The President's Budget Saves Medicare $600 Billion While Reducing Out-of-Pocket Costs

Last year, numerous politicians and outlets repeated the false and misleading claim that the President’s FY 2020 budget cut Medicare benefits by $845 billion. As we showed, along with other experts and factcheckers, the budget only reduced Medicare costs by $575 billion – and the vast majority of the savings would have had little effect on beneficiaries.

With the President’s FY 2021 Budget proposal just released, some are making similar claims of $756 billion in cuts this year. In reality, Medicare savings in the budget total about $600 billion, using the budget's estimates. Rather than reduce Medicare benefits, we estimate these proposals would lower premiums, out-of-pocket medical costs, and state and local health care spending by a combined $325 billion.

Over $300 billion of Medicare savings in the President’s budget come from reducing excessive post-acute care payments, equalizing payments for similar health services offered at different health settings, and reducing reimbursements for bad debts. These policies all have broad support in the expert community and all appeared in some form in President Obama's budgets. They've also been proposed by leading Democrats on the campaign trail.

The $756 billion figure that has been cited includes these and other Medicare reforms, but also counts $390 billion of savings from moving two parts of Medicare – Disproportionate Share Hospital (DSH) payments and Graduate Medical Education (GME) payments – out of Medicare and into other parts of the budget even though $250 billion of these funds are instead spent elsewhere in the budget.

Reclassifying spending is not the same as reducing it. Actual specified reductions to Medicare total only $505 billion over a decade – not $756 billion. Adding in the savings that might be generated from drug pricing reforms would bring the total savings to roughly $600 billion. (On drug pricing, the budget includes a $135 billion placeholder, assuming a bipartisan agreement will emerge similar to the Senate Finance Committee's proposal. Most but not all of those savings are likely to come from Medicare.)

Policy Budget Impact
  Reduce and reform post-acute care payments* $105 billion
  Equalize site-of-service payments* $175 billion
  Reduce payments for bad debts* $35 billion
  Medicare impact of establishing a GME fund outside of Medicare*' $215 billion
  Medicare impact of establishing uncompensated care fund outside of Medicare' $175 billion
  Medicare savings from medical malpractice reform and sequester extension $40 billion
  Other Medicare savings and interactions (net) $10 billion
Gross Reduction in Medicare Spending (not equal to total savings) $755 billion
  Non-Medicare impact of shifting GME funds outside of Medicare*' -$165 billion
  Non-Medicare impact of shifting DSH funds outside of Medicare' -$85 billion
Net Specified Reduction in Medicare Spending $505 billion
  Likely Medicare savings from drug pricing reforms# ~$100 billion
Net Medicare Savings in the President's Budget ~$600 billion
Memo: Net Direct Medicare Savings (excluding sequester & med liability reform) ~$560 billion
Memo: Net Budgetary Savings from Policies with Significant Medicare Impact ~$650 billion

* A version of this policy was proposed by President Obama.

‘ These policies move money out of Medicare and into a new fund. The reductions in Medicare spending are thus much larger than the net budgetary savings.

#The Administration includes a placeholder of $135 billion from drug pricing reform. We assume – based on an initial score of the original Finance Committee bill -- that roughly $100 billion of this would come from Medicare, though the exact amount will depend on the details.

For context, Medicare spending is projected to total $10.4 trillion over the next ten years. $600 billion would represent a 6 percent reduction. It would reduce average cost growth from roughly 7 percent per year to roughly 6 percent.

These policies would not represent reductions in benefits, but instead reductions in cost for roughly the same level of benefits.1 Indeed, the policies would actually reduce costs for individuals by lowering premiums and out-of-pocket costs.

Assuming the policies have the same proportional effect as in our April analysis of bipartisan health proposals, we estimate the President’s Medicare proposals (including non-Medicare effects of drug pricing and medical liability reform) will generate additional cost reductions on top of about $325 billion. In other words, total premiums, out of pocket spending, and spending by state governments will fall by roughly $325 billion over a decade. Total national health expenditures would fall by nearly $1 trillion.

  Federal Budgetary Savings Additional Savings to

Individuals and States
Reduce and reform post-acute care payments* $105 billion $5 billion
Equalize site-of-service payments* $175 billion $115 billion
Reform GME payments $50 billion '
Reform uncompensated care payments $90 billion '
Other Medicare savings and interactions (net) $55 billion $5 billion
Reform medical malpractice laws $40 billion $150 billion
Enact comprehensive drug pricing reform $135 billion $50 billion
Total Savings from Medicare-related Policy Proposals^ $650 billion ~$325 billion

* A version of this policy was proposed by President Obama.

`These policies may have effects on non-federal health spending, but it is difficult to determine the direction or magnitude of those effects.

^This includes non-Medicare savings related to medical malpractice liability reform and drug pricing.

While of course all policies involve trade-offs, the President’s Medicare proposals would improve the value of each Medicare dollar, reduce the unsustainable growth of the program, and lower costs for seniors and other households. These savings would total roughly $600 billion, not $756 billion, and they represent reductions in costs not cuts to benefits.

1 On the margins, reduced payments to providers could impact quality and access in some select cases. But there is little evidence of any significant effect, particular for policies like those proposed which largely focus on reducing excessive payments and spending more efficiently.