The Senate Medicare Options: Serious Savings or Business as Usual?
The Senate is
facing two interrelated major tests: federal spending and Medicare
policy. According to Congress Daily, Senator John McCain
(R-AZ) and other Senate Republicans could offer an amendment to the
Senate's budget reconciliation legislation to cut federal spending,
including a delay of the Medicare prescription drug benefit for two
The Senate Finance Committee, in contrast, proposes only modest
Medicare spending reductions, combined with congressional
reinforcement of the most undesirable features of Medicare payment
policy. How Senators choose between these two approaches will
reflect their seriousness about confronting ballooning federal
spending and the challenges that Medicare faces.
Senator McCain and
his colleagues Senators John Ensign(R-NV), Sam Brownback (R-KS),
Tom Coburn(R-OK), Jim DeMint(R-SC), Lindsey Graham(R-SC) and John
Sununu (R-NH) have produced an impressive "Fiscal Watch Team Offset
Package" of serious spending reductions in major areas of domestic
policy. Altogether, these provisions would yield a savings of at
least $115 billion over the next two years.
The Senators propose these reductions in response to the
unanticipated costs of Hurricane Katrina, estimated to be well in
excess of $200 billion dollars, as well as the clear need to
contain the explosion of government spending that is adding to the
already mountainous unfunded liabilities of the federal entitlement
programs-in particular Medicare, Medicaid, and Social Security.
Senator McCain and
his Senate colleagues' approach would not only result in major
savings to the taxpayer, but would also advance a superior Medicare
policy. The key Medicare provisions are as follows:
- Delay in the
Medicare Part D entitlement. The drug entitlement is scheduled
to go into effect on January 1, 2006. In sharp contrast to the
rushed consideration of the Medicare drug bill in both the House
and Senate, the delay would give Congress the crucial time needed
to reconsider and redesign a rational and responsible Medicare drug
benefit that is affordable for both seniors and taxpayers. This is
simply good public policy. With the enactment of the Medicare
Modernization Act of 2003, congressional leaders, in particular
those of the Senate Finance Committee and the House Ways and Means
Committee, imposed an additional $8.7 trillion dollars of unfunded
liabilities on current and future taxpayers. As the Comptroller
General of the United States David Walker remarked this week, the
United States simply cannot afford Medicare Part D. Members of
Congress have a duty to reconsider and restructure it. A simple
delay, according to the Fiscal Watch Team, could produce a broad
range of big savings, running anywhere between $40 to $80
- Retain and
expand the Medicare Drug Discount Card program. The
prescription drug card program, which uses ATM-like cards for the
purchase of prescription drugs, is scheduled to expire on December
31, 2005. Several million senior citizens have enrolled in the
program, which has also provided unprecedented price transparency
to consumers of prescription drugs. Professional literature and
independent analyses show that enrolled seniors, particularly those
eligible for subsidies under the program, have achieved significant
savings on the cost of drugs. Nonetheless, under the terms of the
Medicare Modernization Act of 2003, the drug discount program will
expire, regardless of whether or not enrolled seniors wanted to
continue to participate in it. This again is bad public policy and
another congressional repudiation of personal choice in health
care. Under the McCain proposal, the drug card program would not
only be retained, but also the annual subsidy for low-income
seniors would be increased from $600 to $1,200 per year. This, too,
is good public policy.
Means Testing for Medicare Part B. Medicare Part B, the part of
the program that pays for physicians and outpatient medical
services, is to be subject to means testing. Under current law,
taxpayers pick up 75 percent of Medicare premiums for Part B;
beneficiaries pay 25 percent. Under the Medicare Modernization Act
of 2003, higher-income seniors would pay more, beginning in 2007.
Individuals with incomes that exceed $80,000 per year and couples
with incomes that exceed $160,000 per year would pay higher
premiums. Senator McCain and his colleagues would apply this change
in 2006, achieving an estimated $6 to $9 billion in savings.
The Senate Finance
In sharp contrast
to the McCain proposals, the Senate Finance Committee aims at a
very modest level of taxpayer savings. The Medicare and Medicaid
savings alone amount to an estimated $10 billion.
Moreover, the Committee proposes several substantive changes to the
Medicare program, including adjustments to hospital payments,
reductions in payments to skilled nursing facilities for bad debt,
a prohibition on physician referrals to certain physician owned
hospitals, and updates for physician payments. Altogether, these
changes would achieve much less savings than the McCain proposals.
At the same time, the Senate Finance Committee package would also
reinforce some of the most undesirable features of Medicare payment
policy. For example:
- Weakening the
new Medicare Advantage Program. The Senate Finance Committee
proposal would eliminate the temporary incentive program for
private health plans to participate in the new Medicare Advantage
system. The new incentive system would be ended, in other words,
even before it took effect. This is unwise policy.
Under the Medicare Modernization Act of 2003, Congress authorized
the creation of Medicare Advantage, a new system of private health
plans to replace an earlier program, the Medicare+Choice program,
created under the Balanced Budget Act of 1997. The deeply troubled
Medicare+Choice program suffered from two principal difficulties.
First, it was smothered in approximately 900 pages of government
regulations, dramatically reducing health plans' flexibility in
meeting consumer demand. Virtually no aspect of health plan
operations was free of the regulatory supervision of the Medicare
bureaucracy. Second, Congress capped Medicare+Choice annual
payments to health plans at arbitrarily low levels, despite the
fact the health care costs were much higher. The result: Many
health plans simply could not participate in the program.
With the enactment of the Medicare Modernization Act of 2003,
Congress provided incentives to private health plans to participate
in the coverage of senior and disabled citizens, particularly in
areas of the country where plan participation had been low.
Congress thus established the Medicare Advantage Regional Plan
Stabilization Fund, with an initial authorization of $10 billion to
be available during from 2007 to 2013. The authorization also
included additional funds for this purpose that would come from a
small portion of the savings to the government from health plans
that priced their product below the government's annual benchmark
Ideological opponents of private health plan participation in
Medicare have at least been consistent in their hostility to the
stabilization fund. Congressional proponents of choice,
competition, and market-oriented reform should recognize the
importance of re-building partnerships with private health plans in
the Medicare program. While health plan participation has been
improving, regional Preferred Provider Organization (PPO)
participation is not as robust as it could be, especially in rural
areas of the country. This is a reason why the stabilization fund
should be retained for the next few years. The Senate Finance
Committee proposal to repeal this incentive fund before it even
becomes effective is premature and once again signals instability
in the Medicare payment system for private health plans.
- More Red Tape
on Doctors and Other Medical Professionals. Currently, Medicare
payment is governed by complex system of fee schedules, formulas,
and price controls. The problem is that the current Medicare
reimbursement system, in sharp contrast to the free market, does
not account for the quality of benefits of services to the patient.
Under the Senate Finance Committee bill, the Secretary of Health
and Human Services would be required to establish a new "quality"
measurement for making "value-based" payments to hospitals,
physicians, and other medical professionals. While this approach to
Medicare payments appears superficially attractive, providing "pay
for performance" for doctors and other providers to get better
outcomes, the new provisions would, in fact, dramatically advance
the intrusion of government decision-making in the practice of
medicine. The government henceforth would establish "guidelines"
for doctors and other medical professionals, and Medicare
reimbursements would be based on these guidelines. This is a
reversal of the spirit, if not the letter, of the original Medicare
prohibition of government interference in the practice of medicine.
Worse, it will add yet another layer of bureaucratic complexity to
an outdated system of central planning where doctors and other
medical professionals are already drowning in a sea of bureaucratic
rules, regulations, and guidelines.
The right policy is to overhaul the Medicare reimbursement system
and introduce free-market pricing of medical services, reduce
bureaucratic complexity, provide independent quality assessments
and information for consumers, and promote transparency in medical
The Senate vote on
budget reconciliation is a major test of the seriousness of
congressional rhetoric about the need to control
spending-especially entitlement spending. It is also another test
of congressional policy on Medicare reform.
proposals reflect both sound Medicare policy and a commitment to a
reversal of the relentless expansion of government spending that
threatens the nation's economic future. The Senate Finance
proposals offer only modest spending reductions and reinforcement
of the most undesirable features of Medicare payment policy.
On the coming
impact of Medicare's unfunded liabilities, see Tracy L. Foertsch
Ph.D., and Joseph R. Antos, Ph.D., "Paying
for Medicare: An Economic Look at The Program's Unfunded
Liabilities," Heritage Foundation WebMemo, #880, October
"Values Based Purchasing", see Richard Dolinar, M.D., and S. Luke
for Performance or Compliance? A Second Opinion on Medicare
reimbursement," Heritage Foundation Backgrounder No.
1882, October 5, 2005.
On the success of
the Medicare drug discount cards, see Derek Hunter, "The
Medicare Drug Discount Cards: One Month In," Heritage
Foundation WebMemo No. 583, July 15, 2004.
E. Moffit, Ph.D., is Director of the Center for Health Policy
Studies at The Heritage Foundation.