Everyone wants to cut Medicare

“Let’s all agree to stand up for seniors,” President Biden told Congress in his State of the Union address. “If anyone tries to cut Medicare, I will stop them.”

Yet, Congress has been constantly pruning Medicare for over four decades — most recently under Biden and the Democratic majority only a few months ago. While most politicians promise to oppose cuts to Medicare on the campaign trail, the bulk of legislators have voted repeatedly to do so, because the growth of expenditure committed to the program is so substantial that it must be drawn from to finance almost any alternative fiscal priority. 

Medicare’s automatically escalating cost reflects the politics of its establishment. To secure the widespread participation of medical providers, Medicare initially offered extremely generous payment terms — covering whatever reasonable costs were incurred in delivering care to beneficiaries. This caused the cost of medical care to surge, because hospitals were able to secure reimbursement for any capital investments they made. Physician fees were pushed up by its commitment to pay “usual and customary” charges, without scrutinizing the value or appropriateness of particular reimbursement claims.

In 2016, the federal government for the first time spent more on Medicare than national defense.  Under current law, the Congressional Budget Office (CBO) projects that Medicare spending will double as a share of GDP to 6 percent in 2050 — almost a third of all projected federal revenues — squeezing out spending on other programs and causing the budget deficit to spiral. 

Legislators who wish to obtain substantial funds to spend on other purposes, without advocating for broad-based tax increases on the middle class, must therefore do so by taking from Medicare.  “Cuts” to Medicare are politically appealing because they can generate enormous pay-fors merely by slowing the growth of expenditure. Big cuts to Medicare repeatedly have been the cornerstone of bipartisan budget agreement to rein in the federal deficit.

In 1983, bipartisan legislation capped payments for inpatient hospital procedures. Congress froze the growth of payments to physicians from 1984 to 1986, and cut fees for various services in 1987, 1989 and 1990 omnibus budget agreements. The 1989 agreement established a comprehensive fee schedule for physician services, along with standards to limit the increase in costs due rising volumes of procedures. This mechanism was flawed, but Congress enacted legislation to revise it on at least 20 different occasions — overall, yielding major savings. 

A 2006 CBO study concluded that Medicare payment cuts over the past two decades had slowed the annual increase of per-beneficiary costs from 5.5 percentage points above the rate of economic growth to only 0.9 percentage points above it. Unlike Social Security, Medicaid and most other entitlements, Medicare is not exempt from automatic reductions to domestic spending (known as “budget sequestration”), so these are concentrated on the program. In 2007, the CBO estimated that Medicare would grow to 3.9 percent of GDP by 2021; in fact, it cost only 3.1 percent — a savings of almost $200 billion, more than the entire federal spending on transportation in that year.

Political attacks for “cutting Medicare” are typically opportunistic and hypocritical. 

Following steep cuts in the 1997 Balanced Budget Act, leading House Democrat Henry Waxman protested that “the Clinton administration and congressional Republicans used Medicare strictly as a piggy-bank.” President Clinton agreed to the Medicare cuts because part of the savings would be used to create the Children’s Health Insurance Program. Despite his criticisms, Waxman had been the architect of similar bipartisan deals in the 1980s to expand Medicaid by cutting Medicare.

When Democrats have controlled Congress, they have pursued this course unilaterally: cuts to Medicare payments to hospitals and insurers were used to fund 40 percent of the 2010 Affordable Care Act’s $1.9 trillion spending (mostly expanding Medicaid). And in 2022, they claimed that cuts to Medicare reimbursement for prescription drugs would pay for over half of the spending in the Inflation Reduction Act. 

Donald Trump recently commanded: “Under no circumstances should Republicans vote to cut a single penny from Medicare or Social Security to help pay for Joe Biden’s reckless spending spree.” As president, Trump had proposed $575 billion in Medicare cuts in his fiscal year 2020 budget. Democrats attacked him for it — even though 85 percent of the cuts he proposed were also featured in President Obama’s last budget.

Policymakers of both parties agree that Medicare’s escalating expenditures need regular trimming. The real fight is over who gets to control the savings.

Chris Pope is a senior fellow at the Manhattan Institute.