Medicare Reform A Century Foundation Guide To The Issues

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Abstract:

Medicare, the federal health insurance program for older persons and those with disabilities, insures more Americans than any other health care program—about 39 million people in 2000. It pays for one out of every
five dollars spent on health care in the United States, and it makes up over 12 percent of the annual federal budget. In its absence, millions of older and disabled Americans would be unable to afford health insurance or to pay for
medical care.
Along with Social Security, Medicare is far and away the most popular government program. Ninety-five percent of all Americans believe that it is “very important” or “somewhat important” that it be preserved. Adults aged fifty to sixty-five, the next group that will enter the program, trust it to deliver better access to care, and a higher quality of care, than employer sponsored group insurance or directly purchased private insurance. In recent years, public attention to Medicare has focused on how the program’s spending affects the federal budget and on whether the program will remain solvent. The retirement of the baby-boom generation, which will begin after 2010, is certain to strain the program’s financing. As recently as 1997, the Medicare Hospital Insurance Trust Fund, which is financed principally through payroll taxes, was expected to run out of money by 2001.
In response to these concerns, the Medicare program was transformed significantly under the provisions of the Balanced Budget Act of 1997, which curbed future budget deficits largely through paring outlays for Medicare. The size of the cuts in projected Medicare spending—estimated at $116.4 billion over five years—far exceeded those made to any other government program.3 As these changes are being implemented, the savings have been even greater than anticipated. When the act was passed, for example, the government expected outlays to reach $245 billion in the year 2000, while actual spending is now anticipated to be in the $210 billion range.
The new cost-saving measures combined with a favorable economy that has boosted tax revenues have improved Medicare’s financial prospects considerably. The Medicare trust fund is now expected to remain in the black through 2025.4 While future projections may be more or less favorable, this more optimistic scenario has resulted in Congress seriously considering critical improvements to Medicare’s benefit package. The most important of
these potential changes is the inclusion of an outpatient prescription drug benefit within Medicare. This reform could improve the quality of life and the financial security of the roughly one-third of beneficiaries who currently
lack such coverage because they are not enrolled in supplemental plans that provide such coverage. In addition to curbing Medicare outlays, the Balanced Budget Act also may affect the way health care is delivered to beneficiaries. While most Medicare beneficiaries are covered under a fee-for-service arrangement in which the government reimburses doctors and other medical providers a standard amount for each service, the 1997 law allowed new kinds of managed care plans and other new types of health plans to enter the Medicare program. Currently, slightly more than one in six beneficiaries are enrolled in managed care plans, which typically receive a set prepayment for each beneficiary from an insurer (usually the government or an employer). The introduction of this type of coverage, termed “Medicare+Choice,” has the potential to increase market competition among these plans and broaden
substantially the health care options for the elderly. Despite these changes, Medicare still faces long-term financing problems due to the expected decline in the ratio of taxpayers to retirees when the baby-boom generation begins to retire. In addition, many experts expect seniors to use more medical services in the future, and they expect inflation
in the health care sector to continue to outpace the general rise in prices.
To examine these financing pressures, the Balanced Budget Act established a National Bipartisan Commission on the Future of Medicare, which was headed by Senator John Breaux (D-La.) and Representative William Thomas (R-Calif.). Although the commission disbanded in March 1999 without making formal recommendations to the president and Congress, it did consider one major reform, under which Medicare beneficiaries would choose among competing private health plans and the government would pay a portion of their premiums. Since these plans would have different premiums and offer different benefit packages above a basic minimum, beneficiaries
would pay more or less for medical services depending on the plan they chose.
While this reform was not formally recommended, a version of it is still under serious consideration by Congress. Proponents of this “premium support” approach argue that it would improve beneficiary choice and reduce Medicare’s long-term costs; critics doubt that the cost savings would materialize and believe that the changes would confuse many seniors. In any event, the plan would fundamentally restructure Medicare by making the
program more reliant on private plans and by moving away from the program’s traditional practice of offering a standard package of benefits at the same price to all.
This Century Foundation publication attempts to inform readers who want to learn more about the important debate over Medicare’s future. It begins by presenting the basic facts about how Medicare works, then describes what is right and wrong with the program. Next, the pamphlet examines the early effects of the 1997 reforms. It concludes by examining major proposals for additional changes that would transform Medicare to accommodate the long-term aging of the U.S. population. The intent is to enable those who care about Medicare’s future to assess the strengths and weaknesses as well as the costs of the various reform proposals.