taxpayers, particularly young people, must somehow find a way to
cope with a long-term Medicare debt of $32.4 trillion. This
amount represents the value today of Medicare's long-term unfunded
promises not financed by any dedicated revenues under current law.
It includes approximately $8 trillion due to the 2003 Medicare drug
The cost of the
Medicare program is rising rapidly, and this growth will accelerate
when the first wave of 77 million baby boomers starts to retire in
2011. In fiscal year 2008, Medicare benefits will total $454
billion, an increase of $28 billion over last year, to cover almost
45 million senior and disabled citizens. In his FY 2008 budget, the
President has proposed a set of serious Medicare proposals that
will begin to address this enormous fiscal challenge.
A Bold Budget
budget calls for savings of $76 billion over the next five years
through a combination of administrative and legislative proposals,
which, if implemented, would reduce the Medicare program's total
rate of growth from a projected 6.5 percent to 5.6 percent.
Meanwhile, it would reverse the projected decline of the Hospital
Insurance (HI) Trust Fund, the part of the Medicare program that
reimburses hospitals. Under current law, the HI Trust Fund would
become insolvent in 2018.
But the most
important feature of the President's budget plan is that, over the
long term, it would accomplish a major objective: starting to
reduce the huge long-term unfunded liabilities of the Medicare
program. Indeed, it would reduce the enormous unfunded obligations
of the program by an estimated $8 trillion, or one-fourth of the
projected red ink.
provisions that would yield substantial savings are as follows:
- Limiting Taxpayer Subsidies to Wealthy Beneficiaries:
Under Medicare Part B, which pays for doctors and outpatient
medical services, coverage is voluntary and is financed with
premiums paid by beneficiaries and the taxpayers. Under current
law, most seniors pay only 25 percent of the premiums for the
Medicare Part B benefits; taxpayers finance the remaining 75
percent through general revenue transfers. There is one exception:
Beneficiaries with an annual income of $80,000, if single, or
$160,000, if married, do pay higher premiums, though this income
threshold is indexed and so will rise in future years. Under the
President's proposal, the annual indexing of income-related Part B
premiums would be eliminated, so the income threshold would not be
adjusted upward each year. This would yield an estimated savings of
$7.1 billion over the period from 2008 to 2012.
- Extending Part B Income-Related Rules to Part D: The
President's proposal would extend his modified Medicare Part B
rules for reduced taxpayer subsidies to upper-income beneficiaries
of the Part D drug entitlement. Under this proposal, taxpayers
would save $3.2 billion over the period from 2008 to 2012.
- Reducing Medicare Payments: Payment for services in
Medicare is governed by a complex and cumbersome system of
administrative pricing. Under current law, Congress establishes
payment formulas, fee schedules, and caps on what can be charged to
Medicare beneficiaries for the thousands of services that are
delivered each year. To be sure, micromanaging prices is a
profoundly inefficient way to reimburse doctors, hospitals, and
other medical professionals. But currently the only way that
Congress can secure savings is to readjust reimbursement formulas.
Under the President's proposal, these reimbursement formulas would
be changed, reducing payments to a wide variety of providers,
including hospitals, skilled nursing facilities, inpatient
rehabilitation facilities, hospice services, outpatient hospital
care, ambulance fee schedules, ambulatory surgical centers, and
home health care services. The President's plan would also
introduce competitive bidding for clinical laboratory services.
Under the President's proposal, these changes would yield savings
of $41.9 billion over the period from 2008 to 2012.
The President's budget also calls for "rationalizing" Medicare
payments and direct subsidies by changing or reducing
reimbursements or subsidies for a variety of other miscellaneous
items, including certain hospital services, acute care conditions
in nursing facilities, wheelchairs, and oxygen equipment. This
proposal would yield an estimated $11.4 billion in savings over the
period from 2008 to 2012.
A Lesson for
In Medicare Part
D, in which private-sector negotiation and market competition set
prices, projected premium costs for beneficiaries and the cost of
the entire program are actually declining from earlier projected
levels. Indeed, thanks to this system of market competition, total
program costs are 30 percent lower than originally projected. So to
improve on the President's budget proposal, Congress should begin
the transformation of Medicare from the existing system based on
central planning and price controls to a new system based on
defined contribution, or "premium support," broadly similar to the
Federal Employees Health Benefits Program (FEHBP). Such a system
would be far superior to the current Medicare program in
performance, efficiency, and cost control.
traditional inaction in addressing Medicare's long-term problems
has only made future policy choices more difficult with each
passing year. The President's proposal is a refreshing first
serious step in demonstrating leadership on America's looming
entitlement crisis. It recognizes that the huge unfunded
obligations of entitlements must be brought under control rather
than simply handed to our children and grandchildren.
Robert E. Moffit, Ph.D.,
is Director of the Center for Health Policy Studies at The Heritage
This is based on a 75-year actuarial
projection. See David C. John and Robert E. Moffit, Ph.D.,
"Medicare and Social Security: Big Entitlement Costs on the
Horizon," Heritage Foundation WebMemo No. 1054, May 1, 2006, at
U.S. Department of Health and Human Services,
Fiscal Year 2008 President's Budget for HHS,
February 2008, p.57.
Office of Management and Budget, Budget of
The United States Government, Fiscal Year 2008
, February 2007,
 Budget of The United States Government,
Fiscal Year 200
8, p. 66.