The Heritage Foundation

Backgrounder #1276

April 22, 1999

April 22, 1999 | Backgrounder on

GAO to President Clinton: Why Your Plan Would Make Medicare Worse

With the exception of the 104th Congress, and of the majority of members of the recently disbanded National Bipartisan Commission on the Future of Medicare, chaired by Senator John Breaux (D-LA) and Representative Bill Thomas (R-CA), policymakers generally have avoided a serious re-examination and reform of the troubled Medicare program.

Usually ignoring the program's structural problems, including outdated benefits and strangulating red tape, Members of Congress and successive Administrations have focused mostly on the financial solvency of Medicare's hospitalization program. Under current law, Medicare's hospitalization benefits are paid out of the Hospital Insurance (HI) trust fund. According to current projections by the Medicare trustees, the HI trust fund faces insolvency by 2015.

THE CLINTON PLAN

In his most recent response to the Medicare problems, President Bill Clinton does nothing to deal with the design problems of Medicare. He does propose to use 15 percent of the projected budget surplus--approximately $700 billion over 15 years--to bolster Medicare's finances. Under the President's initial assumptions, this bailout would extend the life of the HI trust fund from 2008, an earlier estimate, to 2020. The President would make a transfer from the general fund to the HI trust fund by issuing a new set of Treasury securities (in effect, IOUs) for the HI trust fund. As the General Accounting Office (GAO) and others point out, this $700 billion of projected excess funds otherwise would be used to reduce the national debt. Put another way, as the GAO and others also point out, the President's transfer to the HI trust fund merely is an additional claim on the taxpayers.

The nonpartisan GAO is the financial investigating arm of Congress. It recently examined President Clinton's proposal and warned him and Congress that a reliance on this budgetary fix would serve only to put off the Medicare program's day of reckoning and thus make matters even worse.

WHAT THE GAO SAYS ABOUT THE CLINTON MEDICARE SCHEME

In recent testimony before the Senate Finance Committee, David M. Walker, Comptroller General of the United States and the Director of the GAO, issued a series of specific and very pointed warnings on Medicare.1 Among the main concerns:

The Medicare program is in financial trouble already.
Says the GAO:

Unlike Social Security, Medicare's HI program has been experiencing a cash flow deficit since 1992--current payroll taxes and other revenues have been insufficient to cover benefit payments and program expenses. Accordingly, Medicare has been drawing on its special Treasury securities acquired during the years when the program generated a cash surplus with interest on those accumulated balances. In effect, these general fund payments can be viewed as repaying the loan of cash that the trust fund provided the rest of the government when the Medicare program was in surplus.... In essence, Medicare has already crossed the point where it is a net claimant on the Treasury--a threshold that Social Security is not currently expected to reach until 2013. Stated differently, the bleeding of the HI trust fund has already started based on the program's annual cash flow.2

The Medicare program cannot survive in its current form.
According to the GAO:

The current Medicare program is both economically and fiscally unsustainable. This is not a new message--the Medicare Trustees noted in the early 1990s that the program is unsustainable in its present form. They also noted the need for dramatic and fundamental reform of the program to assure its solvency.3

The GAO further notes that, assuming no change in the financing or structure of the Medicare program, the massive projected growth in Medicare spending would start to "crowd out" other federal spending and impose burdens on "other economic activity" of value to American society in the years ahead:

Eventually, again assuming no program or financing changes, Social security, health and interest take nearly all the revenue the federal government takes in by 2050. This is true even if we assume that the entire unified budget surplus is saved and these continued surpluses reduce interest from current levels.

In terms of the general economy, even if Congress were to save the entire surplus, the Medicare program still would be projected to "more than double its share" of the U.S. economy by 2050.

A continued delay in Medicare reform would mean more pain for taxpayers and retirees.
The GAO says that Congress and the Clinton Administration should be prepared to make serious changes and that any delay in reforming the financially troubled Medicare program would serve only to make the choices before the taxpayers and retirees "more painful down the road." Says the GAO:

The longer meaningful action is delayed, the more severe such actions will have to be in the future. As the fastest growing sector of the federal budget, early action to reduce Medicare's cost will have compounding fiscal benefits. Even if the rate of growth is not changed, reducing the base level of spending can produce outyear dividends for the program's finances. Moreover, acting now would allow changes to benefits and health care delivery systems to be phased in gradually so that stakeholders and participants would have time to adjust their saving or retirement goals accordingly.4

The President's Medicare proposal would represent another sharp break from beneficiary financing of Medicare benefits.
Under the traditional model of social insurance, the beneficiary is supposed to pay for the benefits of the program. Unearned benefits, or an income transfer from taxpayers to beneficiaries, turns the program into a welfare program. This is happening already with the Supplemental Medical Insurance program, or Medicare Part B, the part of the program that pays for physicians' services. Originally, taxpayers paid 50 percent of the Medicare Part B costs, but today they pay 75 percent of those costs.

As the GAO notes, the effect of the President's proposal would be to make Medicare Part A look a lot more like Medicare Part B:

Notwithstanding that no real cash is exchanged, the transfer of additional securities to Medicare is a discretionary act with major economic consequences for the future financing of the HI program.... It moves away from payroll financing toward a formal commitment of future general fund resources for the program for the future. The general fund obligation would begin far earlier than for Social Security. Specifically, the HI Trust Fund would begin drawing on the general fund to redeem these new securities in 2008--well before the full reduction in publicly held debt and associated benefits to the general fund will have been realized under the President's plan. In addition, this is 24 years before the Social Security Trust Fund would begin drawing on the additional Treasury securities that the President is proposing to grant to that program.5

As the GAO further notes, the HI trust fund has held Treasury securities in the past, but they were held as the value of money lent from HI surpluses. The Clinton Administration proposal would reverse previous practice sharply:

Under the President's proposal , the value of securities held by the HI trust fund would exceed that supported by earlier payroll tax surpluses and constitute a new and unearned claim on the general fund for the future.6

The President's Medicare proposal would pose new risks for taxpayers, especially if the projected surpluses never materialized.
The GAO emphasizes that this financing arrangement would represent not only a fundamental shift in financing, but a major change that could result in much higher taxes or spending cuts in other federal programs to underwrite the President's Medicare plan. Says the GAO:

Thus the question of bringing significant revenues into the financing of the HI program is a question that deserves full and open debate. The debate should not be overshadowed by the accounting complexity and budgetary confusion of the President's proposal.7

The GAO further notes that the legal obligation of transferring funds from the general fund would take place regardless of whether the projected budget surpluses ever were realized:

These transfers would have a claim on the general fund even if the actual surplus fell below the amount specified for the transfers. However, it is important to realize that any proposal to allocate surpluses is vulnerable to the risk that those projected surpluses may not materialize. Proposals making permanent changes to use the surplus over a long period of time are especially vulnerable to this risk.8

The President's Medicare proposal has the appearance of reform without the substance.
According to the GAO:

It has no effect on the current and projected cash-flow deficits that have faced the HI program since 1992--deficits that taxpayers will continue to finance through higher taxes, lower spending elsewhere or lower paydowns of publicly held debt than the baseline. Importantly, the President's proposal would not provide any new cash to pay for medical services.

Thus, the President's proposal gives the taxpayers an appearance of making progress without the substance of a positive change:

The President's proposal to strengthen the HI program is more perceived than real. Specifically, while the HI trust fund will appear to have more resources as a result of the President's proposal, in reality nothing about the program has really changed. The proposal does not represent program reform, but rather a supplemental means to finance the current program. Stated differently, the reform proposal has more form than substance.9

The President's Medicare proposal would undermine the remaining vestiges of fiscal discipline in the program and thus make matters worse.
The President's proposal to use the budget surplus would amount, in effect, to a grant of federal treasury securities to the HI program. Says the GAO:

It is important to note, however, that these new Treasury securities would constitute an unearned claim on general funds for the HI program--a marked break with the payroll tax-based financing structure of the program. This would be a significant change that could serve to undermine the remaining fiscal discipline associated with the self-financing trust fund concept.10

The President's Medicare proposal would not be real reform, but could make real reform more difficult.
Says the GAO:

The transfer of surplus resources to the HI trust fund, which the administration argues is necessary to lock in surpluses for the future, would nonetheless constitute a major shift in financing for the Medicare program. However, it would not constitute real Medicare reform because it does not modify the program's underlying commitments for the future. Moreover, the proposed transfer may very well make it more difficult for the public to understand and support the hard choices necessary for the program's future viability.11

CONCLUSION

The latest Clinton Administration budget proposal would not make for serious Medicare reform. It would rely on future, and as-yet nonexistent, budget surpluses and proposes to transmit funds into Medicare in the form of IOUs. As the General Accounting Office emphasizes, the Clinton proposal also would make a major change in the financing of Medicare's Hospital Insurance trust fund--relying on general funds instead of traditional payroll taxes--but would alter neither the growth in spending nor the financial obligations on present and future taxpayers. Indeed, it would make them worse by locking in future obligations, regardless of whether the surpluses ever materialized, while lowering public expectations concerning the need to undertake serious changes in the Medicare program.

Serious Medicare reform is not a simple matter of dollars and cents; it has much more to do with the way in which medical services will be delivered to the next generation of retirees. The fundamental questions are not financial but qualitative: whether the next generation of Medicare patients will be able to choose the kinds of plans, benefits, and medical treatments they want; whether they will be free of bureaucratic restrictions on their personal choices; and whether they will be protected from arrogant invasions of their medical privacy. Nevertheless, the future financial condition of Medicare is far from secure, and the Clinton Administration's proposal would give only the appearance of security. As the GAO analysis makes clear, this latest Administration proposal is a snare and a delusion.

Robert E. Moffit, Ph.D., is Director of Domestic Policy Studies at The Heritage Foundation.

  Endnotes



1. David M. Walker, Comptroller General of the United States, Medicare and Budget Surpluses: GAO's Perspective on The President's Proposal, Statement before the Committee on Finance, U.S. Senate (GAO/T-AIMD/HEHS-99-113), 106th Cong., 1st Sess., March 10, 1999.

2. Ibid., p. 9.

3. Ibid., p. 2.

4. Ibid., p. 15.

5. Ibid., pp. 11-12.

6. Ibid., p. 12.

7. Ibid.

8. Ibid., p. 13.

9. Ibid., pp. 14-15.

10. Ibid., p. 1.

11. Ibid., p. 23.

About the Author

Robert E. Moffit, Ph.D. Senior Fellow
Center for Health Policy Studies