What Bush Didn’t Say about Medicare Reform

Published April 1, 2003

President Bush appears to be struggling to settle on a Medicare reform plan that can dodge political bullets yet still deliver results that make a difference.

His State of the Union address and follow-up speech in Michigan reiterated his support for a new (and more expensive) prescription drug benefit for seniors, but it also proposed more basic restructuring of the 38-year-old health care program.

Four Objectives

If the President hopes to get Medicare out of reform school, he will need to move beyond a few sentences of sketchy platitudes and bland principles. He should concentrate on four key objectives:

  • Get the overall program structure and its incentives realigned correctly and worry about budget savings later.
  • Structurally integrate the various portions of the antiquated Medicare program (Part A for hospital care, Part B for outpatient care, Part C for private plan options) into a single package.
  • Spend political capital to set Medicare payments according to indicators of market-based prices, instead of administered price controls. Some early, if limited, version of competitive bidding should determine prices and reimbursements and establish level-playing-field competition between the traditional Medicare program and private plan alternatives.
  • Provide strong economic incentives for Medicare beneficiaries to choose lower-cost private plan options.

For the past two years, the Bush administration was content to make statements of broad Medicare reform principles that promised new benefits for prescription drugs and preventive care but mostly downplayed structural changes needed to keep the program affordable and sustainable.

Collision with Reality Imminent

This year, the President again promised seniors that, if they are happy with current coverage, they could keep their Medicare “just the way it is.”

Yet the traditional Medicare program only pretends to offer beneficiaries unlimited choice of fee-for-service medicine. Mounting fiscal pressures force the program to hollow out that promise–through price controls, outdated benefits, and complex reimbursement rules.

Traditional calculations of Medicare’s trust fund solvency don’t capture the full dimensions of the imminent collision ahead between the demands of an entitlement program set on autopilot and the financial resources available to sustain those demands.

The most recent annual Financial Report of the U.S. Government estimated the net present value of negative cash flow (the funds needed to cover projected shortfalls) over the next 75 years for Medicare is $12.8 trillion. The fiscal year 2004 budget proposed by Bush projects about $13 trillion. Both figures assume no new drug benefits.

Now Is the Time

The latest opportunity to start serious restructuring of the overall Medicare program should not be squandered. With Republicans back in at least nominal control of both houses of Congress, the Bush re-election team and other GOP candidates in 2004 will find it more difficult to tell seniors again that the “Democratic dog ate my Medicare drug homework.”

Serious Medicare reform will be difficult. A host of traditional political obstacles urge us to “stop thinking about tomorrow.” The Bush administration also must overcome the legacy of past flawed reform efforts, which triggered the meltdown of Medicare+Choice private plan options, and the tendency for promises of new and improved benefits to drown out the need for structural changes that set limits and require tradeoffs.

In late January, Bush appeared ready to propose a three-tiered menu of Medicare options that would limit expanded drug coverage to those seniors who move to new types of private plans and are willing to pay more for better benefits. But simply trying to hook seniors on private insurance plans by offering them drugs is not going to fly–either politically or commercially.

Most current beneficiaries will resist offers to leave an unreformed traditional Medicare program, even if the availability of private plan alternatives improves. Five years’ experience with a shrinking Medicare+Choice program should convince policymakers the program needs both a modernized benefits carrot and a market pricing stick. Fear of change and inertia by beneficiaries, as well as obstacles to private plan penetration in rural markets, will slow the pace of change in any event.

Bringing the Market into Play

If Medicare payments to beneficiaries were linked to market prices by using the enrollment-weighted competitive bids of all plans (public and private) ready to serve all comers in a given regional market, the traditional Medicare program then could and should provide drug benefits–so long as its administrators could adjust the program’s other benefits and cost sharing provisions to meet market-based fiscal constraints.

Beneficiaries, instead of taxpayers, would pay extra for supplemental benefits. And plans should be free to offer a wide range of supplemental benefits without having to maneuver through new bureaucratic speed bumps and guard rails.

Further fine-tuning of the Bush administration proposal should include providing full cash rebates (not just 75 percent) of the savings to seniors who choose plans that cost less than the price set through the regional competitive bidding process. Initial versions of basic drug benefits offered in all core plans should focus on stop-loss protection against high drug costs, without early dollar coverage as well.

Some secondary subsidies for lower-income seniors and beneficiaries with exceptionally high medical expenses would be far simpler to administer than continuing the perpetually elusive search for broader risk-adjusted reimbursement methods that never actually work in practice.

The essential long-term objective is to inject real-world price information into the entire Medicare program.

Standard politics resorts to top-down price controls and hidden benefits reductions. It won’t be able to reform traditional Medicare in the decades ahead. But market pressures and beneficiary choices will, if we don’t try to suppress them.

Tom Miller is director of health care policy at the Cato Institute and a contributing editor for Health Care News. His email address is [email protected].