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Q & A with Paul Van de Water on How the Health Reform Law Reduces the Deficit


Today, we sat down with Paul Van de Water, Senior Fellow, to discuss some of the major provisions in the health reform law that will help reduce the deficit.

Paul, the Congressional Budget Office says that health reform will reduce the deficit by $143 billion dollars over the next ten years. That’s a lot of money. What are some ways that the federal government will save money?

There are four major sources of savings.  First, reducing overpayments to Medicare Advantage plans.  Second, lowering some Medicare payment rates. Third, cutting Medicaid prescription drug costs, and, fourth, reducing payments to hospitals for treating uninsured patients.

Let’s start with Medicare Advantage.

Sure. One quarter of Medicare beneficiaries get their health coverage through private insurance companies in a program called Medicare Advantage. Medicare pays those private insurance companies about 13 percent more per beneficiary than it would spend on the same beneficiary in traditional Medicare. The health reform law scales back these overpayments.

You mentioned reducing some Medicare payment rates in your second point. Which rates would be cut and why?

Each year, Medicare increases the amount that it pays hospitals, nursing facilities, and other providers to account for inflation and other factors that increase the cost of providing care. But, Medicare doesn’t consistently factor in productivity improvements that actually reduce providers’ costs. The health reform law scales back annual payment increases to account for increased productivity.

Your third point was Medicaid prescription drug costs. How does the health reform law reduce them?

To participate in Medicaid, drug companies must pay rebates to the federal and state governments for drugs that are prescribed to beneficiaries. The health reform law will increase these rebates. This will save money by ensuring that Medicaid programs don’t pay more than private purchasers for the same drugs.

Finally, you noted that the health reform law reduces spending on the uninsured. How so?

The federal government compensates hospitals that treat a large number of uninsured patients. But, health reform will dramatically shrink the number of uninsured Americans. In fact, more than 30 million people will gain coverage. As a result, hospitals will serve fewer uninsured patients – which means that the federal government won’t need to pay hospitals as much for treating them.

Paul, what’s the bottom line?

The health reform law is fiscally responsible – not only does it pay for the cost of expanding health insurance for more than 30 million people, it also will reduce the deficit. And, it achieves this result with sound policies that make sense.

Savings is only one part of how health reform will be paid for, bringing in revenue is another. Stay tuned for the next Q and A, which will discuss how health reform will bring in revenue.

Listen to the podcast of this conversation (or find it on iTunes).  To learn more about the new health reform law, check out our special series “Moving Forward with Health Reform.”