With
the exception of the 104th Congress, and of the majority of members
of the recently disbanded National Bipartisan Commission on the
Future of Medicare, chaired by Senator John Breaux (D-LA) and
Representative Bill Thomas (R-CA), policymakers generally have
avoided a serious re-examination and reform of the troubled
Medicare program.
Usually ignoring the program's structural
problems, including outdated benefits and strangulating red tape,
Members of Congress and successive Administrations have focused
mostly on the financial solvency of Medicare's hospitalization
program. Under current law, Medicare's hospitalization benefits are
paid out of the Hospital Insurance (HI) trust fund. According to
current projections by the Medicare trustees, the HI trust fund
faces insolvency by 2015.
THE CLINTON PLAN
In
his most recent response to the Medicare problems, President Bill
Clinton does nothing to deal with the design problems of Medicare.
He does propose to use 15 percent of the projected budget
surplus--approximately $700 billion over 15 years--to bolster
Medicare's finances. Under the President's initial assumptions,
this bailout would extend the life of the HI trust fund from 2008,
an earlier estimate, to 2020. The President would make a transfer
from the general fund to the HI trust fund by issuing a new set of
Treasury securities (in effect, IOUs) for the HI trust fund. As the
General Accounting Office (GAO) and others point out, this $700
billion of projected excess funds otherwise would be used to reduce
the national debt. Put another way, as the GAO and others also
point out, the President's transfer to the HI trust fund merely is
an additional claim on the taxpayers.
The nonpartisan GAO is the financial
investigating arm of Congress. It recently examined President
Clinton's proposal and warned him and Congress that a reliance on
this budgetary fix would serve only to put off the Medicare
program's day of reckoning and thus make matters even worse.
WHAT THE GAO SAYS ABOUT THE CLINTON
MEDICARE SCHEME
In
recent testimony before the Senate Finance Committee, David M.
Walker, Comptroller General of the United States and the Director
of the GAO, issued a series of specific and very pointed warnings
on Medicare. Among the main concerns:
The Medicare program is in
financial trouble already.
Says the GAO:
Unlike Social Security, Medicare's HI
program has been experiencing a cash flow deficit since
1992--current payroll taxes and other revenues have been
insufficient to cover benefit payments and program expenses.
Accordingly, Medicare has been drawing on its special Treasury
securities acquired during the years when the program generated a
cash surplus with interest on those accumulated balances. In
effect, these general fund payments can be viewed as repaying the
loan of cash that the trust fund provided the rest of the
government when the Medicare program was in surplus.... In essence,
Medicare has already crossed the point where it is a net claimant
on the Treasury--a threshold that Social Security is not currently
expected to reach until 2013. Stated differently, the bleeding of
the HI trust fund has already started based on the program's annual
cash flow.
The Medicare program cannot
survive in its current form.
According to the GAO:
The
current Medicare program is both economically and fiscally
unsustainable. This is not a new message--the Medicare Trustees
noted in the early 1990s that the program is unsustainable in its
present form. They also noted the need for dramatic and fundamental
reform of the program to assure its solvency.
The GAO further notes that, assuming no
change in the financing or structure of the Medicare program, the
massive projected growth in Medicare spending would start to "crowd
out" other federal spending and impose burdens on "other economic
activity" of value to American society in the years ahead:
Eventually, again assuming no program or
financing changes, Social security, health and interest take nearly
all the revenue the federal government takes in by 2050. This is
true even if we assume that the entire unified budget surplus is
saved and these continued surpluses reduce interest from current
levels.
In terms of the general economy, even if
Congress were to save the entire surplus, the Medicare program
still would be projected to "more than double its share" of the
U.S. economy by 2050.
A continued delay in Medicare
reform would mean more pain for taxpayers and
retirees.
The GAO says that Congress and the Clinton Administration should be
prepared to make serious changes and that any delay in reforming
the financially troubled Medicare program would serve only to make
the choices before the taxpayers and retirees "more painful down
the road." Says the GAO:
The
longer meaningful action is delayed, the more severe such actions
will have to be in the future. As the fastest growing sector of the
federal budget, early action to reduce Medicare's cost will have
compounding fiscal benefits. Even if the rate of growth is not
changed, reducing the base level of spending can produce outyear
dividends for the program's finances. Moreover, acting now would
allow changes to benefits and health care delivery systems to be
phased in gradually so that stakeholders and participants would
have time to adjust their saving or retirement goals
accordingly.
The President's Medicare proposal
would represent another sharp break from beneficiary financing of
Medicare benefits.
Under the traditional model of social insurance, the beneficiary is
supposed to pay for the benefits of the program. Unearned benefits,
or an income transfer from taxpayers to beneficiaries, turns the
program into a welfare program. This is happening already with the
Supplemental Medical Insurance program, or Medicare Part B, the
part of the program that pays for physicians' services. Originally,
taxpayers paid 50 percent of the Medicare Part B costs, but today
they pay 75 percent of those costs.
As the GAO notes, the effect of the
President's proposal would be to make Medicare Part A look a lot
more like Medicare Part B:
Notwithstanding that no real cash is
exchanged, the transfer of additional securities to Medicare is a
discretionary act with major economic consequences for the future
financing of the HI program.... It moves away from payroll
financing toward a formal commitment of future general fund
resources for the program for the future. The general fund
obligation would begin far earlier than for Social Security.
Specifically, the HI Trust Fund would begin drawing on the general
fund to redeem these new securities in 2008--well before the full
reduction in publicly held debt and associated benefits to the
general fund will have been realized under the President's plan. In
addition, this is 24 years before the Social Security Trust Fund
would begin drawing on the additional Treasury securities that the
President is proposing to grant to that program.
As the GAO further notes, the HI trust
fund has held Treasury securities in the past, but they were held
as the value of money lent from HI surpluses. The Clinton
Administration proposal would reverse previous practice
sharply:
Under the President's proposal , the value
of securities held by the HI trust fund would exceed that supported
by earlier payroll tax surpluses and constitute a new and unearned
claim on the general fund for the future.
The President's Medicare proposal
would pose new risks for taxpayers, especially if the projected
surpluses never materialized.
The GAO emphasizes that this financing arrangement would
represent not only a fundamental shift in financing, but a major
change that could result in much higher taxes or spending cuts in
other federal programs to underwrite the President's Medicare plan.
Says the GAO:
Thus the question of bringing significant
revenues into the financing of the HI program is a question that
deserves full and open debate. The debate should not be
overshadowed by the accounting complexity and budgetary confusion
of the President's proposal.
The GAO further notes that the legal
obligation of transferring funds from the general fund would take
place regardless of whether the projected budget surpluses ever
were realized:
These transfers would have a claim on the
general fund even if the actual surplus fell below the amount
specified for the transfers. However, it is important to realize
that any proposal to allocate surpluses is vulnerable to the risk
that those projected surpluses may not materialize. Proposals
making permanent changes to use the surplus over a long period of
time are especially vulnerable to this risk.
The President's Medicare proposal
has the appearance of reform without the substance.
According to the GAO:
It
has no effect on the current and projected cash-flow deficits that
have faced the HI program since 1992--deficits that taxpayers will
continue to finance through higher taxes, lower spending elsewhere
or lower paydowns of publicly held debt than the baseline.
Importantly, the President's proposal would not provide any new
cash to pay for medical services.
Thus, the President's proposal gives the
taxpayers an appearance of making progress without the substance of
a positive change:
The
President's proposal to strengthen the HI program is more perceived
than real. Specifically, while the HI trust fund will appear to
have more resources as a result of the President's proposal, in
reality nothing about the program has really changed. The proposal
does not represent program reform, but rather a supplemental means
to finance the current program. Stated differently, the reform
proposal has more form than substance.
The President's Medicare proposal would
undermine the remaining vestiges of fiscal discipline in the
program and thus make matters worse.
The President's proposal to use the budget surplus would
amount, in effect, to a grant of federal treasury securities to the
HI program. Says the GAO:
It
is important to note, however, that these new Treasury securities
would constitute an unearned claim on general funds for the HI
program--a marked break with the payroll tax-based financing
structure of the program. This would be a significant change that
could serve to undermine the remaining fiscal discipline associated
with the self-financing trust fund concept.
The President's Medicare proposal
would not be real reform, but could make real reform more
difficult.
Says the GAO:
The
transfer of surplus resources to the HI trust fund, which the
administration argues is necessary to lock in surpluses for the
future, would nonetheless constitute a major shift in financing for
the Medicare program. However, it would not constitute real
Medicare reform because it does not modify the program's underlying
commitments for the future. Moreover, the proposed transfer may
very well make it more difficult for the public to understand and
support the hard choices necessary for the program's future
viability.
CONCLUSION
The
latest Clinton Administration budget proposal would not make for
serious Medicare reform. It would rely on future, and as-yet
nonexistent, budget surpluses and proposes to transmit funds into
Medicare in the form of IOUs. As the General Accounting Office
emphasizes, the Clinton proposal also would make a major change in
the financing of Medicare's Hospital Insurance trust fund--relying
on general funds instead of traditional payroll taxes--but would
alter neither the growth in spending nor the financial obligations
on present and future taxpayers. Indeed, it would make them worse
by locking in future obligations, regardless of whether the
surpluses ever materialized, while lowering public expectations
concerning the need to undertake serious changes in the Medicare
program.
Serious Medicare reform is not a simple
matter of dollars and cents; it has much more to do with the way in
which medical services will be delivered to the next generation of
retirees. The fundamental questions are not financial but
qualitative: whether the next generation of Medicare patients will
be able to choose the kinds of plans, benefits, and medical
treatments they want; whether they will be free of bureaucratic
restrictions on their personal choices; and whether they will be
protected from arrogant invasions of their medical privacy.
Nevertheless, the future financial condition of Medicare is far
from secure, and the Clinton Administration's proposal would give
only the appearance of security. As the GAO analysis makes clear,
this latest Administration proposal is a snare and a delusion.
Robert E. Moffit,
Ph.D., is Director of Domestic Policy Studies at The
Heritage Foundation.
Endnotes