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
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
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.
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:
Medicare spending was 2.6 percent of GDP-$267 billion.
Medicare spending is projected to reach 5.3 percent of GDP.
Medicare spending is projected to top 9.6 percent of GDP.
related chart, (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,
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:
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
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."
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. However, the CBO
estimates that between 32 and 37 percent of employers would drop
their retiree coverage if the current House and Senate proposals
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.
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.
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. Not surprisingly, all
plans in the FEBHP offer prescription drug coverage. They were not
mandated by law to offer it,
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. 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
To make reform at the core of any Medicare proposal, Members
should consider the following recommendations:
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
universal drug benefit with targeted assistance.
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.
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.
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 .
$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,
"Medicare Drug Folly,"
Editorial, The Wall Street Journal, June 16, 2003 at .
Beneficiaries' Links to Drug Coverage," Joint Economic Committee,
Economic Policy Research, April 10, 2003.
Robin Toner and Robert
Pear, "House Committee Approves Drug Benefits for Medicare," New
York Times, June 18, 2003.
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.
The Honorable Kay Coles
James, "FEHP 101: What Medicare Reformers Should Know," Heritage
Foundation Lecture No. 792, June 10 2003, at .
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.
The House Ways and
Means Committee and the Energy and Commerce Committee passed
similar Medicare legislation.
For more information
regarding the proposal, see Joseph Antos and Grace-Marie Turner,
"Executive Summary: Prescription Drug Security Plan," at .