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5. Modernize and Reform Medicare

Like Social Security, Medicare represents a promise that the Nation has made to its senior citizens—a promise that we have an enduring obligation to keep.

With this Congress, the executive and legislative branches and both political parties will take a first step towards restoring the strength of this promise not just for years to come, but for generations to come.

Modernizing and saving Medicare must rank among the most urgent priorities in an era of common purpose.

Promises to Restore

Following Congressional passage of Medicare in 1965, President Lyndon Johnson said: "No longer will older Americans be denied the healing miracle of modern medicine." Yet today, in many ways, Medicare no longer keeps pace with modern medical advances. Although Medicare coverage of preventive care services has been significantly expanded over the past five years, Medicare still offers a benefit package based on the most popular Blue Cross/Blue Shield package of President Johnson's era—a standard of excellence at the time that is inadequate today. And for many seniors, Medicare does not offer coverage choices that many of the privately insured have become accustomed to receiving.

One of the largest flaws in Medicare coverage today is its failure to cover outpatient prescription drugs. Approximately 98 percent of private health insurance plans offer a prescription drug benefit or a cap on out-of-pocket expenses as an integral part of the benefit package. Private health insurers recognize the important role of drug therapy in medical care. Drugs can often be cost-effective therapies preventing the need for more expensive hospitalizations or other intensive therapies.

The need for Medicare reform does not relate only to the financial condition of Medicare or the lack of adequate coverage. Of perhaps equal concern is the complexity and inflexibility of the Medicare bureaucracy itself. The current system, with ever increasing pages of regulations, administrative guidelines and other endless directives issued on a monthly basis, leaves providers and beneficiaries often bewildered and frustrated. The current system is too complex, too centralized, and becoming more so each year. Burdensome regulations and other central directives force providers to take time away from patients to comply with excessive and complex paperwork.

Excessive administrative complexity also makes Medicare prone to fraud and abuse. In 1999, the HHS Inspector General determined that Medicare made more than $13 billion in improper payments. Given the complexity of Medicare, it is often difficult to determine where honest mistakes end and fraud begins. The GAO concluded as recently as January 2001 in its High-Risk Updatethat the Health Care Financing Administration (HCFA) "lacks sufficient information on newly designed payment systems to determine whether providers are being paid appropriately for the services they deliver."

Sustaining the Medicare program for future generations of beneficiaries will require an honest and forthright effort by the Federal Government to address these problems. Reforming Medicare will also require reforming HCFA. This will include employing every strategy appropriate to enhance quality health care options for beneficiaries rather than relying on increasingly punitive regulations, arbitrary and multiple pricing systems, and delays to maintain the status quo.

How Outmoded Has Medicare Become?

Today, Medicare covers only 53 percent of the average senior's annual medical expenses. The current Medicare program is burdened by horrific bureaucratic complexity and operates in a non-competitive, inefficient manner. In addition, the program lacks the flexibility to operate differently.

Medicare fails today's elderly patients in other ways:

  • The preventive care services offered under Medicare, while greatly expanded, are still insufficient to help seniors remain healthy, and therefore avoid more expensive care later;

  • Routine services such as annual physicals, vision tests and hearing aids are not covered;

  • It is not coordinated with the employment-based health insurance system, providing disincentives to continued work;

  • It has a fee-for-service cost-sharing structure that still leaves seniors vulnerable to high costs, and is less effective than necessary in ensuring good use of care; and

  • It currently maintains separate trust funds, one for inpatient hospital and post-acute care, and one for physician fees and other outpatient costs. This separation may lead to misleading assessments of Medicare's financing and reflects a different era of medicine.

Financial Reasons for Reform

In addition to the way Medicare fails to provide the care seniors deserve, there is irrefutable evidence that Medicare's finances are headed for bankruptcy.

Like Social Security, Medicare's long term financing is driven by the significant demographic trends that will begin taking shape in about 10 years. (See Chart 5–1.)

5–1. The Aging of Society Makes Reform Urgent
  • Between 2010 and 2030, the number of persons age 65 and older will increase from 39.7 million to 69.1 million. That's an average of one and a half million more seniors per year for 20 years.

  • During that same period, the Medicare actuaries project Medicare spending will increase from $324 billion to $694 billion, in constant 2000 dollars.

  • This shift in demographics will begin with retirement of the baby boom, but it will not end there.

  • The great advances in health and well-being of the 20th Century will lead to significant increases in the average life span in the 21st Century.

  • Demographers now project that persons born in 2000 will live, on average, to age 76, up almost six years compared to people born in 1970.

  • As a result, there is projected to be a permanent shift in the ratio of workers to Medicare beneficiaries, from 4.0 workers today to 2.3 in 2030 and 2.0 in 2070.

These demographic trends will dramatically change spending for both Social Security and Medicare, but the problem is likely to be even more pronounced in Medicare due to the expected increases in health care costs per beneficiary. Medicare per capita spending is projected to vastly outpace the consumer price index for the next 25 years.

These demographic trends are impacting the Medicare program as a whole, making it critical to focus on the solvency of Medicare in its entirety.

While it is true that the Hospital Insurance Trust Fund is projected to have a surplus over the next ten years, it is misleading to focus so much attention on only one of the program's two trust funds representing only 60 percent of total Medicare spending.

A full assessment of Medicare's finances reveals spending exceeds the total of tax receipts and premiums dedicated to Medicare today, and that "financing gap" is projected to widen dramatically. This gap is $51 billion in 2000, growing to $216 billion (using constant dollars) in 2020, and $368 billion in 2030. Not only is there no surplus in Medicare today, there is a large deficit. (See Chart 5–2.)

Even without the large financing problem, Medicare modernization would be necessary to ensure beneficiaries get high quality health care. But the looming financial shortfall makes reform even more urgent. To be successful, reform must substantially improve Medicare's long-term financing.

The President's Approach to Improving and Strengthening Medicare

Coupled with a systematic effort to change the outmoded Medicare program and its administration, the budget will devote $156 billion this year and over 10 years for urgently needed Medicare modernization, including providing for an integrated prescription drug plan.

The President plans to reform Medicare based on the following principles:

  • Medicare's current guarantee of access to seniors must be preserved;

  • Every Medicare recipient must have a choice of health plans, including the option of purchasing a plan that covers prescription drugs;

  • Medicare must cover expenses for low-income seniors;

  • Reform must provide streamlined access to the latest medical technologies;

  • Medicare payroll taxes must not be increased; and

  • Reform must establish an accurate measure of the solvency of Medicare.

5–2. Medicare Outlays vs. Medicare Tax Receipts and Premiums

The President's Proposal: Immediate Helping Hand

Until Medicare reform is enacted and implemented, the President is proposing a program to give immediate help to our neediest seniors.

The President believes it is essential to get help to seniors now. He believes it is equally essential for the Administration and both parties in Congress to work together to make certain that Medicare reform produces a better program that is financially sound.

The President's program includes:

  • Immediate Helping Hand funds that will go to States to offer quick, short-term assistance for low income seniors to cover all or part of the cost of prescription drugs, and catastrophic drug coverage for all seniors;

  • Prescription drug coverage to seniors whose incomes are at or below 135 percent of the poverty line for no premium and nominal co-payments. The President's proposal also provides partial coverage for those with incomes between 135 percent and 175 percent of poverty; and

  • Funds for States to provide catastrophic coverage for all seniors with over $6,000 in out-of-pocket drug costs per year. (See Chapter 13, "Invest in Health Care" for a more detailed description.)

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