The Senate is facing two interrelated major tests: federal spending and Medicare policy. According to Congress Daily, Senator John McCain (R-AZ) and other Senate Republicans could offer an amendment to the Senate's budget reconciliation legislation to cut federal spending, including a delay of the Medicare prescription drug benefit for two full years.[1] The Senate Finance Committee, in contrast, proposes only modest Medicare spending reductions, combined with congressional reinforcement of the most undesirable features of Medicare payment policy. How Senators choose between these two approaches will reflect their seriousness about confronting ballooning federal spending and the challenges that Medicare faces.

A Serious Approach

Senator McCain and his colleagues Senators John Ensign(R-NV), Sam Brownback (R-KS), Tom Coburn(R-OK), Jim DeMint(R-SC), Lindsey Graham(R-SC) and John Sununu (R-NH) have produced an impressive "Fiscal Watch Team Offset Package" of serious spending reductions in major areas of domestic policy. Altogether, these provisions would yield a savings of at least $115 billion over the next two years.[2] The Senators propose these reductions in response to the unanticipated costs of Hurricane Katrina, estimated to be well in excess of $200 billion dollars, as well as the clear need to contain the explosion of government spending that is adding to the already mountainous unfunded liabilities of the federal entitlement programs-in particular Medicare, Medicaid, and Social Security.

Senator McCain and his Senate colleagues' approach would not only result in major savings to the taxpayer, but would also advance a superior Medicare policy. The key Medicare provisions are as follows: 

• Delay in the Medicare Part D entitlement. The drug entitlement is scheduled to go into effect on January 1, 2006. In sharp contrast to the rushed consideration of the Medicare drug bill in both the House and Senate, the delay would give Congress the crucial time needed to reconsider and redesign a rational and responsible Medicare drug benefit that is affordable for both seniors and taxpayers. This is simply good public policy. With the enactment of the Medicare Modernization Act of 2003, congressional leaders, in particular those of the Senate Finance Committee and the House Ways and Means Committee, imposed an additional $8.7 trillion dollars of unfunded liabilities on current and future taxpayers. As the Comptroller General of the United States David Walker remarked this week, the United States simply cannot afford Medicare Part D. Members of Congress have a duty to reconsider and restructure it. A simple delay, according to the Fiscal Watch Team, could produce a broad range of big savings, running anywhere between $40 to $80 billion.
   
• Retain and expand the Medicare Drug Discount Card program. The prescription drug card program, which uses ATM-like cards for the purchase of prescription drugs, is scheduled to expire on December 31, 2005. Several million senior citizens have enrolled in the program, which has also provided unprecedented price transparency to consumers of prescription drugs. Professional literature and independent analyses show that enrolled seniors, particularly those eligible for subsidies under the program, have achieved significant savings on the cost of drugs. Nonetheless, under the terms of the Medicare Modernization Act of 2003, the drug discount program will expire, regardless of whether or not enrolled seniors wanted to continue to participate in it. This again is bad public policy and another congressional repudiation of personal choice in health care. Under the McCain proposal, the drug card program would not only be retained, but also the annual subsidy for low-income seniors would be increased from $600 to $1,200 per year. This, too, is good public policy.
   
• Accelerate Means Testing for Medicare Part B. Medicare Part B, the part of the program that pays for physicians and outpatient medical services, is to be subject to means testing. Under current law, taxpayers pick up 75 percent of Medicare premiums for Part B; beneficiaries pay 25 percent. Under the Medicare Modernization Act of 2003, higher-income seniors would pay more, beginning in 2007. Individuals with incomes that exceed $80,000 per year and couples with incomes that exceed $160,000 per year would pay higher premiums. Senator McCain and his colleagues would apply this change in 2006, achieving an estimated $6 to $9 billion in savings.

The Senate Finance Committee Approach

In sharp contrast to the McCain proposals, the Senate Finance Committee aims at a very modest level of taxpayer savings. The Medicare and Medicaid savings alone amount to an estimated $10 billion.[3] Moreover, the Committee proposes several substantive changes to the Medicare program, including adjustments to hospital payments, reductions in payments to skilled nursing facilities for bad debt, a prohibition on physician referrals to certain physician owned hospitals, and updates for physician payments. Altogether, these changes would achieve much less savings than the McCain proposals. At the same time, the Senate Finance Committee package would also reinforce some of the most undesirable features of Medicare payment policy. For example:

• Weakening the new Medicare Advantage Program. The Senate Finance Committee proposal would eliminate the temporary incentive program for private health plans to participate in the new Medicare Advantage system. The new incentive system would be ended, in other words, even before it took effect. This is unwise policy.
  
  Under the Medicare Modernization Act of 2003, Congress authorized the creation of Medicare Advantage, a new system of private health plans to replace an earlier program, the Medicare+Choice program, created under the Balanced Budget Act of 1997. The deeply troubled Medicare+Choice program suffered from two principal difficulties. First, it was smothered in approximately 900 pages of government regulations, dramatically reducing health plans' flexibility in meeting consumer demand. Virtually no aspect of health plan operations was free of the regulatory supervision of the Medicare bureaucracy. Second, Congress capped Medicare+Choice annual payments to health plans at arbitrarily low levels, despite the fact the health care costs were much higher. The result: Many health plans simply could not participate in the program.
  
  With the enactment of the Medicare Modernization Act of 2003, Congress provided incentives to private health plans to participate in the coverage of senior and disabled citizens, particularly in areas of the country where plan participation had been low. Congress thus established the Medicare Advantage Regional Plan Stabilization Fund, with an initial authorization of $10 billion to be available during from 2007 to 2013. The authorization also included additional funds for this purpose that would come from a small portion of the savings to the government from health plans that priced their product below the government's annual benchmark payment.
  
  Ideological opponents of private health plan participation in Medicare have at least been consistent in their hostility to the stabilization fund. Congressional proponents of choice, competition, and market-oriented reform should recognize the importance of re-building partnerships with private health plans in the Medicare program. While health plan participation has been improving, regional Preferred Provider Organization (PPO) participation is not as robust as it could be, especially in rural areas of the country. This is a reason why the stabilization fund should be retained for the next few years. The Senate Finance Committee proposal to repeal this incentive fund before it even becomes effective is premature and once again signals instability in the Medicare payment system for private health plans.
   
• More Red Tape on Doctors and Other Medical Professionals. Currently, Medicare payment is governed by complex system of fee schedules, formulas, and price controls. The problem is that the current Medicare reimbursement system, in sharp contrast to the free market, does not account for the quality of benefits of services to the patient. Under the Senate Finance Committee bill, the Secretary of Health and Human Services would be required to establish a new "quality" measurement for making "value-based" payments to hospitals, physicians, and other medical professionals. While this approach to Medicare payments appears superficially attractive, providing "pay for performance" for doctors and other providers to get better outcomes, the new provisions would, in fact, dramatically advance the intrusion of government decision-making in the practice of medicine. The government henceforth would establish "guidelines" for doctors and other medical professionals, and Medicare reimbursements would be based on these guidelines. This is a reversal of the spirit, if not the letter, of the original Medicare prohibition of government interference in the practice of medicine. Worse, it will add yet another layer of bureaucratic complexity to an outdated system of central planning where doctors and other medical professionals are already drowning in a sea of bureaucratic rules, regulations, and guidelines.
  
  The right policy is to overhaul the Medicare reimbursement system and introduce free-market pricing of medical services, reduce bureaucratic complexity, provide independent quality assessments and information for consumers, and promote transparency in medical pricing.

Conclusion

The Senate vote on budget reconciliation is a major test of the seriousness of congressional rhetoric about the need to control spending-especially entitlement spending. It is also another test of congressional policy on Medicare reform.

The McCain proposals reflect both sound Medicare policy and a commitment to a reversal of the relentless expansion of government spending that threatens the nation's economic future. The Senate Finance proposals offer only modest spending reductions and reinforcement of the most undesirable features of Medicare payment policy.

For Further Background

On the coming impact of Medicare's unfunded liabilities, see Tracy L. Foertsch Ph.D., and Joseph R. Antos, Ph.D., "Paying for Medicare: An Economic Look at The Program's Unfunded Liabilities," Heritage Foundation WebMemo, #880, October 11, 2005.

On Medicare "Values Based Purchasing", see Richard Dolinar, M.D., and S. Luke Leininger, "Pay for Performance or Compliance? A Second Opinion on Medicare reimbursement," Heritage Foundation Backgrounder No. 1882, October 5, 2005.

On the success of the Medicare drug discount cards, see Derek Hunter, "The Medicare Drug Discount Cards: One Month In," Heritage Foundation WebMemo No. 583, July 15, 2004.

Robert E. Moffit, Ph.D., is Director of the Center for Health Policy Studies at The Heritage Foundation.