Lawmakers in Washington are arguing over President Bush's proposed 2004 budget. Eventually they'll decide how large his tax cut should be and how much money will be set aside for "Operation Iraqi Freedom."

But there's a bigger fiscal problem they may try to avoid -- again -- this year, even though they know they shouldn't: Medicare. It's in trouble.

The board of trustees of the Social Security and Medicare programs recently released their annual report on the financial condition of the programs. They say Medicare's problems are more immediate and more serious than those facing Social Security.

Without reform, the Medicare hospitalization trust fund will start running in the red -- meaning that it will start taking in less in taxes than it must pay out in benefits -- in just 10 years. That's three years earlier than they predicted last year, and right after the huge baby-boom generation starts retiring. Even worse, the trustees say the trust fund will be exhausted in 2026 -- when the baby boomers are in full retirement -- four years sooner than expected.

But the Medicare trust fund isn't the only money issue. The big story is the coming tax increases that will be required to keep Medicare afloat. Thomas Saving, a Medicare trustee and a professor at Texas A&M University, estimates that Medicare alone will consume 20 percent of federal income taxes in 2026, the year the trust fund is exhausted. And that estimate doesn't take into account any of the proposed congressional drug plans, expected to cost between $400 billion and $1 trillion over the next 10 years.

Congress needs to make important changes in the traditional Medicare program that now covers 41 million senior and disabled citizens. It also needs to make long-term fixes to enable Medicare to absorb the demographic shock of the 77 million baby boomers who start to retire in just eight years.

For one thing, Congress should target funding for a prescription drug benefit to low-income seniors who need the most help. Most middle and upper-income seniors today already have private coverage. Those who can afford it should continue to get coverage that way, rather than through the government.

If Congress insists on a universal government drug benefit, millions of seniors likely would lose their private coverage, whether they want to or not. That would also impose a huge burden on taxpayers.

Professor Saving estimates that a new government benefit paying 75 percent of drug costs would leave Medicare alone consuming 35 percent of all federal income taxes in 2026, the same year the program's trust fund goes broke.

Taxpayers simply don't have enough money to fund national defense and domestic programs while giving Bill Gates the same drug coverage as a retired librarian. A little congressional common sense today would save taxpayer dollars tomorrow.

Lawmakers pondering how to change Medicare should pay close attention to Douglas Holtz-Eakin, director of the Congressional Budget Office. "The most effective approaches to constraining Medicare costs in the future -- and to getting the greatest improvement in health for the money that is spent -- are likely to be those that give beneficiaries and health care providers appropriate incentives to spend federal funds wisely," Holtz-Eakin recently told the Senate Special Committee on Aging. He added that beneficiaries should have "as many choices among providers and health plans" as possible. In short, patient choice and market competition can control costs and improve the quality of care.

Luckily, the best model for a future Medicare system based on patient choice and market competition is the senators' own plan, the Federal Employees Health Benefits Program (FEHBP). Under FEHBP, the government negotiates rates and benefits with a variety of health plans and makes a generous contribution to enrollees' coverage. Federal employees and retirees then select the coverage option that best suits them.

All of the FEHBP plans have prescription-drug coverage. Federal enrollees get substantial discounts on drugs, and nobody is forced to go outside and buy an extra health plan or pay additional premiums to bridge big gaps in coverage, like most Medicare patients do today.

Medicare is a popular and important program. But the longer Congress delays in making serious changes, the harder it will be to make those changes. Congress should start revamping the program today, so that a strengthened and improved Medicare program will be available to the baby boomers tomorrow.

Robert E. Moffit is director of Center for Health Policy Studies at The Heritage Foundation (www.heritage.org).