Medicare's Fiscal Future: Getting Worse? Getting Better?
About This Event

Medicare is under intense scrutiny from the Democratic Congress, driven by recent policies that have increased program spending. The new Part D drug benefit is popular with seniors, but expensive to taxpayers. Democrats argue that the prices of Part D pharmaceuticals are too high and that direct government negotiation would Listen to Audio


Download Audio as MP3
rein in the cost of the program. The Medicare Advantage program, which offers private health plans as a substitute for traditional Medicare, is criticized because payments to the plans exceed the cost of providing standard benefits under the traditional fee-for-service program. These and other developments have increased Medicare spending in the near term, and have exacerbated the long-term financing problems facing the program over the next few decades. Although there have been positive developments, including lower spending in Part D than initially projected, the fiscal outlook for Medicare is grim. Will competitive approaches improve the operation of Medicare and slow the growth of program spending? Will policymakers be forced to take drastic actions triggered by a worsening financial outlook?

The annual Medicare trustees' report, to be released April 23, provides the latest assessment of Medicare's fiscal future. Richard Foster, Medicare's chief actuary, will present this year's findings. Thomas Saving, a public trustee for Medicare and Social Security, and coauthor of the new AEI Press book The Diagnosis and Treatment of Medicare; and John Palmer, also a public trustee, will provide their interpretations of the report and the policy problem. Robert Reischauer, former director of the Congressional Budget Office (CBO); Jeanne Lambrew, former budget official in the Clinton administration; and AEI's Joseph Antos, a former official with CBO and the Centers for Medicare & Medicaid services, will discuss the policy challenges facing the program.

This is the first part of a health policy double feature to be held at AEI on April 24. Following the Medicare panel, secretary of the Department of Health and Human Services Michael Leavitt will deliver a major policy address on promoting health insurance for children and all Americans. Please register for the second event separately at www.aei.org/event1502.

Agenda
9:15 a.m.
Registration
9:30
Panelists:
Joseph Antos, AEI
Richard Foster, Center for Medicare & Medicaid Services
Jeanne Lambrew, George Washington University
John Palmer, Syracuse University
Robert Reischauer, Urban Institute
Thomas Saving, Texas A&M University
Moderator:
Robert B. Helms, AEI
11:45
Adjournment
Event Summary

April 2007

Medicare's Fiscal Future: Getting Worse? Getting Better?

 

Medicare is under intense scrutiny from the Democratic Congress, driven by recent policies that have increased program spending. The new Part D drug benefit is popular with seniors, but expensive to taxpayers. Democrats argue that the prices of Part D pharmaceuticals are too high and that direct government negotiation would rein in the cost of the program. The Medicare Advantage program, which offers private health plans as a substitute for traditional Medicare, is criticized because payments to the plans exceed the cost of providing standard benefits under the traditional fee-for-service program. These and other developments have increased Medicare spending in the near term, and have exacerbated the long-term financing problems facing the program over the next few decades. Although there have been positive developments, including lower spending in Part D than initially projected, the fiscal outlook for Medicare is grim. Will competitive approaches improve the operation of Medicare and slow the growth of program spending? Will policymakers be forced to take drastic actions triggered by a worsening financial outlook?

The annual Medicare trustees' report, released April 23, provided the latest assessment of Medicare's fiscal future. At the April 24 event, Richard Foster, Medicare's chief actuary, presented this year's findings. Thomas Saving, a public trustee for Medicare and Social Security, and coauthor of the new AEI Press book The Diagnosis and Treatment of Medicare; and John Palmer, also a public trustee, provided their interpretations of the report and the policy problem. Robert Reischauer, former director of the Congressional Budget Office (CBO); Jeanne Lambrew, former budget official in the Clinton administration; and AEI's Joseph Antos, a former official with CBO and the Centers for Medicare & Medicaid Services, discussed the policy challenges facing the program.

Richard Foster
Center for Medicare & Medicaid Services

The Medicare trustees' report projects the financial status of the two Medicare trust funds: Hospital Insurance (for Part A) and Supplementary Medical Insurance (for Part B and Part D). The Hospital Insurance (HI) Trust Fund is financed principally by payroll taxes and taxes on Social Security benefits. In contrast, the Supplementary Medical Insurance (SMI) Trust Fund is financed by beneficiary premiums, general tax revenues, and state transfers.
This year's report predicts that HI outlays will overtake revenues around 2011, at which point the program's assets will have to be drawn down to help cover the deficit. By 2019, one year later than reported last year, the assets will be exhausted and the trust fund will become insolvent. After seventy-five years, scheduled income will not cover even a third of projected HI expenditures. There is currently no provision to address this impending mammoth deficit.
The financial outlook for the SMI Trust Fund is less threatening because existing law precludes its insolvency. SMI's solvency is jeopardized, however, by Congress's reversal of scheduled payment reductions to physicians over the past few years. These overrides have already resulted in rapid increases in Medicare Part B premiums and cost-sharing, which means that fewer and fewer beneficiaries will be able to pay for the services offered. The good news, however, is that the total cost of Part D is lower than previously estimated. This is the result of less-than-expected prescription drug use and beneficiary enrollment, and greater-than-expected discounts negotiated by insurers.

The Medicare Modernization Act requires that the president propose legislation to reduce Medicare spending if the trustees predict in two consecutive reports that general revenues will exceed 45 percent of total program expenditures within seven years. This warning of excess general revenue funding is a useful reminder that a growing portion of the program is paid for with general revenue, affecting the budget and other federal finances. Last year and again this year, the trustees reported that the threshold was met. According to the law, Congress must respond to the president's proposed changes to Medicare quickly, turning up the heat in the upcoming election year.

The trustees conclude that Congress must take action to address the growing share of gross domestic product (GDP) appropriated by Medicare and Social Security.

John Palmer
Syracuse University

There have been significant improvements in the analysis provided by the trustees' report. The intermediate projections are much more reliable, the financing requirements and their effects on beneficiaries are much clearer, and the effect of the Medicare program's growth on federal finances and the budget are more obvious. Also, for the first time, this year's report quantitatively addresses what continued overrides of physician payment cuts mean for the program's financing.

There are three conclusions to draw from the report. The first is that the fiscal challenge posed by Medicare is far more daunting than that posed by Social Security. Second, the fiscal picture is much worse over the intermediate term than the report projects because the trustees must assume that the repeatedly reversed physician fee cuts will take place. The final conclusion is that the long-term insolvency of Medicare is due not only to demographic changes that also affect Social Security, but to the rapid growth in health-care costs.

Growth in the economy, increased taxation, and structural changes in Medicare will not solve the long-term fiscal problem of Medicare. We must change the underlying dynamics to affect excess cost growth favorably. Experimentation and lessons from the private health-care sector will help determine how much of the excess cost growth is either valuable or detrimental to the fiscal future of Medicare.

Thomas Saving
Texas A&M University

It is more useful to express Medicare numbers in terms of non-entitlement federal revenues or income taxes. It does not make sense to express numbers in terms of GDP, because the public only lets the government use a portion of GDP. The pressure on that part is what the public needs to understand. By 2020, more than a fourth of federal income taxes will have to go to Medicare and Social Security. The trustees' report also reports that the general revenue obligation to Medicare over the next seventy-five years will be $34 trillion. Even when the current transfer share of GDP is accounted for as part of the budget base, the obligation is $25 trillion over seventy-five years.

The fiscal problem posed by the projected growth in Medicare spending is monumental. Stabilizing the program through higher taxes on workers or higher premiums for Medicare beneficiaries would require dramatic and politically impossible increases. Tax rates would have to increase by almost 10 percent by 2020, and increase 60 percent by the end of the seventy-five-year projection period. Premiums would have to increase to 73 percent of Medicare expenditures at the end of seventy-five years, for a monthly premium of about $3,700 in 2006 dollars.

The most effective reform proposal scored in my new book, The Diagnosis and Treatment of Medicare (AEI Press, April 2007), coauthored with Andrew J. Rettenmaier, involves removing all Medigap coverage and giving beneficiaries a high-deductible plan. Eliminating first-dollar coverage would force beneficiaries to be cost-conscious, but even with this reform, we are still left with a gigantic problem. Other effective solutions could include using competition to reduce costs in Medicare Part D.

Jeanne Lambrew
George Washington University

There is some good news in the latest Medicare trustees report. The HI trust fund did not get significantly worse since last year, despite upward cost trends in health care. The 2006 numbers are also not bad: Medicare outlays ($408 billion) came in under income ($437 billion). This year, the Congressional Budget Office (CBO) and Medicare Payment Advisory Committee (MedPAC) have recommended outlays to be trimmed, including overpayments to Medicare Advantage plans. Cuts could also be prompted by Congress' return to a "pay-as-you-go" system.

The 45 percent trigger was pulled with this report. The threshold is arbitrary, however, and Congress will be skeptical of using this trigger to take action. Additionally, the policies that can avert this sort of warning are not going to make a difference to Medicare in the long run. For example, increasing premiums or state clawback payments or cutting benefits would meet this narrow trigger test, but chronic care management and a focus on quality would not. We have to focus on prevention in addressing long-term Medicare cost trends.

On the drug benefit, there is not much data available yet, but it is not surprising that there were lower-than-expected bids and enrollment levels in the first year of a new program. Long-term trends for prescription spending tend to be higher than other health spending and we will need good data on what is happening with the drug benefit.

Medicare cost growth is exceeding the growth of our economy and our budget, and it will at some point exceed seniors' ability to share its costs. These are serious systemic problems not unique to Medicare.

Robert Reischauer
Urban Institute

The 45 percent trigger is a flawed measure of program distress, and a flawed tool for solving whatever problems exist. The 45 percent number is totally arbitrary, and the fraction of general revenue funding is not a measure of overall fiscal sustainability of the program. Such a threshold could be breached during a period when overall Medicare spending is falling. The measure also biases solutions toward steps like cutting spending or raising state clawback payments, having the government negotiate lower drug prices, or implementing new taxes.

The president is required to send draft legislation to fix the issue at the height of the primary season in February 2008. What we need is an environment in which both parties can share the responsibility, making it look like forces beyond their control are demanding difficult Medicare reform. A divided government and a flawed trigger may afford such an opportunity.

On the sustainable growth rate (SGR), we are in for sharp cuts in physician payments, but these will be politically unsustainable and create a huge access problem for Medicare unless all other insurers make comparable rate cuts to physicians. The trustees should be congratulated for including projections based on an SGR freeze or increasing physician payment rates by the Medicare economic index; such projections make the report more realistic.

The report suggests that by 2030 about 32 percent of beneficiaries will be in Medicare Advantage plans. This raises questions about what type of plan will attract most of the enrollment. Expanding private fee-for-service plan would have very different fiscal consequences and different political dynamics than increased HMO enrollment. The trustees report should include greater detail about what is expected to happen with Medicare Advantage enrollment.

Joseph Antos
AEI

The key dates in the report moved up a year, but overall not much has changed since last year's report. This is because nothing has changed in the program between this year and last year. We have not addressed any of the fundamental problems facing Medicare.

Does the fiscal outlook portrayed by the trustees report provide a sound guide for policymakers? The trust fund perspective offers an optimistic view of Medicare compared with a conventional budget perspective, as illustrated in Table V.E1 of this year's report. In fiscal year 2006, for example, Medicare Parts B and D together represented a net drain on the federal budget of $147 billion, but the net impact on the trust fund was a slight increase in net revenue. The failure of the trust fund perspective to recognize the broader consequences of Medicare for the operation of government is one reason why Congress created the 45 percent trigger.

The 45 percent trigger is intended to provide a fuller view of the financial ebbs and flows of the program, but it is unlikely to produce good policy. The legal bar for responding to the trigger is very low: the president only has to respond in some way, and he is free to propose almost any set of policies, regardless of their chances of enactment. Congress must consider the president's proposal promptly, but they do not have to enact anything.

The short-term dollar focus on the trigger means we will overlook steps for better performance over the long term. Some argue for putting teeth in the funding warning, but this would fail in the same way as the SGR formula by creating an ongoing political crisis without forcing Congress to address the program's underlying problems. We ought to pay for greater value, think about how we set prices and how we deliver care, and look again at what competition means in Medicare.

AEI health policy program manager Elizabeth Walker and research assistant Jonathan Stricks prepared this summary.

View complete summary.
Also Visit
AEIdeas Blog The American Magazine

What's new on AEI

Making Ryan's tax plan smarter
image The teacher evaluation confronts the future
image How to reform the US immigration system
image Inversion hysteria
AEI Participants

 

Joseph
Antos

 

Robert B.
Helms
AEI on Facebook