For years, official Washington has studiously ignored the
warnings of prominent liberal and conservative analysts, as well as
the Government Accountability Office, about the entitlement
crisis, particularly the exploding costs of the Medicare program.
As a result, the crisis has deepened, piling up future debt and
threatening huge tax increases on younger workers. The law requires
that the President and Congress begin to address the issue in 2008.
Even though there is no requirement that legislation be enacted,
the debate is unavoidable.
A Fiscal Alarm
Today, payroll taxes, beneficiary premiums, and general revenues
finance Medicare. The long-term impact of the increasing draw-downs
on general revenue funds to cover Medicare benefits will mean huge
tax increases, especially after the baby boomers begin to retire in
2011. Medicare already has unfunded costs of $34 trillion over the
next 75 years (in net present value terms).
When Congress created a universal prescription drug benefit
with the Medicare Modernization Act of 2003 (MMA)--adding an
estimated $8 trillion to the program's long-term unfunded
liability--it enacted a "cost containment" mechanism designed to
control excessive general revenue funding for Medicare. That amount
becomes "excessive" when it funds more than 45 percent of the total
Medicare outlays. The "trigger" for presidential and congressional
action is when two consecutive Medicare trustees' reports project
that the "excessive" threshold will be met within seven years.
The alarm was triggered by the 2007 Medicare Trustees Report, in
which the trustees concluded for the second year in a row that
total Medicare outlays will reach 45 percent of total outlays in
fiscal year 2013--the seventh year of the projection.
Required Presidential Action
Under Title VIII of the MMA, the President and Congress are
required to take specific steps to control an excessive growth in
Medicare spending.[1]
Under Sec. 802, the President is required to submit legislation
to respond to the Medicare funding warning. The legislation must be
submitted within 15 days of the President's budget request in the
year following the trustees' report. The President would not be
required to submit a legislative proposal if, in the meantime,
Congress were to take remedial action to eliminate the excessive
general revenue funding of Medicare within the seven-year period.
The President has already submitted a Medicare budget proposal that
would, if enacted, reduce spending by $178.2 billion over five
years and $556 billion over ten years.[2]
For its part, Congress has done nothing significant since the
enactment of the MMA. In fact, the House leadership went in the
opposite direction with the failed Children's Health and Medicare
Protection Act (H.R. 3162), legislation to reauthorize the State
Children's Health Insurance Program (SCHIP). They supported a
provision that would have repealed the early-warning mechanism,
breaking the fiscal alarm clock. Left-wing health policy analysts
generally want to get rid of the trigger because it would encourage
what they consider to be undesirable structural changes in the
Medicare program--changes that would move the program toward a
market-based system driven by real consumer choice and genuine
competition. Such reforms would also preclude general tax increases
to finance the rapidly rising Medicare costs.[3]
Required Congressional Action
Under Sec. 803 of the MMA, the House Majority Leader must
introduce the President's proposal for remedial action within three
days of receiving it. The legislation is then referred to the
appropriate House committees, which must report remedial
legislation no later than June 30, 2008. The Chairman of the House
Budget Committee must certify whether the legislation would
eliminate "excessive" general revenue funding for Medicare within
the seven-year period. The legislation can be the President's
proposal or any other measure that would address the "Medicare
funding warning." If the House fails to vote on the legislation by
July 30, the law provides for an expedited discharge process to
bring the legislation to the floor of the House of
Representatives.
Under Sec. 804 of the MMA, the Senate Majority Leader and
Minority Leader are required to introduce the President's
legislation, which is to be referred to the Senate Finance
Committee. This remedial legislation and any companion legislation
enacted by the House of Representatives would be subject to special
procedures prescribed for expedited Senate floor consideration. If
the Senate Finance Committee does not report the "Medicare funding
legislation" by June 30, any Senator may move to discharge the
legislation from committee consideration and bring it to the floor
for full Senate consideration.
The motion to discharge the remedial legislation is no longer
available to Senators if the Chairman of the Senate Budget
Committee certifies that legislation eliminating the "excessive"
general revenue funding of Medicare has already been enacted.
Otherwise, the discharge motion takes priority over other measures
or motions; it cannot be amended, and debate on the motion is to be
limited to two hours.
What Washington Should Do
The law provides a rare opportunity for the President and
Congress to deal directly with the entitlement crisis in a
responsible bipartisan fashion.
A single package of remedial legislation should include both
short- and long-term changes in the Medicare program. The
short-term budgetary changes could bring the program into
compliance with the requirement that Medicare's reliance on general
funds remain within the 45 percent range, while long-term changes
(enacted with a date certain for implementation) should address the
graver problem--the enormous unfunded liability of the program that
threatens the future standard of living of working families. A
crucial test of the proposals would be their logical compatibility;
that is, any short-term changes should be logically compatible with
efforts to secure the long-term reform of the Medicare program.
There are ample reform options to accomplish both objectives.
Short-Term Changes
Congress should make specific changes in Medicare policy that
would be compatible with a broader Medicare reform. President Bush
has already offered several proposals that would better target
Medicare funding to those who need the most help. For example,
Congress could start by limiting taxpayer subsidies to wealthy
beneficiaries in Medicare Part B through an elimination of the
annual indexing of income-related Part B premiums. This would mean
that the income threshold would not be adjusted upwards each year,
resulting in billions of dollars in savings. Congress could also
apply the Medicare Part B income-related premium rules to Medicare
Part D, the prescription drug program.[4] Congress could also explore a
more rational cost-sharing structure for traditional Medicare,
including the hospital program, that would vary co-payments on the
basis of income.
Long-Term Comprehensive Reform
Medicare should remain as it is today for all current Medicare
beneficiaries; but for future Medicare beneficiaries, at a certain
date, the program should be transformed into a defined-contribution
system. This would guarantee seniors and disabled citizens a wide
choice of health plans while making Medicare funding predictable to
taxpayers. The government contribution should reflect the real
conditions of supply and demand for medical services, and the
contribution for beneficiaries should also be adjusted for
significant factors such as age, income, or health status. Medicare
enrollees would be able to bring their private health insurance
coverage with them into retirement if they wished to do so, or they
could pick any other licensed health plan of their choice.
As in the Federal Employees Health Benefits Program
(FEHBP),[5] the government contribution should be
capped annually for enrollees at a specific dollar amount. If they
wanted to buy an expensive health plan at a price greater than the
government contribution, they would be free to do so--just as
federal employees and retirees do today. If they wanted to buy a
health care plan at an amount less than the government
contribution, they would be able to keep 100 percent of the
difference in the savings. For enrollees, this would be an
improvement over both the FEHBP, which does not provide rebates,
and Medicare Advantage,[6] which limits savings to enrollees to 75
percent of the total amount of savings.
In the design of a new Medicare program for the next generation,
the President and Congress can draw upon a treasure trove of policy
work that has already been completed in this area. They should
borrow from the best features of the FEHBP, Medicare Advantage, and
Medicare Part D and should consider the majority recommendations of
the National Bipartisan Commission on the Future of Medicare,
reported in 1999.
Change the Legislative Dynamics
The trigger included in the MMA requires actions by Congress and
the Administration to ensure a more fiscally sustainable future for
Medicare. In a sense, it is a tacit admission that the current
legislative system for ensuring sound financial health for Medicare
is flawed. The same is true for Social Security.
Though they currently comprise about one-third of the entire
federal budget, Congress is not required to pass an annual budget
for either program. Rather, they each operate on auto-pilot, under
formulas contained in their governing laws. Moreover, the tendency
of politicians to make promises to expand or enact new benefits is
greatly enhanced by the lack of any measure of long-term costs of
these programs in the budget. Two changes should be made in
the budget process to ensure better stewardship for the nation's
long-term solvency.
First, Congress should ensure that the long-term costs
for entitlement programs are built in to the budget process and
considered along with other priorities during the annual budget
process so that spending on Medicare would be considered in
the same context as defense, education, or tax policy. Any
changes in entitlement programs should also be measured over
the long-term. When the Medicare drug benefit was enacted, there
was no debate over the costs it would impose on younger
generations. It was only after the law was passed that Congress and
the public learned that this burden was as large as the entire
federal debt. Bringing long-term costs into the legislative debate
will mean that, unlike today, Congress must consider whether
children and grandchildren can really afford to pay for new
benefits for their parents and grandparents.
Second, Congress should put all programs on a more level
playing field--from "discretionary" programs like defense and
education, to "mandatory" programs like Medicare and Social
Security (also referred to as "entitlements"). Because entitlement
programs grow on auto-pilot, they are putting more budgetary
pressure on other priorities, so there is not a fair or honest
consideration of budgetary trade-offs. At the same time, retirement
programs require longer time horizons and planning. Thus, Congress
should create a framework for a budget that would be periodically
evaluated to ensure that entitlement programs are sustainable over
the long term.
This could be done by creating a long-term budget window--for
example, 30 years. All spending on entitlements would have to be
reviewed and reauthorized every five years. This is similar to how
other countries manage their long-term commitments. Congress should
include "triggers" that would make automatic adjustments should
spending grow above budgeted levels. One way to keep spending
within budgeted levels would be to automatically raise
premiums, deductibles, and out-of-pocket expenses for Medicare Part
B and Part D for middle- and upper-income retirees.
Conclusion
Since the enactment of the MMA, Congress has repeatedly
been warned about the explosive growth of entitlement spending on
the horizon. Congress has steadfastly refused to address the
gravity of the situation. Now, the cost-containment provisions
embodied in the MMA are forcing Washington to begin taking
action.
Congress has an opportunity to forge a sound policy that will
address the immediate need to bring the program into the funding
balance required by law--while also setting in motion changes that
will result in long-term savings to the taxpayer. Instead of simply
re-adjusting Medicare payment formulas, tightening price controls
on doctors and hospitals, or imposing research-killing price
regulations on prescription drugs, Congress should go back to the
drawing board and craft a rational and responsible Medicare policy
that integrates short-term and long-term reform objectives and
aligns incentives for doctors, patients, and health plans. At the
same time, Congress should change the budget process to account for
a longer time horizon. This would tilt the political dynamics
toward sound fiscal management and better stewardship for future
generations.
Current Medicare law provides Congress and the taxpayers an
early warning. It gives Congress the opportunity to put the
long-term good of the country, taxpayers, and seniors ahead of
short-term partisan politics. It can be done. Congress has no
excuse for "blowing it."
Robert E. Moffit,
Ph.D., is Director of the Center for Health Policy Studies and
Alison Acosta Fraser is
Director of the Thomas A. Roe Institute for Economic Policy Studies
at The Heritage Foundation.