkably stable. In 2018, the Medicare trustees report, the standard monthly premium was $35.02 and by 2023 it was even lower: $32.74. A refreshing exception to our experience with health costs.

Those days are coming to an end. Under the provisions of the Inflation Reduction Act of 2022, patients in the near future can expect higher Part D premiums and out-of-pocket costs. In September, the Biden-Harris administration will announce average standard Part D premiums for 2025, but it is already launching a “voluntary demonstration” program to “stabilize” Part D premiums in Medicare’s prescription drug plans. In short, taxpayers will  paper over higher premiums with approximately $5 billion in additional subsidies. 

While the Inflation Reduction Act does establish a desirable cap on all seniors’ yearly out-of-pocket expenses of $2,000 next year, those relying on drugs subjected to the government’s price-fixing will still experience higher out-of-pocket drug costs. In an intricate analysis of the likely impact of the new law, Milliman, the prominent research firm, projects that in 2026 all Medicare patients relying on the drugs subjected to government pricing will experience 12 percent average annual increase ( $70) in their out-of-pocket costs, with Black and Asian beneficiaries experiencing 15 percent and 13 percent increases, respectively.

Skeptics will surely dismiss the recent Milliman report because the pharmaceutical industry, which fiercely opposed the law, funded the research. Before Congressional leaders dismiss the Milliman report, however, they must acknowledge that the firm’s data, methodology and assumptions are all public, making it a relatively easy task for the CBO to confirm or contradict its findings.

A far more serious issue than either higher premiums or out-of-pocket costs is the reduced availability of breakthrough medications and the costs to public health.

Why? The Inflation Reduction Act of 2022 replaces private-sector market negotiations with drug companies with government “negotiation” in determining the cost and availability of major medications. But the phrase “government negotiation” is profoundly misleading. Outlined in the new law, this complex process is nothing like a private-sector market negotiation in the normal meaning of that term. Rather, it is coercive government price fixing. Non-compliant firms face heavy punitive taxation.

In short, the IRA creates a complex price-control regime. Based on a wealth of experience over a period of more than 4,000 years, such a regime guarantees certain results: reduced revenues and thus investment in production and distribution of the controlled goods and services, massive cost shifting and punishing shortages. In the case of pharmaceuticals, expect reduced availability of new medications or breakthrough drugs.

Price control is a deliberate strategy to control costs by spending less and controlling supply, in this case the supply of new drugs and breakthrough medications. CMS reports that if the government’s new price-control regime were in effect in 2023, the government would have spent $6 billion less (22 percent) on Medicare prescription drugs.

There will surely be a reduction in R&D for future drugs and breakthrough medications. The main point of disagreement among government and private-sector analysts is over the severity of the reductions and future availability of breakthrough drugs and medications. For example, University of Chicago economist Thomas Philipson last year estimated that the Inflation Reduction Act would cut cancer research and development spending by 21.7 percent below 2022 levels, and a large number of advanced cancer treatments would never see the light of day.

Why? The Inflation Reduction Act focuses disproportionately on price-controlling drugs made from small molecules. Conceding this as a likely unintended consequence, Kirsten Axelson, a senior fellow at the American Enterprise Institute, and her colleagues simulated its price-fixing impact:

“We find that the vast majority of medicines that will be selected (for “negotiation”) are made from small molecules and that the most common therapeutic area selected is cancer treatments, followed by respiratory conditions and diabetes. We find that IRA price setting, if done conservatively at the upper limit of what the law permits, will reduce future revenues of the small molecule medicines by 28 percent. This will mean that there will be less investment in those medicines, particularly in post market trials which are large and expensive and often used to study medicines in people not represented in earlier stage trials including children.”

So while Biden’s claim in his debate with Trump that he “finally beat” Medicare confirmed his hopeless confusion, you can be sure that Biden’s appointees are not at all confused. They fervently believe in the efficacy of government price controls and central planning. Likewise, Vice President Kamala Harris, as a senator, enthusiastically endorsed the abolition of almost all private and employer-based health insurance in favor of government control over American health care.

If such crude statist policies should ever triumph, Americans should not be surprised by the crushing impact on patients who cannot access the quality of care or medications that they want and need. Check out Great Britain.

Meanwhile, the right response to rising healthcare costs is an aggressive policy agenda that will require health care price transparency and a frontal attack on health market consolidation, forcing big insurance companies and hospital corporations to engage in tough, head-to-head, competition. A bold competition strategy will lower costs and improve quality. Meanwhile, Medicare and Medicare Advantage need patient-centered reforms, not counterproductive payment cuts.

Otherwise, Medicare will indeed be finally beaten.

Robert E. Moffit, Ph.D., is a Senior Research Fellow in the Center for Health and Welfare Policy at The Heritage Foundation.