"Medicare has long-term financial problems rooted in rising costs and an aging population that threaten the security of its promised benefits just when the Baby Boom needs it the most." -- President George W. Bush

Since 1965, Medicare has provided a guarantee of health care coverage for more than 90 million seniors and people with long-term disabilities. Medicare has made the same promise to millions of Americans who are contributing their hard-earned dollars through payroll and income taxes. These Americans are counting on the financial stability and integrity of the Medicare program.

Despite the importance of Medicare’s promised benefits to all Americans, Medicare’s bifurcated trust fund system does not provide a clear picture of Medicare’s financial status. The best-known measure of Medicare’s solvency looks at only half of the program – the Hospital Insurance Trust Fund (HI) or Part A. This tTrust fFund finances hospital services and "post-acute" services after hospitalization, but does not account for spending on physician and outpatient services. These services represent nearly half of all spending and are growing at a faster rate than inpatient services. Even when using this narrow approach, by 2016 Medicare is projected to have Part A expenses that exceed its new revenues by 2016(excluding interest income), and then to head rapidly toward bankruptcy by 2029 (see Chart 5).

Medicare’s trust fund for the other half of the program, the Part B or Supplementary Medical Insurance Trust Fund, is financed mainly from income taxes and partly from beneficiary premiums. Part B’s expenses are projected to rise even more rapidly than Part A expenses. However, bBecause income tax contributions and beneficiary premiums are increased automatically as Part B costs rise, the Part B Trust Fund will not become insolvent. This does not mean that Part B benefits are secure from a budget standpoint – as the income tax contributions keep rising, it will be more and more difficult for ultimately taxpayers will decide whether to bearto sustain the total cost of the Medicare program and other important national priorities. Part B’s expenses are projected to rise even more rapidly than Part A expenses.

Between now and 2030 the number of persons age 65 and older is expected to increase rapidly from 40 million to 77 million. Since Medicare relies primarily on payroll and income taxes to finance its benefits, this population increase means that the payroll taxes of fewer workers will be available to support the benefits of more retirees. Expenses will also rise because health care costs are expected to increase.

The importance of meeting Medicare’s benefit guarantee despite the rising costs facing the program means that careful financial planning is essential. Careful planning requiresIt is necessary to view viewing Medicare’s finances in their entirety, including both Part A and Part B benefits, to have an accurate and straightforward picture of the program’s overall financial outlook. A comparison of Medicare’s dedicated revenues and premiums to total spending reveals an imbalance -- spending far outpaces dedicated dollars coming into Medicare from payroll taxes and premiums (see Chart 6). Medicare is kept afloat solvent by an a freely increasing claim on general fund revenues. This revenue requirement is projected to more than double over the next 10 years. And even with this large infusion of revenues, Medicare will still go bankrupt in 2029. In addition, total Medicare expenditures are expected to consume an ever growing portion of the US economy, rising from 2 percent of GDP today to almost 9 percent in 2075, or about half the size of the entire Federal government now. This amount also exceeds what the Federal government spends now on all discretionary Federal programs – education, defense, crime, and others. Only by planning ahead can drastic, and undesirable changes in Medicare or other Federal programs be avoided later.

The President will work to strengthen Medicare’s benefit guarantee based on the following principle:

Principle #5: Medicare legislation should strengthen the program’s long-term financial security.

Legislation should strengthen Medicare’s ability to plan for and provide its benefit entitlement in the years ahead, thereby improving the program’s long-term financial security. To support good planning for the entire program, Medicare’s separate trust funds should be unified to provide a straightforward and meaningful measure of Medicare’s overall financial security that is not vulnerable to accounting gimmicks. Financial security cannot be achieved simply by increasing reliance on unspecified financing sources.

Medicare’s government traditional plan is falling short in important respects other than its benefits. It has not been able to use competitive approaches to help keep its costs down. Its contracting requirements are outdated, making it more difficult for providers and patients to work effectively with a complex claims processing system. And perhaps most importantly, the government plan does not provide efficient, integrated services for many seniors who need support for managing their illnesses, particularly in cases of chronic disease.

Many Medicare beneficiaries are among the sickest and most vulnerable individuals in our society, with complex chronic and acute medical conditions. Unfortunately, Medicare’s traditional approach to paying only for discrete visits and services has denied many seniors the opportunity to take advantage of the pharmaceutical, clinical, and medical management advances that have been pioneered by integrated health plans to treat complex conditions and chronic diseases. These programs lead to better health outcomes and reduce total medical costs by avoiding complications.

For example, over 30 percent of the elderly suffer from some form of heart disease – a condition ideally suited to integrated medical management, including diet, exercise, smoking cessation, and medication counseling. Each of these steps has been proven to reduce the risk of further cardiovascular complications, and programs developed by health plans that use integrated, coordinated approaches featuring experienced professionals have been shown to achieve better results in all dimensions. Many individuals with heart disease who are enrolled in private plans can take advantage of these kinds of integrated programs, while traditional Medicare enrollees cannot. Similar private programs have also been developed by integrated health plans for individuals with diabetes (afflicting 13 percent of seniors), hypertension (afflicting 40 percent of seniors), and HIV/AIDS. Altogether, over two thirds of seniors could benefit from the kinds of integrated clinical management programs common in private plans and widely available to non-Medicare beneficiaries.

Enrollees in traditional Medicare frequently require the use of medical supplies such as hospital beds, blood glucose monitors, wheelchairs, and oxygen equipment. Under current law, Medicare sets regulated prices for literally hundreds of these supplies. Unfortunately, theThese prices set by Medicare tend to be higher than those paid by private plans or even other government agencies that negotiate or contract for the samese supplies on a competitive basis. A number of studies and recent Medicare pilot programs indicate that Medicare’s outdated system results in Medicare beneficiary payments for these supplies (?) that the cost of supplies could be reduced byare between 15 and 30 percent if the traditional plan used the same kinds of competitive bidding tools that help reduce costs and improve quality for higher than those faced by non-Medicare patients. Competitive bidding presents an opportunity to enhance the financial security of America’s seniors.

Medicare’s current contract authority has also failed to keep pace with changes in the marketplacehealth care industry. For example, Medicare is restricted to using certain insurance companies to process certain types of claims. Other businesses have the expertise and capacity to provide these claims processing services, but Medicare is prohibited from contracting with them. In addition, unlike other purchasers, Medicare cannot Medicare cannot reward or penalize a contractor based on their performance, regardless of error rates, delays, and responsiveness to providers and beneficiaries.

Many Medicare beneficiaries are among the sickest and most vulnerable individuals in our society, with complex chronic and acute medical conditions. Unfortunately, Medicare’s traditional approach to paying only for discrete visits and services has denied many seniors the opportunity to take advantage of the advances that have been pioneered by integrated health plans in coordinating care for complex conditions and chronic diseases. These programs can lead to better health outcomes and reduce total medical costs by avoiding complications.

For example, over 30 percent of the elderly suffer from some form of heart disease – a condition ideally suited to integrated medical management, including diet, exercise, smoking cessation, and medication counseling. Each of these steps has been proven to reduce the risk of further cardiovascular complications, and programs developed by health plans that use integrated, coordinated approaches featuring experienced professionals have been shown to achieve better results in all dimensions. Many individuals with heart disease who are enrolled in private plans can take advantage of these kinds of integrated programs, while traditional Medicare enrollees cannot. Similar private programs have also been developed by integrated health plans for individuals with diabetes (afflicting 13 percent of seniors), hypertension (afflicting 40 percent of seniors), and HIV/AIDS. Altogether, over two thirds of seniors could benefit from the kinds of integrated clinical management programs common in private plans and widely available to non-Medicare beneficiaries.

The President will work to improve Medicare based on the following principle:

Principle #6: The management of the government Medicare plan should be strengthened so that it can provide better care for seniors.

The management of Medicare’s government plan should be updated and improved, to provide lower-cost and higher-quality care for seniors who prefer this plan.

• Medicare should be allowed to use competitive bidding tools to improve quality and reduce costs for durable medical equipment, prosthetics and orthotics, and clinical lab services – provided that the government plan is not allowed to create new price controls and that seniors continue to have choices.

• Contractor reform should be implemented to improve efficiency and performance.

• Beneficiaries who wish to participate in innovative programs such as disease management should be able to do so, and Medicare should be able to test other innovative approaches to improving quality of care and reducing coststhrough expanded demonstration authority to implement promising new initiatives that have local support.

• Medicare’s process for covering new technologies should be streamlined.

Medicare today is a complex system of ever-changing rules and regulations affecting the 40 million Medicare beneficiaries and over 1 million physicians and providers who serve them. Patients and providers face variable and inconsistent policy interpretations from various contractors and from different offices with overlapping jurisdictions within the Federal government itself: Rules may vary across areas and over time. Beneficiaries and their families may find the system confusing and difficult to navigate. Providers seeking technical assistance from Medicare are often frustrated because their questions go unanswered.

Nonetheless, providers are expected to comply with a near-continuous stream of complicated regulations and program changes. Providers are forced to spend more time and effort keeping up with the latest rules and interpretations instead of providing patient care. Even worse, some physicians have stopped treating Medicare patients, and more are threatening to do so.

The complexity of Medicare makes targeting fraudulent activities difficult without unfairly burdening the vast majority of honest physicians and other providers. Providers who are struggling to give Medicare beneficiaries the best care that they can, while also struggling to avoid billing errors, are laboring under the misperception that honest errors might be considered fraud. At the same time, the magnitude of improper payments is a serious problem for taxpayers. The Office of the Inspector General found that Medicare made $11.9 billion in improper payments in 2000. This amount would be sufficient to increase the entire budget of the National Institutes of Health by two-thirds. It is a significant reduction from earlier years, but also a clear indication that more needs to be done.

Complexity, variability, constant change, and the existence of some rules that just are notn’t workable when a doctor is caring for a patient all contribute to the need to reduce regulatory and administrative burdens in Medicare. As Dr. Robert Waller, Chairman Emeritus of the Mayo Foundation, has testified, "The public has been led to believe that the Medicare program is riddled with fraud, when, in reality, complexity is the true root of the problem."

Medicare’s administrative structure also contributes to this complexity. The current administrative agency with responsibility for running the traditional plan, the Centers for Medicare and Medicaid Services, must also manage private plans and Medicaid. Currently, the same administrators running the traditional plan must also oversee competing private plans – even though these tasks often require different skills. The traditional plan deserves its own dedicated administrators focused on making the plan operate more effectively. Medicare’s program-wide responsibilities, including oversight of private plans and providing good information on coverage options to beneficiaries, also deserve specialized administrators. Separate specialized teams will also help protect against conflicts of interest, and provide clearer lines of communication for beneficiaries and providers.

The President will work to improve the administration of thestreamline and strengthen Medicare program based on the following principle:

Principle #7: Medicare’s regulations and administrative procedures should be updated and streamlined, while the instances of fraud and abuse should be reduced.

Needed relief in regulation and oversight, including many some bipartisan proposals from members of Congress, should be implemented. This will allow providers to spend more time and effort on patient care and less on paperwork and unexpected and complex rule changes, while continuing to assure the integrity of Medicare funds. Medicare’s administration should be restructured so that program staff can work more effectively with beneficiaries, health care and providers, and health plans.