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WebMemo #300 on Health Care

June 23, 2003

Time to Draw the Line on Medicare

By

Congress is poised to act on Medicare legislation that, without fundamental reform, would place the program at risk and leave future generations with a staggering unfunded liability. As the legislative process moves forward, Members of Congress should accept nothing less than a proposal that embraces the principles of real Medicare reform. The reasons:

  1. The Medicare program faces a fiscal crisis. Medicare Trustees continue to warn that the program, in its current form, cannot sustain itself. Adding a costly new entitlement will only make the fiscal situation worse.
  2. To protect Medicare from disaster, Congress must act to overhaul the entire program. These efforts should be based on the core elements of reform-consumer-choice and market-based competition.

Looming Financial Disaster
Medicare is facing a fiscal crisis. With 77 million baby boomers nearing retirement and a shrinking workforce relative to a growing retiree population, the program, in its current form, cannot be sustained. As Chart 1 points out, the program will continue to grow at faster rates. The Medicare Trustees' 75-year projections show that Medicare spending will be over three times the current spending levels, as a percentage of GDP, thus placing a greater burden on future taxpayers and straining other government spending. Consider the cost projections from the Trustees: [1]

  • In 2002, Medicare spending was 2.6 percent of GDP-$267 billion.
  • In 2035, Medicare spending is projected to reach 5.3 percent of GDP.
  • In 2077, Medicare spending is projected to top 9.6 percent of GDP.

[See the related chart, Figure I.E1.-Medicare Expenditures as a Percentage of the Gross Domestic Product (pdf page 7), from the 2003 Annual Report of the Board of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Fund, March 17, 2003.]

 

Drug Entitlement: A Prescription for Explosive Costs
Congress is considering adding a costly new entitlement to the already unstable Medicare program. Policymakers claim such a proposal will cost no more than $400 billion over the next 10 years. These estimates are shortsighted and can also be misleading. As Joseph Antos, formerly an Assistant Director of the Congressional Budget Office (CBO) and currently a scholar at the American Enterprise Institute (AEI), and his colleague Jagadeesh Gokhale, a visiting scholar at AEI, point out:

 

Using the same long-term spending assumptions applied to Social Security, the present value of all future Medicare expenditures associated with the administration's original proposal for extending prescription drug coverage could generate an unfunded federal obligation of $6,000bn.[2] 

           

Medicare Trustee Tom Saving, Professor of Economics at Texas A&M University, has reached similar conclusions. In his estimation, the cost of the prescription drug benefit pending before the Senate in "present value" (the value of future obligations in today's dollars) is close to "two-thirds the size of the current $3.8 trillion in debt held by the public."[3]

 

Furthermore, the addition of a universal prescription drug benefit would put seniors with existing private coverage at risk. According to a Joint Economic Committee report, 78 percent of Medicare beneficiaries already have prescription drug coverage.[4] However, the CBO estimates that between 32 and 37 percent of employers would drop their retiree coverage if the current House and Senate proposals were enacted.[5] Ironically, in many cases, seniors who lost their private coverage would likely spend more on premiums and out-of-pocket costs for prescription drugs under the House and Senate proposals.[6]

 

Fixing the Medicare Mess
Recognizing the deepening crisis facing Medicare, Members of Congress must act to implement sound policies now that will help the program adjust for the future. Meaningful reforms must take place now to prepare the program for the first wave of the baby boomer generation. In less than 10 years, 77 million baby boomers will begin to retire.

 

Members of Congress should model their reform efforts after the successful Federal Employees Health Benefit Program (FEHBP). This program has been in existence for 43 years and serves federal employees and retirees, their families and dependents. It is structured as a system of plans competing for enrollee participation. Plans are designed, not by the heavy-handedness of the government, but to meet the demands and needs of the enrollees.[7] Not surprisingly, all plans in the FEBHP offer prescription drug coverage. They were not mandated by law to offer it,[8] but chose to do so in order to adjust to the changing needs of their enrollees. It is the centrality of consumer preferences and reliance on real market competition that has made the FEBHP program one of the most successful employer-based health insurance programs in the world.

 

Core Element of Reform
The House Medicare bills do include a key element for real reform.[9] Starting in 2010, the House bills establish a competitive FEHBP-style system for Medicare. Such program reforms, which are currently lacking in the Senate bill, must be at the core of any legislative proposal on Medicare, and Members of Congress should build on and strengthen these elements to design a better, sounder, Medicare program for all.

 

What Congress Should Do
To make reform at the core of any Medicare proposal, Members should consider the following recommendations:

  1. Accelerate the time frame for reform. The House bills provide for a FEHBP model to begin in 2010. Members of Congress should build on the work of the Ways and Means Committee and put real competition on the fast track. Knowing how much can change by 2010, the earlier competition is implemented, the better the chances are for real change.
  2. Replace the universal drug benefit with targeted assistance. As previously noted, close to two-thirds of Medicare beneficiaries already have a prescription drug benefit. Instead of displacing those seniors, Members of Congress should replace the universal entitlement established under Part D of both House and Senate bills with a targeted assistance program for those seniors without coverage. Such an approach has been developed by health care experts Grace-Marie Turner from the Galen Institute and Joseph Antos with the American Enterprise Institute, and could be easily integrated into a FEHBP model.[10]

The success or failure of the entire Medicare program will rest on whether or not Congress can make real reform the centerpiece of any legislative proposal. The centerpiece should not be the creation of a new entitlement program of unknown cost. Members of Congress must secure provisions that advance reforms that are based on consumer-choice and market competition. Without it, the program cannot be sustained for the next generation of retirees.





[1] 2003 Annual Report of the Board of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Fund, March 17, 2003, p. 6 at http://cms.hhs.gov/publications/trusteesreport/2003/tr.pdf.
[2] $6 trillion in U.S. terms. Joseph Antos and Jagadeesh Gokhale, "A Benefit That is Bad for American's Health," The Financial Times, June 19, 2003, at http://www.ft.com.
[3] "Medicare Drug Folly," Editorial, The Wall Street Journal, June 16, 2003 at http://www.wsj.com.
[4] "Medicare Beneficiaries' Links to Drug Coverage," Joint Economic Committee, Economic Policy Research, April 10, 2003.
[5]Robin Toner and Robert Pear, "House Committee Approves Drug Benefits for Medicare," New York Times, June 18, 2003.
[6]If a senior's current retiree prescription drug coverage were more generous than the Medicare standard plan, as defined in both the House and Senate bills, then their costs would increase. 
[7] The Honorable Kay Coles James, "FEHP 101: What Medicare Reformers Should Know," Heritage Foundation Lecture No. 792, June 10 2003, at http://www.heritage.org/Research/HealthCare/HL792.cfm.
[8] On this point, see Carolyn Merck, The Medicare Program and the Federal Employees Health Benefits Program: Purpose, Design and Options, CRS Report to Congress, The Congressional Research Service, May 26, 1999, p. 19.
[9] The House Ways and Means Committee and the Energy and Commerce Committee passed similar Medicare legislation.
[10] For more information regarding the proposal, see Joseph Antos and Grace-Marie Turner, "Executive Summary: Prescription Drug Security Plan," at http://www.galen.org/news/plan_description.html.

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