Members of Congress are growing concerned that the Medicare bills now being considered in conference will constitute a huge new unfunded liability - equivalent to a two-thirds increase in the $3.8 trillion in public debt.

Neither the President nor responsible lawmakers should accept a Medicare bill that adds to the unfunded liabilities of Medicare and does not contain serious reform. Failure to take such a stand undoubtedly will result in a continued stampede to enact a measure that does little or nothing to resolve the problems of Medicare while effectively imposing an enormous new tax on future generations.

New Entitlement Program

Medicare Trustee Tom Saving estimates that the cost of the additional obligations in the Senate bill is equivalent to a two-thirds increase in the $3.8 trillion in public debt. In addition to this staggering new burden, many of these members and other lawmakers are also distressed that serious reform of the Medicare program will fall by the wayside in a desperate rush to pass a politically attractive new entitlement program for middle class Americans.

Several dozen, chiefly conservative, House members wrote to Speaker Dennis Hastert (R-IL) during the House debate to make two things clear:

1. That their support for a final conference report on the measure depends on the legislation including a key House provision that would - but only seven years from now - introduce serious reform modeled after the Federal Employee Health Benefits Program (FEHBP).
2. That there must be serious cost controls in the final legislation to rein in the cost on future generations.

Conservative lawmakers are right to draw attention to these requirements of a responsible bill. It is important now that these and other members, and the President, clearly indicate what an acceptable bill would look like. Specifically, neither the President nor responsible lawmakers should accept a Medicare bill that adds to the unfunded liabilities of Medicare and does not contain serious reform. Failure to take such a stand undoubtedly will result in a continued stampede to enact a measure that does little or nothing to resolve the problems of Medicare while effectively imposing an enormous new tax on future generations.

Two Critical Elements

There are two critical elements required for a responsible Medicare drug bill:

1. The bill must contain genuine reforms modeled on the FEHBP.
2. The bill must impose no new net unfunded liability on future generations beyond the $400 billion in the current budget resolution.

Specifically, these elements entail:

1) Genuine reforms modeled on the FEHBP. 

Section 241 of the House bill would introduce some elements of FEHBP-style competition, but these would be delayed until 2010. The conference should build on this provision and on the 1999 work of the National Bipartisan Commission on the Future of Medicare, headed by Representative Bill Thomas (R-CA) and Senator John Breaux (D-LA), which was followed by legislation sponsored by Senators John Breaux and Bill Frist (R-TN), to craft an FEHBP-style reform of the program. Key elements of a reform based on that approach should include the following:

• Any private plan meeting basic threshold standards should be able to market its services to seniors.
• Price controls and detailed benefit requirements should not be imposed on private plans. Moreover, Medicare plans, just like FEHBP plans, should also be able to modify their benefits over time as they strive to reflect consumer choice while seeking to offer the best value for money. Seniors, not government officials, should decide what constitutes a good plan.
• The management of the traditional fee-for-service Medicare program should be separated from the management of the overall Medicare program, as the current House bill would do. There is an inherent conflict of interest if traditional Medicare and the competing private plans are both administered ultimately by the same officials at the Centers for Medicaid and Medicare Services.
• The timetable for the new benefits must be inextricably linked to the timetable for reforms. A delay in reforms must mean a delay in new benefits. No reforms must mean no new benefits. If new benefits are scheduled to go into effect before serious reforms, the probability is that those reforms will never be implemented.

2) Imposing no new net new unfunded liability

The new unfunded liability (i.e. tax) on future generations should be limited to the $400 billion over 10 years already included in the budget resolution. Bearing in mind that the demands on Medicare will expand sharply after that 10-year "window", a responsible bill must phase in steps during that period that will achieve a permanent drug benefit that imposes no net new obligation to the already unsustainable Medicare program. Failure to do that means imposing the equivalent of huge new taxes on future generations.

To avoid new taxes the bill must include real and efficient expenditure controls designed to trigger long-term savings within the Medicare program. To be sure, Congress could enact expenditure controls that could be disastrous to seniors and the Medicare program. Imposing price controls on the health care industry, for example, might hold down expenditures but only by producing the same inefficiencies and service shortages that always result from price controls.

Appropriate spending controls actually means controlling and focusing the taxpayers' funds committed to the program, allowing the market to adjust to that subsidy and allowing beneficiaries to spend their own funds as they wish. Options to achieve that goal could include:

• Introducing income related premiums and benefits throughout traditional Medicare and income-related payments to managed care plans. Affluent seniors should not enjoy the same subsidies as the needy while passing the tab to everybody's children and grandchildren.
• Assuring that the net budget cost of the drug benefit does not exceed budgeted costs during the next ten years by automatically increasing cost sharing for middle and upper income retirees to keep within the spending target.
• Directly limiting the taxpayer cost by transforming Medicare into a program that annually makes a contribution to the costs of services, or a chosen plan, up to a specified limit. The FEHBP operates in this way, with a proportion of premium costs covered by the government up to a maximum amount. Such a fixed contribution can be adjusted according to income, but it would allow Congress to cap the long term unfunded cost of Medicare with a drug benefit to no more than the current program cost after 10 years.

Reform Imperative
In all probability this legislation, if enacted, will be the last opportunity to address the shortcomings of the Medicare program. Soon the aging Baby Boom generation will make it politically impossible to enact serious reforms to deal with the program's staggering liabilities. This political fact means that this Congress must face up to the task of legislating real reform, modernizing the program and taking sound and decisive steps to eliminate new unfunded liabilities. Simply adding a new benefit and sharply increasing the unfunded burden being passed on to future generations would be unconscionable.