ECONOMIC REPORT OF THE PRESIDENT

Government, which pays for the majority of care Medicare beneficiaries
receive, as well as for beneficiaries themselves, who pay the remaining costs
through premiums and cost sharing.17
Recent research implies that reductions in Medicare payment rates
can also generate savings for individuals enrolled in private insurance plans
by enabling private insurers to secure better rates from medical providers.18
Clemens and Gottlieb (forthcoming) study a past reform in Medicare’s payments
to physicians that had different effects in different parts of the country.
They find that when Medicare reduces its payment rate by one dollar,
private insurers reduce their payment rates for the same services by $1.12,
on average. White (2013) and White and Wu (2014) undertake a similar
analysis focused on Medicare payment to hospitals using variation in how
earlier Medicare payment reforms affected different hospitals. White (2013)
finds that when Medicare reduces its payment rates by one dollar, private
payers reduce their payment rates by $0.77. White and Wu (2014) find that
for each dollar Medicare saves in response to such a reform, other payers
realize savings of $0.55. These results run contrary to earlier conventional
wisdom that Medicare payment reductions generate offsetting “cost shifts”
to private payers that drive up the costs of private insurance.
The ACA made a range of changes designed to bring payment rates in
public programs more closely in line with the actual cost of delivering services.
Two of these were particularly important due to their large size. First,
the ACA modified Medicare’s formula for updating payment rates to certain
medical providers to reflect an expectation that providers will improve their
productivity to a similar extent as the rest of the economy over the long run.
Previously, Medicare had updated payment rates for these providers based
solely on changes in the costs of the inputs they use to deliver care, without
accounting for improvements in productivity, an approach that caused payment
rates to rise more quickly than the providers’ actual cost of delivering
health care services.
Second, the law addressed long-standing deficiencies in the system
used to pay Medicare Advantage plans that led to those plans being paid far
17 Many Medicare beneficiaries have supplemental coverage that pays for some or all of their
cost sharing. In some cases, they purchase this coverage individually and in other cases they
receive it from a former employer or a state Medicaid program. In these cases, cost-sharing
is ultimately financed by the entity paying for the supplemental coverage. Similarly, some
Medicare beneficiaries also have all or part of their premiums paid by another entity, typically
a state Medicaid program or a former employer.
18 The mechanism by which Medicare payment rates affect private payment rates remains
unclear. Clemens and Gottlieb (forthcoming) suggest that reducing Medicare’s payment rate
may strengthen private payers’ negotiating position, perhaps because it becomes less attractive
for a provider to walk away from the negotiation or because Medicare’s rates serve as a
benchmark for judging whether contract terms are reasonable.
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