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Avoiding Medicare Insolvency in 2016

The recent Senate bill entitled “The Patient Protection and Affordable Care Act” is intended to bring insurance to many uninsured Americans and to help the Medicare program avoid insolvency, which is projected to happen in 6 years. Unfortunately, the bill will probably have just the opposite effect.

In addition to making draconian cuts to the Medicare Advantage program, the bill largely increases the number and cost of beneficiaries in Medicare. For example, both the House and Senate bills reduce the coverage gap, or “doughnut hole” in Part D coverage by $500 beginning in 2010. Other additions include increased benefits for dual Medicare-Medicaid eligible and eliminating cost-sharing for preventative services (beneficiaries will not have to pay for any of the cost). Such great cost reduction is certainly an enormous benefit for any senior, but puts a new strain on the need for more Medicare funds.

Additionally, the Senate bill plans to tax companies receiving prescription drug subsidies. Since 2003, companies that continued to provide their own prescription drug benefits qualified for a 28% tax-free subsidy (about $600 per year per retiree). The advantage for companies was the ability to list the subsidy as a reduction to their retiree health liability. The Senate bill will tax the subsidy, thus increasing companies’ tax liabilities and companies will be required to register the change as a loss in earnings.

The response expected from these companies will be to no long provide prescription drug benefits on their own. Thus, the cost falls back on Medicare who will see a dramatic increase in Part D beneficiaries. Increasing the number of Medicare eligibles will only add fuel to the fire: these change merely bring the day of reckoning for Medicare closer than 2016.

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