February 8, 2006

February 8, 2006 | WebMemo on Health Care

The President's Modest Medicare Budget Proposal

The cost of Medicare is set to explode. Under current law, Medicare spending is projected to jump from $395 billion in FY 2007 to $504.4 billion in FY 2011 and to total roughly $2 trillion over that same period.[1]


In his FY 2007 budget proposal, President George W. Bush outlines Medicare savings of just $36 billion over five years, and $105 billion over ten years. This reduction in spending growth is achieved mostly through administrative and regulatory changes in the way payments are made to medical providers, particularly hospitals, nursing homes, and home health agencies. As the editors of The Washington Post observed, these are very limited changes. Nonetheless, say The Post's editors, "…President Bush deserves credit for at least proposing to take modest steps to restrain Medicare's growth…" [2]


The Bush budget proposal does not even begin to tackle the enormity of the task facing Congress and the nation. Given the size of Medicare's unfunded liabilities, which amount to almost $30 trillion, this modest reduction will not significantly improve Medicare's finances, nor will it provide any serious relief to the taxpayers charged with paying the bill for Medicare's promises to current and future retirees. According to The Heritage Foundation's Center for Data Analysis, fully funding Medicare's promised benefits would require the Medicare payroll tax to jump from today's 2.9 percent to 13.4 percent, with a devastating impact on jobs and economic growth.[3]


Business as Usual

Since the inception of the Medicare program, Congress has relied on a series of bureaucratic "cost-control" schemes-such as tightening price controls and devising elaborate fee schedules-to contain Medicare's rising costs. Based on the commentary accompanying its budget submissions,[4] the Administration's proposed reductions in Medicare spending growth build on this regulatory trajectory. They include:


  • "Quality initiatives" to ensure that patients receive medically appropriate and cost-effective care. This approach is superficially attractive-no congressional caucus favors sub-par care in Medicare-but it would significantly increase federal regulatory control over the practice of medicine in the Medicare program.[5] Doctors, hospitals, and other medical professionals are already drowning in Medicare paperwork, regulation, and costly compliance requirements. Congress should not only refrain from adding more red tape, but aggressively seek ways to reduce it.
  • "Competitive bidding" for clinical laboratory services and certain physician-administered drugs, medical supplies, and equipment. "Competitive bidding" has an appealing "free market" tone, suggesting a fiscally tough-minded, business-like approach to government. But the President proposes a Department of Defense-style procurement process for Medicare. This kind of centralized purchasing arrangement may work well for the military, where standardization of arms, equipment, and uniforms is essential, but it is incompatible with the goal of creating a health care system that addresses the diverse needs of the senior and disabled populations. A new consumer-driven Medicare system, based on personal choice and competition for patient dollars, would best satisfy future demand for medical services in an economically efficient fashion.
  • Adjustments to Medicare's complex pricing system for doctors, hospitals, and other medical providers. Putatively, this would encourage efficiency and productivity in the provision of medical services. In reality, the current system of administrative pricing and price regulation is incompatible with the goal of economic efficiency in the delivery of high-quality medical care to senior and disabled Americans.
  • Stronger cost control provisions. The Medicare Modernization Act of 2003 requires presidential action if and when general revenues make up 45 percent of program costs within the next seven years. The Administration proposes automatic reductions in payments to medical providers amounting to four-tenths of a percent for every year that general revenues exceed the targeted amount. This would encourage cooperative presidential and congressional action to bring Medicare spending back into line. While this provision may goad Congress and the White House into corrective action, it must be judged in terms of its impact on the quality of care for seniors and disabled citizens and on the future liabilities of America's taxpayers.

Time to Get Serious

In recent years, Medicare's unfunded liabilities have gotten worse, not better. Congress and the Administration aggravated the budgetary problems of the Medicare program by adding a massively expensive universal entitlement for prescription drug coverage and failing to enact far-reaching reforms during the Medicare debate in 2003.


In his 2006 State of the Union address, the President called for the creation of yet another commission on entitlements, trying once again to forge a bipartisan consensus on the future of entitlement programs, including Medicare. Perhaps this commission will yield the legislative fruit that previous commissions, such as the National Bipartisan Commission on The Future of Medicare (1997-1999) and the Social Security Advisory Council (1994-1996), did not.


Meanwhile, Congress should not delay in the hope that this commission will put forth a serious reform agenda. Rather, Congress should start to transform Medicare as soon as possible, with a schedule of reforms to be triggered on or before December 31, 2010, the year before the first big wave of baby boomers enters retirement. Broadly, a Medicare transformation should include:


  • Scaling back Medicare's drug program into an affordable program targeted at low-income seniors without drug coverage.
  • Accelerating means-testing for all medical services throughout Medicare. This would build on the limited progress that has already been made in the means-testing provisions of Medicare Part B.
  • Replacing the existing defined-benefit system with a new defined-contribution system for the baby-boomer generation. Congress could allow these future retirees to carry existing private coverage into retirement and base the financing of the new system on a formula broadly similar to that which governs the financing of employee and retiree benefits in the Federal Employees Health Benefits Program (FEHBP). Every baby boomer would be entitled to a capped amount for health coverage, just like federal workers and retirees are today.

Until the President and Congress commit to such bold action, they demonstrate that they do not yet take the coming entitlement crisis seriously.


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

[1] "Budget Bravery," editorial, The Washington Post, February 7, 2006, p. A-20.

[2] Ibid.

[3] See Tracey 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 No. 880, October 11, 2005.

[4] The Budget for Fiscal Year 2007, Office of Management and Budget, 2006, pp. 21-22.

[5] See, e.g., Richard Dolinar, M.D., and S. Luke Leininger, "Pay for Performance or Compliance? A Second Opinion on Medicare Reimbursement," Heritage Foundation Backgrounder No. 1882, October 5, 2005.

About the Author

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