Five Fables about Medicare

The Washington Post has published an op-ed entitled “Five myths about Medicare” by John Rother, the president and chief executive of the National Coalition on Health Care, which works to “achieve comprehensive health system reform.” His commentary purports to challenge “everything you think you know” but there are at least five misleading assertions in what he writes:

1. “Providers’ costs for treating Medicare patients are generally covered, and in many sectors, such as in-home nursing and hospice, providers make almost 20 percent profit from treating Medicare patients.”

The source Rother cites (a Washington Post article) does not state what he says it does. Instead, it states that hospice “profit margins on healthier patients who survive for years with minimal care can exceed 20 percent, according to Medpac.” In other words, these high profit margins apply only to a select group of hospice patients. Per a 2011 MedPAC report (page 275), hospice providers make an average of 5.1% profit from treating Medicare patients, not “almost 20 percent” as Rother affirms.

More importantly, contrary to the claim that providers’ costs for treating Medicare patients are generally covered, Medicare pays hospitals an average of 10% below their costs of caring for Medicare patients. These losses are shifted onto private sector patients, thereby increasing their hospital bills.

Although Rother focuses on hospice, what Medicare spends on hospice is less than 8% of what Medicare spends on hospital care. Per the above-cited MedPAC report, Medicare spent $12 billion on hospice in 2010. In comparison, Medicare spent $168 billion on hospital care that year (2011 Medicare Trustees Report, page 9).

2. It is a “myth” that Medicare “fails to control costs,” because its spending growth has been no greater than that of private health insurance.

In addition to the fact that Medicare shifts some of its costs onto the private sector, Rother’s claim is based upon the implicit premise that private health insurance is effective at controlling costs. In reality, inflation-adjusted healthcare spending per person has multiplied by 7.6 times between 1960 and 2009. In absolute terms, per capita healthcare spending swelled by 55 times during this period.

This dramatic increase in healthcare spending took place along with a pronounced rise in third-party payments, which occur when consumers don’t directly pay for their healthcare. Instead, these expenses are paid by other entities such as government and insurance companies. Between 1960 and 2009, the portion of U.S. healthcare expenses paid directly by consumers decreased from 48% to 12%, while the portion paid by government increased from 24% to 48%, and the portion paid by private insurance increased from 21% to 32%.

As explained in the Encyclopedia of Health Care Management (page 391), when individuals don’t directly pay for their healthcare, they have “little interest in price.” This partly explains why both Medicare and private insurance fail to control costs.

3. It is a “myth” that Medicare is “inefficient.”

In the federal government’s 2010 fiscal year, Medicare made about $48 billion in improper payments, amounting to 9.3% of all Medicare outlays. This rate is more than double the annual median net profit margin for the ten largest health insurance companies from 2007 through 2010, which ranged from 2.1% to 4.4%.

Furthermore, Medicare’s improper payment figures fail to account for its prescription drug program, which had outlays of $59 billion in 2010.

4. “The Congressional Budget Office recently predicted that per capita Medicare spending will grow 1 percent faster than the rate of inflation over the next decade.”

The prediction appears on page 56 of the Congressional Budget Office (CBO) report that Rother cites, but the same page explains that the projection is based upon the implausible assumption that Medicare will cut physicians’ fees “by 27 percent in March 2012 and by additional amounts in subsequent years.”

This 27% cut stems from a 1997 provision of federal law intended to constrain Medicare costs, but it has been overridden every year since 2003 and was overridden for 2012 shortly before Rother’s op-ed was published. This was no surprise. As the 2011 Medicare Trustees Report explained on page 2, it is a “virtual certainty that Congress will override this reduction.”

The same page of this CBO report also explains that this projection excludes the costs of Medicare’s prescription drug program, which “will double” over the next decade “largely because of a combination of rising drug costs and the more generous benefits enacted in the Affordable Care Act [a.k.a. Obamacare].”

5. “Trimming Medicare costs by limiting increases in payments to providers and plans” has “rarely been found to affect quality or access to care.”

This assertion is proven false by consequence of the 1997 law mentioned above. As explained in a 2011 Medicare actuarial study, Congress enacted this law “to limit growth in spending on physician services to a sustainable rate, roughly in line with the rate of overall economic growth.” This effort lasted for five years, and in 2002, the New York Times reported: “For the first time, significant numbers of doctors are refusing to take new Medicare patients, saying the government now pays them too little to cover the costs of caring for the elderly.”

To repeat, for every year since 2003, various congresses and presidents have legislatively overridden this so-called “sustainable growth rate” to ensure that Medicare patients have access to care. However, instead of removing this provision entirely, they overrode it one year at a time. Hence, each year, the distance between reality and what the law specifies became wider. This explains why Medicare was due to cut payments for physicians services by a whopping 27% this year.

Since these cost limits are always supposed to become effective “next year,” this method of changing the law one year at a time has the effect of skewing Medicare’s financial projections, making it seem as though future costs will be far lower than they actually will be.

This Washington Post/Rother op-ed, which was published with the subtitle, “Challenging everything you think you know,” contains four more fallacies that will be examined in an upcoming article on

Editor’s Note: This guest post was written by James D. Agresti, president of JustFacts, a nonprofit research institute based in New Jersey. Send comments to A version of this was first published at on March 5, 2012.