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Older Americans, Medicare, and the Affordable Care Act: What's Really In It for Elders?
posted 07.08.2011

Editor's Note: This article is taken from the Spring 2011 issue of ASA's quarterly journal, Generations, an issue devoted to the topic, “The Affordable Care Act: A Way Toward Aging with Dignity in America.” ASA members receive Generations as a membership benefit; non-members may purchase subscriptions or single copies of issues at our online storeFull digital access to current and back issues of Generations is also available to ASA members and Generations subscribers at Ingenta Connect. For details, click here.

By Richard L. Kaplan

The Patient Protection and Affordable Care Act (ACA) is the most significant healthcare legislation enacted since the passage of Medicare and Medicaid forty-five years ago. The new law’s full implications will not be known for years, but its impact on the Medicare program will be significant and immediate. Many of its effects will be beneficial to enrollees in Medicare, despite the fact that polls of older Americans reveal a pervasive antipathy to the new statute. At the same time, financing the ACA includes more than half a trillion dollars of cuts to Medicare. It defies common sense to believe that cuts of this magnitude will not have some deleterious effect on how older Americans pay for their medical needs.

Preventive Services

Even before healthcare reform was enacted, Medicare began to cover more preventive services, in line with United States healthcare plans generally, and in an effort to minimize the need for expensive medical interventions down the road. For example, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA) provided that in the first six months (later amended to the first year) of a person’s enrollment in Medicare Part B, that person is entitled to an “initial preventive physical examination.” The purpose of this exam is to promote health and detect diseases before they worsen. Along with various cancer screenings and tests for cardiovascular disease, this examination includes “education, counseling, and referral” services.

In 2008, the final year of President George W. Bush’s administration, this examination was expanded to incorporate “end-of-life planning,” which included information about “an individual’s ability to prepare an advance directive in the case that an injury or illness causes the individual to be unable to make health care decisions” (Title 42 U.S. States Code 1395x).

To this now-expanded examination, the ACA adds “annual wellness visits.” These visits include a comprehensive risk assessment and a “personalized prevention plan.” These services will consider a person’s medical and family history, various biometrics such as body mass index and blood pressure, cognitive impairments, and a five-to-ten year schedule of screening tests. These services will be provided by the Medicare program at no charge to the enrollee—no deductibles or co-payment obligations will apply to wellness visits. Such services have long been a touted component of Medicare managed care, and the ACA extends them to the traditional Medicare program. Annual wellness visits now available to every Medicare enrollee should significantly improve enrollees’ health, and might reduce Medicare’s programmatic expenses down the road.

Prescription Drugs

One of the most significant categories of medical spending for many older adults is prescription medications—an issue also addressed in 2003. Medicare Part D, the program’s coverage for prescription drugs, did not begin, however, until 2006, and it included a coverage gap known as “the donut hole.” After an annual deductible, the initial coverage component of a Medicare Part D plan required enrollees to pay 25 percent of their prescription drug costs. Once the total drug costs (what the plan paid and what the enrollee paid) reached $2,830 (in 2010), enrollees went into the donut hole, where they paid the total cost of their drugs. This no-coverage feature continued until total drug costs reached $6,440. At that point, a catastrophic level of coverage kicked in where enrollees paid no more than 5 percent of the cost of a drug, with no coverage limit.

This strange configuration has no counterpart in any other healthcare financing arrangement, public or private, in the United States or elsewhere. It resulted from the interaction of three unrelated political imperatives. First, Medicare’s drug plan needed a fairly low annual deductible to ensure that most enrollees would see some personal benefit from participating in the program. This imperative derived from the failed enactment of a Medicare prescription drug plan in 1988. That plan was repealed the next year as older citizens vociferously protested its mandatory nature (Himelfarb, 1995). Consequently, any newly enacted Medicare drug plan had to be voluntary (Kaplan, 2005). And if plan participation had to be voluntary, it was essential that most enrollees receive some tangible benefit for their participation.

Second, the distribution of annual drug expenses follows the basic pattern for medical expenses generally—the bulk of programmatic costs are incurred by a minority of program participants. For that minority of participants, however, the incurred costs can be large. Accordingly, if Medicare’s drug plan were to provide the greatest assistance for those enrollees who needed it most, a catastrophic coverage level with a very low co-payment obligation was required. The prototype’s final cost tier has a 5 percent co-insurance requirement with no coverage limit.

Finally, the Bush Administration determined it was willing to commit a stipulated sum toward this new entitlement, and no more. The combination of a low annual deductible with more comprehensive benefits available after the deductible was met, an unlimited catastrophic coverage tier with a low co-insurance payment obligation, and a fixed global budget, meant something had to give. What gave was the gap in coverage between the initial period of drug coverage and the beginning of catastrophic coverage—the infamous donut hole.

Inasmuch as there was no economic, medical, or theoretical rationale for the Medicare Part D coverage gap, its elimination was an objective of elder advocacy groups from the moment of its creation, and the ACA accomplishes that. The new law reduces the donut hole by decreasing an enrollee’s cost responsibility in this coverage gap from 100 percent to 25 percent over the next ten years. The precise schedule of decreased out-of-pocket costs depends upon whether the prescription medications are generic or brand name. Figures 1 and 2 below show what percentage enrollees will pay for generic and brand name drugs during the next ten years.


Figure 1

Figure 1. Enrollee Co-Insurance Obligation for Generic Drugs

Figure 2

Figure 2. Enrollee Co-Insurance Obligation for Name-Brand Drugs

Several key points become clear in these graphs. First, the donut hole does not completely close. Rather, the 25 percent coinsurance, co-payment obligation of the initial coverage component will be extended through what was formerly the donut hole. This result is a major improvement for affected enrollees, but at least $903 at 2010 cost levels will remain the enrollee’s responsibility.

Second, the drug coverage gap’s closing phases in gradually over a ten-year period. For generic drugs, costs decrease by only 7 percent in 2011, and the enrollee continues to pay the majority of the applicable costs until the year 2018 (see Figure 1). Brand name drugs present their own peculiarities, but generally follow the same course—an immediate drop of 50 percent in the enrollee’s co-insurance, co-payment obligation takes effect in 2011, but subsequent declines are small and slow in coming (see Figure 2). For example, the percentage enrollees need to pay does not decline to 45 percent until the year 2015.

As with any government program, back-loaded benefits are always subject to subsequent Congressional actions that could delay or even terminate further reductions in what enrollees must pay. The significant decline of 12 percent in an enrollee’s co-insurance from 2019 to 2020 for generic drugs is particularly vulnerable.

Third, generic drugs remain more expensive as a percentage of cost paid by the enrollee until the very end of the phase-in period. The enrollee’s percentage obligation for brand name drugs is lower than the comparable percentage for generic drugs until they both reach the 25 percent level in 2020.

One final aspect of the ACA related to prescription medications is increased costs for upper-income Medicare beneficiaries. Following the approach of increasing premiums charged to upper-income enrollees for Medicare Part B, the ACA increases the Part D premiums that these same upper-income enrollees must pay. This change is typically described as a reduction in the premium subsidy for upperincome beneficiaries, but the effect on those older Americans who are subject to this provision is the same—an increase in monthly costs for enrollment in a component of the Medicare program.

Unlike Medicare Part B, however, Medicare Part D plans do not have uniform prices. Every Medicare Part D plan provider establishes its own premiums, and these premiums vary from $10 to $120 per month (in 2010), depending upon the specific contours of the plan’s benefits and the scope of its formulary. Accordingly, the increased cost, or reduced subsidy for upper-income enrollees, takes the form of an additional amount charged to them. This additional amount is a percentage of the Medicare Part D program’s “base beneficiary premium,” adjusted every year, generally upward.

The concept of adjusting Medicare costs according to income, in effect a means-test, is not new. But the ACA extends this concept to Medicare Part D and significantly widens its potential scope by freezing the applicable dollar parameters for a decade. Relatively few Medicare beneficiaries will be affected by these new income-based provisions. Nonetheless, the upper-income premium surcharge might cause some affected beneficiaries to drop out of the Medicare Part D program or not enroll at all (Kaplan, 2006).

If wealthier Medicare beneficiaries are healthier than the average Medicare enrollee (as is often the case) or are not major users of prescription medications, their absence from the Medicare Part D program might increase the average costs of the remaining enrollees, disturbing the inherent social insurance principle upon which Medicare originated.

The ACA’s Skilled Nursing Home Initiatives

Regarding long-term care in skilled nursing homes, the principal contribution of the ACA is to expand the information available to Medicare beneficiaries. Certain other initiatives promote ethics programs for nursing home employees, but the main focus of the ACA’s nursing home initiatives is to require that additional nursing home information be included in the existing Nursing Home Compare tool on Medicare’s website. This additional information pertains to the following:

  • ownership of the facilities and any affiliated parties;
  • governing boards and organization structure;
  • staffing data for each facility, including how many residents live there, hours of care per day per resident, staff turnover, and their length of service;
  • summary information about the number of substantiated complaints, their type, severity, and outcomes;
  • adjudicated criminal violations by the nursing facility or its employees, including elder abuse violations that occur outside the nursing facility; and
  • civil monetary penalties that are levied against the facility, its employees, and its contractors or other agents.

Some of this information is vital when considering a nursing home placement. For example, information on criminal violations relating to elder abuse and neglect speak directly to many fears that older Americans express when faced with the prospect of moving to a nursing facility. While some of this information is now available, it is often not sufficiently standardized to allow a prospective resident to easily evaluate potential residential facilities. On the other hand, older people often have few realistic alternatives to long-term care, and they may require a nursing home on fairly short notice. The sort of deliberative facility comparison shopping that the new statute’s requirements seem to envision is more typical of assisted living facilities than it is of nursing homes. But the requirement that criminal violations and civil penalties be publicly disclosed may add weight to the sanctions, enhancing their protective power.

In some cases, however, the information may lead to inappropriate interpretations. For example, the number of hours of care provided per resident depends greatly upon the presenting condition of the facility’s residents and the intensity of their care needs. Similarly, the appropriate level of staff training requirements depends greatly upon the severity of the residents’ condition. Only very knowledgeable consumers will be able to deduce the quality of care a nursing facility provides based on the additional information nursing facilities must now disclose.

Medicare Managed Care

Regarding Medicare managed care, the ACA directs some of its most significant financial changes at Medicare Part C, the managed care component of the Medicare program. Under the MMA, Medicare’s managed care plans, called Medicare Advantage plans, were given extra payments and other incentives to expand their enrollment of Medicare beneficiaries. These provisions were generally successful, and the proportion of Medicare beneficiaries who are enrolled in Medicare Advantage plans doubled to the current level of 22 percent of the Medicare population (Kaiser Family Foundation, 2009). On average, however, Medicare Advantage costs the federal government approximately 14 percent more per beneficiary than the traditional Medicare program. For that reason, the ACA makes major budgetary cuts to Medicare Advantage plans.

Most of the enacted changes are targeted at the components of the plans themselves, but their overall effect reduces the profit potential of operating a Medicare Advantage plan. Thus, the ACA restructures payments to these plans and offers a range of bonuses to encourage quality enhancement. At the same time, the ACA mandates certain minimum levels of expenditures for patients’ medical care via stipulated “medical loss ratios.” Thus, the plans are limited in terms of what they pay for non-medical expenses, such as marketing, profits, salaries, administrative costs, and agent commissions (HHS, 2010). Because Medicare Advantage plans may not discontinue any “guaranteed Medicare benefits,” they are likely to scale back or eliminate many of the extra benefits they provide, such as vision and dental care. Some Medicare Advantage plans may raise premiums for their enrollees, while other plans may cease participating in the Medicare program.

In any case, the appeal of Medicare managed care to prospective enrollees has diminished. One of the major attractions of such plans prior to 2006 was their coverage of prescription medications, but such coverage is now available through Medicare Part D. And, the coverage of preventive services in the traditional Medicare program has been improved, as explained above. Managed care still offers the prospect of better coordinated care among various medical specialists and related healthcare providers, plus an undeniable simplification of recordkeeping for the healthcare services used. But the net result of the ACA is likely fewer Medicare managed care plans and reduced choices for millions of beneficiaries who currently participate in these arrangements.

Medicare’s Solvency

According to the authoritative analysis of the Chief Actuary for the Centers for Medicare and Medicaid Services, Medicare’s Part A trust fund is enhanced by the ACA (Foster, 2010). Specifically, the new legislation’s effect is to delay exhaustion of this fund by twelve years, until 2029. This projection, however, is critically dependent upon its constituent assumptions.

More than 40 percent of the projected Medicare savings is derived from reductions in payment rates to Medicare providers—hospitals, nursing homes, and home health agencies. But as the Chief Actuary notes, these reduced payments might cause providers to “end their participation in the program” (possibly jeopardizing access to care for beneficiaries). As a result, these providers and the beneficiaries they treat are likely to seek payment relief from future Congresses. According to the Chief Actuary, the ACA’s projection of these Medicare savings “may be unrealistic” (Foster, 2010).

The history of mandated reductions in doctors’ fees under Medicare seems to validate this assessment. The Balanced Budget Act of 1997 established a mechanism to limit fee increases for physicians participating in Medicare, but Congress moderated the applicable provisions in 1999 and 2000 and, for the past eight years, has overridden the scheduled reductions. One of the final acts of the last Congress was to pass the so-called doc fix suspending scheduled Medicare reductions in physician reimbursement fees for another year. With the trust fund solvency improvements dependent upon future reductions in provider payments, it is uncertain whether these savings will take place.

Another 25 percent of the projected cost savings for Medicare comes from lower payments to Medicare Advantage plans, as described previously. Those projections may also be politically vulnerable, however, especially in the new Congress, which is more favorably disposed to market-oriented arrangements like the Medicare Advantage program. Still another 11 percent of Medicare’s projected cost savings comes from higher payroll taxes on Americans who have annual earnings of more than $200,000 (or $250,000 for married couples). This provision may be politically vulnerable in the aftermath of President Obama’s signing of tax rate reduction legislation on December 17, 2010.

Finally, the ACA creates an Independent Medicare Payment Advisory Board charged with reducing the per capita growth rate of Medicare’s expenditures. When implemented, this Board will make substantive recommendations toward this goal. At the same time, the new statute prohibits the Board from making proposals “to ration healthcare, raise revenues or Medicare beneficiary premiums, increase Medicare beneficiary costsharing (including deductibles, co-insurance, and copayments), or otherwise restrict benefits or modify eligibility criteria” (Title 42 U.S. States Code 1899A). In this context, one wonders what’s left? The only remaining cost lever available to this Board is reducing payment rates to Medicare providers—a mechanism that has been proved difficult to implement.


Medicare was created in 1965, and the new legislation makes many changes to the program. Prescription drug coverage, a relatively recent addition to the Medicare program’s portfolio, is expanded for those enrollees who have major pharmaceutical expenses, even though this expansion will be phased in over ten years.

Other programmatic changes enhance the value of the basic Medicare program, focusing it more on prevention. But the most preventivefocused component of Medicare— its managed care program— is the subject of substantial cost-cutting. The impact of those cuts cannot be predicted with unassailable accuracy, but they are unlikely to be positive. Many Medicare enrollees will probably be required to make major changes in how they receive their medical care.

More fundamentally, the most exhaustively considered and far-reaching healthcare legislation in nearly half a century left intact the basic structure of healthcare financing for older Americans. The individual components of Medicare Parts A, B, C, and D are basically unchanged. If anything, the currently fashionable approach of assuring integration of care through a “medical home” has been degraded somewhat by the ACA’s treatment of Medicare managed care. On balance, the ACA’s impact on individual older Americans is likely to vary considerably, depending upon a specific enrollee’s medical circumstances and present financial arrangements.

Richard L. Kaplan, J.D., is Peer and Sarah Pedersen Professor of Law at the University of Illinois at Urbana-Champaign.


Foster, R. 2010. “Memorandum of Richard S. Foster, Chief Actuary, Centers for Medicare & Medicaid Services, Estimated Financial Effects of the ‘Patient Protection and Affordable Care Act,’ As Amended.” Retrieved January 4, 2011.

Himelfarb, R. 1995. Catastrophic Politics: The Rise and Fall of the Medicare Catastrophic Coverage Act of 1988. University Park, Pa.: Pennsylvania State University Press.

Kaiser Family Foundation. 2009. Medicare Fact Sheet: Medicare Advantage. Retrieved March 30, 2011.

Kaplan, R. 2005. “The Medicare Drug Benefit: A Prescription for Confusion.” National Academy of Elder Law Attorneys Journal 1(2): 167–86.

Kaplan, R. 2006. “Means-Testing Medicare: Retiree Pain for Little Governmental Gain.” Journal of Retirement Planning 9(3): 22–8; 48–9.

Title 42 United States Code § 1395x(ww)(3)(A), added by Medicare Improvements for Patients and Providers Act of 2008, Public Law No. 110-275, § 101(b)(1) (C). Retrieved March 30, 2011.

Title 42 United States Code § 1899A(c)(2)(A)(ii). Retrieved March 30, 2011.

U.S. Department of Health and Human Services (HHS). 2010. Retrieved March 24, 2011.

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