The House-Senate conference committee on Medicare drug legislation is considering a "trigger" proposal to control program costs. This measure is intended to place a limit on the amount of general taxpayer revenue that would be devoted to cover any gap between the actual expenditures of Medicare and "dedicated sources" of revenue for the program--primarily payroll taxes and premiums.

The focus on devices to control costs is long overdue and a welcome development for current taxpayers and future generations. These Americans would be saddled with the huge, unfunded new obligations implicit in the drug legislation--estimated by Medicare Trustee Tom Saving as a two-thirds increase in the $3.8 trillion federal debt held by the public. Placing an effective dollar limit on the additional unfunded liabilities of the structurally insolvent Medicare program is one of two critical tests of an acceptable Medicare drug bill. The other is true structural reform of the program.1

For a cost-control device to satisfy the test, however, it must have the same characteristics that the Food and Drug Administration requires of new drugs. It must be "safe and effective." The trigger proposal, however, does not appear to meet this most basic requirement:

• The trigger would not even come into play for at least 12 years--six Congresses from now and at a time when the politically powerful and huge baby-boom generation is reaching retirement. This means tough decisions on spending would be delayed until a far more politically difficult time.
• The proposal has far weaker enforcement tools than budget controls already tried over the past 20 years with little success. Future Congresses could easily evade it--or simply ignore it.
• If the trigger proposal somehow were to prove effective, it would not be safe for the objective of consumer choice and the availability of private plans. If a future Congress did feel obligated to ratchet down Medicare spending to meet the general revenue cap, it is hard to imagine lawmakers cutting specific services under the traditional Medicare program--other than imposing new and tighter price controls on doctors and hospitals. It is far more likely they would cut funding to private plans. The result would be a further exodus of private plans from the program, leaving traditional Medicare as the only "choice."

Protecting future taxpayers from the huge costs of an open-ended expansion of Medicare is no easy task. But a "supply-side" strategy of trying to clamp down on program spending is unlikely to succeed. That approach would either be ineffective or lead to ever-increasing price controls, micromanagement, and other vestiges of central planning.

Much more likely to succeed is a "demand-side" approach that limits the taxpayer subsidy for seniors enrolling in plans or purchasing services while providing modest-income seniors with enough assistance to guarantee them adequate services. This approach means cost control must be in the form of a "premium support" mechanism. Without such a mechanism, there will be no effective cost control in a Medicare drug bill.

What's Wrong With The "Trigger" Proposal

Currently, 70 percent of Medicare spending is funded by a combination of payroll taxes, premiums paid by Medicare beneficiaries, Social Security taxes, and net interest received from trust funds. The remaining 30 percent is funded through general tax revenues. As Medicare falls sharply into deficit over the next few decades, additional general tax revenues will be needed to close this funding gap--even without a drug entitlement. Those new general revenues would strain the federal budget and force a choice between substantial tax increases and deep spending cuts.2

Under pressure to limit taxpayer costs, House-Senate conferees are considering a proposal to limit general tax revenues to funding no more than 45 percent of Medicare spending in a given year. If the Medicare trustees project that this threshold will be exceeded in two consecutive years within the following seven years, the President would be required to include in the next budget proposal a plan to reduce Medicare's reliance on general tax revenues. Congress would then be required by law to take up this proposal quickly.

Regrettably, this proposal would not lead to meaningful Medicare reforms for two major reasons:

• It would delay reform. Chart 1 shows that the percentage of Medicare spending funded by general tax revenues has usually fluctuated between 28 percent and 33 percent over the past 15 years and is not projected to reach 45 percent until 2023. The enactment of a Medicare drug benefit would move up this day of reckoning to perhaps 2017. But by that point, millions of baby boomers will be enrolling each year, costs will be soaring, and the program will be moving sharply into deficit. The political window for reforming Medicare before its costs reach crisis levels will have closed.

In the meantime, the benchmark for the trigger would create a false sense of security as well as political cover for lawmakers during the next decade. There would be little incentive to tackle the underlying spending pressures until the trigger is imminent. But pretending that everything is fine until 2017 or 2023 will only delay needed reforms and make future steps more painful to seniors or, perhaps more likely, more expensive to taxpayers.

• It is not enforceable. Throughout the past 20 years, Congress and the President have enacted numerous laws intended to limit future spending. When it came time to write those budgets, those same lawmakers typically evaded or ignored their own rules.

For example, the Gramm-Rudman-Hollings Act in the 1980s and the discretionary spending caps and PAYGO laws of the 1990s set specific targets limiting spending and/or the budget deficit. Under both of these pieces of legislation, failure by Congress to adhere to those limits led automatically to immediate, across-the-board spending cuts (called sequestrations) until spending or the budget deficit reached the year's target.

While these laws were supposed to impose discipline automatically, spenders routinely voted to exempt certain programs or simply ignore the rules whenever they would have required anything beyond minimal spending reforms. Lawmakers usually passed new laws to write in new, weaker targets for the current year. On other occasions, they simply voted to ignore their own law altogether. Of course, immediately after bypassing the current year's restraints, lawmakers would turn around and enact seemingly tough, new restraints scheduled to begin in the following year. And the game would begin again.

The Likely Medicare "Trigger" Scenario

The proposal to limit the general revenue funding of Medicare is far weaker than even these past, ineffective spending process reforms. In the past, exceeding spending and deficit targets would trigger automatic spending reductions, but the Medicare proposal does not require any automatic controls or process reforms at all. The proposal merely requires the President to submit a plan to curb general revenue funding, and Congress must debate it.

Even those frail requirements are unenforceable. What if the President refuses to submit a reform plan or proposes steps few lawmakers could stomach? No matter how the law is written, nothing would force the President to submit a realistic plan. For political reasons, the White House could purposely submit a vague, short, weak proposal that it has no intention of seriously supporting.

What If a Congress Did Decide to Live by the Law?

In the very unlikely event that a future Congress decided to face down the baby boomers and actually put spending controls into place, how might those controls be distributed? History suggests two things, perhaps in combination.

One would be tighter price controls on doctors and hospitals throughout the program, moving Medicare and the entire health system further toward the centrally planned health systems of countries like Britain and Canada. But America's recent experience of ratcheting down costs in this way indicates the consequences of price controls--reductions in service reaching such a level that Congress is under pressure to raise spending again.

The other likely approach would be to reduce spending on private health plans serving seniors in order to protect the politically sensitive traditional fee-for-service Medicare program. But if private plans were forced to shoulder most of the cost-cutting burden, history shows that more and more of them would withdraw from the program. The result would be fewer private plans available, increasing the probability that in state after state the "fallback" provisions for government-sponsored drug benefits would come into force. The likely effect of supply-side spending controls with real teeth, therefore, would be to undermine the goal of assuring choice and private plans for seniors.