Medicare Reform

The President's Medicare reform proposal is an important first step in the debate over how the country will deal with the explosive costs of medical care for older Americans in the coming decades. The President has included a first step toward Medicare reform as part of a broader plan that would use a significant share of the surplus to pay down the debt, ultimately lowering interest rate costs and spurring economic growth. The President would use 13 percent of the projected budget surpluses during the next 15 years to help shore up the Medicare Hospital Insurance Trust Fund and to offset the cost of the proposed prescription drug benefit. Although the surplus "transfer" in the form of additional Treasury securities would extend the Fund's solvency, this move would represent a significant departure from the long-standing use of payroll taxes to finance the Fund. GAO is concerned that without underlying program reform, the transfers would simply extend the Fund's solvency on paper but do nothing to make Medicare more sustainable--that is, they would not reduce the program's projected share of gross domestic product or the federal budget. More importantly, the proposed transfer, by extending the solvency of the Hospital Insurance program through 2027, well into the baby boomers' retirement years, could end up masking the Fund's underlying condition and remove any sense of urgency among policymakers to address the program's underlying fiscal imbalance. The President wants to make two major program changes to Medicare. First, he would have Medicare's health plans compete on the basis of price. However, the administration has yet to provide specifics on the design and implementation of this proposal. Second, the President would add a prescription drug benefit. GAO is concerned about (1) the cost of the benefit and who would be targeted, (2) the fact that some costs now borne by employers and retirees could become the responsibility of taxpayers, (3) uneven impact across states, and (4) obstacles to the government realizing savings from the use of pharmacy benefit managers.

GAO noted that: (1) the President's proposal contains programmatic reforms that reflect a good faith effort to advance the reform debate; (2) it provides a baseline for further debate and consideration of reforming Medicare; (3) as such, it is an important step in the goal of reaching a national consensus about how the nation is going to deal with the explosive cost of medical care for the elderly population in the decades to come; (4) Congress and the President may ultimately decide to include some form of prescription drug coverage as part of Medicare; (5) given this expectation and the future projected growth of the program, some additional revenue sources may in fact be a necessary component of Medicare reform; (6) the most critical issue facing Medicare is the need to ensure the program's long-range financial integrity and sustainability; (7) the 1999 annual reports of the Medicare Trustees project that program costs will continue to grow faster than the rest of the economy; (8) given the size of Medicare's unfunded liability, it is realistic to expect that reforms to bring down future costs will have to proceed in an incremental fashion; (9) ideally, the unfunded promises associated with today's program should be addressed before or concurrent with proposals to make new ones; (10) to do otherwise might be politically attractive but not fiscally prudent; (11) any potential program expansion should be accompanied by meaningful reform of the current Medicare program to help ensure sustainability; (12) to qualify as meaningful reform, a proposal should make a significant down payment toward ensuring Medicare's long-range financial integrity and sustainability; (13) the President's latest proposal is projected to virtually eliminate the publicly held debt by 2015; (14) such an initiative would provide a substantial fiscal dividend by reducing interest costs, raising national savings, and contributing to future economic growth; (15) this initiative would help better afford future commitments, but it would not alone be sufficient; and (16) reforms reducing the future growth of Medicare as well as Social Security and Medicaid are vital under any fiscal and economic scenario to restoring fiscal flexibility for future generations of taxpayers.