2003-11-10 - Enacting Limits on Medicare Spending Endangers Program

The following article on proposed Medicare spending limits over the
next decades is basically about ending Medicare as an entitlement.

It is probably as serious as the premium-support plan that rewards
beneficiaries choosing Medicare-HMOs and penalizes sicker
beneficiaries remaining in original Medicare.

The NY Times article is followed by a Center on Budget and Policy
Priorities criticism of the plan.  I apologise for the length of this,
but it is important.

(A few notes: Medicare Part A (hospitalization) is intended to be
financed by employer payroll taxes.  Medicare Part B (outpatient) is
financed 25% by premiums and 75% by federal General Revenue. The
proposed spending limit mechanisms would automatically kick in if 45%
of TOTAL Medicare spending came from federal General Revenue. This is
how the proposals endanger the basic financing structure of Medicare
and its existance as an entitlement. As hospitalization is restricted
and outpatient and drug costs increase, it is expected that the 45%
limit will be reached in about 15 years. Once the 45% triggor is
reached, reductions in provider reimbursement, drug payments, and
premium vouchers and/or increases in premiums, deductables or co-pays
automatically kick in until the General Revenue contribution is back
below 45%.  This will inevitably put access for poorer recipients at
risk.)



New York Times, November 4, 2003

White House Backs Limits on Spending for Medicare

By ROBERT PEAR

WASHINGTON, Nov. 3 - The Bush administration joined House Republicans
on Monday in pushing a proposal that would force Congress to vote on
possible cutbacks in Medicare if the costs of the program, including
new drug benefits, grow faster than expected.

The plan would also set limits on the use of general tax revenue for
Medicare.

Senate negotiators have offered a similar proposal, labeled a
"bipartisan Senate staff option." This suggests that some cost-control
mechanism is likely to be in any Medicare bill that emerges from
Congress, despite objections from many Democrats and advocates for the
elderly.

Both proposals would fundamentally change the financing of Medicare.
They would also make it more difficult for Congress to enhance drug
benefits, raise payments to doctors or provide coverage for more
outpatient services.

The proposals were discussed on Monday by a group of House and Senate
negotiators trying to meld Medicare bills passed by the two chambers.
The negotiators, most of them Republicans, have agreed on the
structure of drug benefits to be offered to 40 million elderly and
disabled people. The benefits are significantly less comprehensive
than those in many private health plans.

Democrats have said that if Congress enacts a Medicare drug benefit
this year, they will immediately campaign to expand it, so that
Medicare would pay more of the costs.

In the House, which passed the Medicare bill by one vote in June,
Republicans have demanded a mechanism to make sure the drug benefits
do not cost more than the 10-year budget allocation of $400 billion.

President Bush's budget director, Joshua B. Bolten, and Tommy G.
Thompson, the secretary of health and human services, have been trying
to devise such a mechanism in talks with the Medicare conferees.

Representative Jeb Hensarling, Republican of Texas, said the proposals
did not go far enough. "The conferees are working hard and acting in
good faith," he said, "but most of what I have seen, read or heard
about their work on cost containment reveals little cause for
optimism."

Democrats outside the conference committee are wary. The proposed cost
controls would "undermine Medicare's protection for the elderly," said
Representative John M. Spratt Jr. of South Carolina, senior Democrat
on the budget committee.

One of the two Democrats participating in the Medicare negotiations,
Senator John B. Breaux of Louisiana, favors a cost-control mechanism.

The other Democrat, Senator Max Baucus of Montana, said: "I personally
believe that there should be some mechanism, but it should not be
discriminatory. It should not single out Medicare." If the cost of new
Medicare benefits must be offset to avoid increasing the deficit, Mr.
Baucus said, a similar requirement should apply to tax cuts.

Under the latest proposal from House Republican negotiators, Medicare
would be declared "programmatically insolvent" if its trustees found
that general tax revenue would account for more than 45 percent of
Medicare spending at any point in the next seven years. If the
trustees made such a prediction for two consecutive years, the
president would have to propose ways to reduce the dependence on
general revenue.

That could be done by cutting benefits, increasing beneficiary
premiums or raising payroll taxes.

The proposal would create expedited procedures for Congress to
consider such legislation within six months. The procedures would
override normal Senate and House rules and would limit debate in the
Senate.

The Senate proposal also calls for the president and Congress to take
action if general tax revenue accounts for more than 45 percent of
projected Medicare spending. The Senate could not consider any
legislation that increased the use of general revenue beyond that
threshold unless 60 senators wanted to do so.

In 2002, the federal government pumped more than $78 billion of
general revenue into Medicare, accounting for about 30 percent of the
program's spending. Federal officials predict that the dollar figure
will more than double, to $170 billion in 2012, even without new drug
benefits.

The Leadership Council of Aging Organizations, a coalition of groups
representing the elderly, expressed alarm at the cost-control
proposals.

"Requiring Congressional action if and when Medicare spending exceeds
an estimated target would bring fear and uncertainty to millions of
Americans at a time in their lives when they need security," the
council said in a letter to conferees. An unforeseen outbreak of a
disease like SARS could make spending estimates irrelevant, the
council said. (See below.)

But the General Accounting Office, the investigative arm of Congress,
said that Medicare's growing reliance on general revenue imposed a
mortgage on future generations.

= = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = =

Center on Budget and Policy Priorities, Revised November 7, 2003

MEDICARE "COST CONTAINMENT" PROPOSAL INCLUDES IDEOLOGICALLY LOADED
PROVISIONS By Richard Kogan and Edwin Park, and Robert Greenstein


(The authors, one can see, favor Medicare cost containment that would
probably hurt us, but thier comments are useful on how this plan would
wreck Medicare as we know it. It's hard to understand all of it, but
you can see the direction they're headed.)

 Conferees on the Medicare prescription drug bill are now considering
a proposal they term "Medicare cost containment."  Although some
policymakers and observers appear to have assumed this proposal would
trigger measures to contain Medicare drug costs if the new drug
benefit turns out to cost more than the Congressional Budget Office
has projected, that is not the case; the "cost containment" mechanism
under discussion has nothing to do with whether Medicare drug costs
(or, for that matter, total Medicare costs) exceed projections.
Instead, the proposal is designed to limit general-revenue financing
of the Medicare program as a whole.

Specifically, the "cost-containment" proposal would establish a policy
presumption that general revenues should not finance more than 45
percent of overall Medicare costs.  The proposal would require that
the second time the Medicare trustees project the general-fund share
of Medicare expenditures will exceed 45 percent in any of the next
seven years, two events would be triggered automatically:

  *  the President would be required to submit a legislative proposal,
presumably to alter Medicare sufficiently to bring the projected
percentage below 45 percent, and

  *  a new Senate Rule would automatically come into force, barring
consideration of any improvements in Medicare benefits or Medicare
payments to health care providers unless the extra costs are fully
offset, with the only allowable offsets apparently being cuts in
Medicare.

Based on current projections of Medicare costs, these events would be
triggered starting in about 2010 or 2011 (that is, seven years before
the 45 percent level is projected to be reached).  They would be
triggered every year thereafter unless increasingly radical changes
were made in Medicare.

As explained below, the concept of erecting a percentage limit on
general fund financing for Medicare is inconsistent with Medicare's
basic financing structure.  Medicare Part B, which covers physician
and outpatient services, and Part D - the new drug benefit - are
**supposed** to be financed with general revenues.  Only Medicare Part
A, which covers hospital costs, is financed with payroll taxes.  For
this and other reasons, the proposed "cost-containment" proposal is
fraught with problems.

This is not to say that a properly designed trigger to force
Congressional consideration of the Medicare program and rising
Medicare costs would be inappropriate.  Recent long-term budget
forecasts from GAO, the Brookings Institution, Goldman Sachs, and the
Center on Budget and Policy Priorities in partnership with the Concord
Coalition and the Committee for Economic Development all project
long-term budget deficits of rather massive proportions.  Projected
increases in Medicare costs are among the factors that underlie these
projections (along with a shrinking revenue base due to tax cuts and
expected increases in Social Security costs as the population ages).
A cost-containment mechanism that would be triggered when Medicare
costs exceed a certain percentage of the economy (or of the federal
budget) - and that is neutral with respect to the type of
deficit-reducing measures that could be instituted to address such
developments - could be a useful part of a larger effort to address
the nation's looming long-term fiscal difficulties.  Such an effort
also could reinstitute the Pay-As-You-Go rule that worked effectively
through most of the 1990s, and under which the costs of any
entitlement increases - including increases in Medicare - as well as
any tax cuts had to be fully offset.

The "cost containment mechanism" now under discussion in the Medicare
conference, however, is very different.  It would apply whether or not
deficits were out of control, and whether Medicare was growing faster
or slower than expected.  It would set a dubious standard - that
general revenues should not finance more than 45 percent of Medicare
costs - that favors regressive payroll tax increases and increases in
Medicare premiums over progressive revenue-raising measures instituted
through the income tax.  The proposed mechanism also would limit
future Medicare improvements that would increase costs without
applying similar discipline to future tax cuts (or to increases in
other entitlements).  It would require the Medicare trustees to
produce an analysis of Medicare's financial status each year that
would necessarily be inaccurate and misleading.  It also would
calculate the degree to which Medicare is financed by general-fund
subsidies in a manner that is not valid.  In each of the areas in
which the proposed "cost containment" mechanism is problematic, the
proposal reflects a decidedly ideological tilt.

Misguided in Concept

The proposed mechanism would treat general-fund financing beyond the
45-percent level as inappropriate and something that must be avoided.
Yet establishing a limit on the percentage of Medicare expenditures
that can be financed with general revenues (rather than, for example,
creating a trigger that is tied to the percentage that Medicare
constitutes of the economy or the federal budget) would contradict the
basic principles of Medicare's financing structure.  By law, all parts
of Medicare except hospital costs are financed by general revenues
(and premiums), not by payroll taxes.  General revenues are supposed
to constitute a substantial share of Medicare financing.

Moreover, as a result of advances in medical practice that are
shortening and deemphasizing hospital stays and relying more on
outpatient services and drug therapies instead, Medicare costs for
physician and outpatient services and prescription drugs - the parts
of Medicare that are (or would be) financed by general revenues - are
rising faster than Medicare hospitalization costs.  This continuing
shift in medical practice helps to moderate the growth in Medicare
costs and is a positive development.  It also causes the proportion of
Medicare expenditures that is financed by general revenues to rise.
General-revenue financing is projected to reach the 45-percent level
sometime in the 2015-2020 period and to rise above that level in
subsequent years.  The general-revenue percentage of Medicare is
likely to rise in all years even if Medicare spending grows more
slowly than projected.

For these reasons, erecting an artificial ceiling on general-revenue
financing at 45-percent of overall Medicare costs is a misguided way
to structure a cost-containment mechanism.  Furthermore, such a
ceiling would have far-reaching effects.  If adhered to, it would ease
the burdens of rising Medicare costs on the individual and corporate
income tax and those who pay it, since those taxes are deposited in
the general fund.  Such a ceiling would instead shift more of the
burden of paying for Medicare to working-poor and middle-income
families that pay the bulk of the payroll taxes and to Medicare
beneficiaries, who would stand to have their premiums and co-payments
raised.  The provision also could affect Medicare providers, who could
see their reimbursements reduced substantially in order to help hold
general-revenue financing to 45-percent of total Medicare costs.

The design of the trigger consequently appears to reflect an
ideological agenda.  If one wanted to create a trigger to force action
on rising Medicare costs, there are far less ideologically loaded ways
to do it.

Moreover, the problems do not end with the concept of establishing a
percentage limit on general-fund financing for Medicare.  Even if that
concept is accepted, a number of other elements of the proposal raise
very serious concerns.

  *  The proposal would treat general-fund financing beyond the
45-percent level as being synonymous with insolvency for all
components of Medicare, including Medicare Parts B and D.  It would
require the production of "official" projections each year that assume
that federal law restricts general fund contributions to 45 percent of
overall Medicare costs even though that is not the case.

This treatment of Medicare's finances has no basis in fact.  **It
makes no more sense to say that reliance on general revenue financing
makes Medicare Part B or the new drug benefit insolvent than to say
that defense, education, veterans benefits, or military retirement
face long-term insolvency because they rely on general revenue
financing**.

  *  Although these insolvency projections would be inaccurate and
misleading, they would be given an official imprimatur.  They likely
would be trumpeted continually by those who favor radical changes in
Medicare (and, ultimately, large reductions in Medicare benefits) to
scare the public and Medicare beneficiaries into believing the entire
program will collapse unless it is sharply altered.

  *  The new Senate Rule that the proposal would create - under which
legislation that increases Medicare costs would be barred - would
resurrect in a distorted way the concept underlying the Pay-As-You-Go
rule that was in effect through most of the 1990s.  But under the
version of the "cost containment" proposal that key conferees -
including Senate Budget Committee Chairman Don Nickles and reportedly
the Administration - are pushing, the resurrected Pay-As-You-Go rule
would apply to Medicare only.  Unlimited tax cuts that have no
offsets, as well as expansions of other entitlements, would continue
to be allowed.

Reinstating the Pay-As-You-Go rule budget-wide makes sense.  But
singling out Medicare while continuing to allow unlimited tax cuts
that are not offset would be inequitable.  So would erecting a
prohibition that bars the use of any offsets to finance Medicare
improvements except for cuts in Medicare itself, another feature of
the version of the cost containment proposal that Senator Nickles is
advancing.

  *  The proposal would treat the interest that the Medicare Part A
trust fund earns on the Treasury securities it holds as though the
interest income were a subsidy from the general fund; the proposal
would count the interest income as part of the "general fund
 financing" that would be capped at 45 percent, rather than as part of
the trust fund's dedicated funding.  As explained below, this
treatment is inconsistent with Medicare's financing structure and is
very difficult to justify.  This dubious aspect of the proposal would
accelerate the date when the 45-percent level is reached by between
five and seven years and ultimately would require more radical changes
(i.e., deeper cuts) in Medicare to stay within the 45-percent limit.

These issues are examined in more detail below.


Proposal Likely to Lead to Radical Changes in Medicare Over Time

Holding general revenue financing to no more than 45 percent of
overall Medicare costs (as general-revenue financing would be defined
under the proposal) would entail instituting changes in Medicare that
would have to become increasingly severe over time.  Maintaining the
45-percent level over time would require such measures as:

  *  Establishing the 45-percent threshold as a legal cap, with
across-the-board reductions automatically instituted in provider
reimbursement rates and payments for prescription drugs to the degree
such reductions are needed to remain under the cap, or with increases
automatically instituted in premiums, deductibles, or co-payments.
Such reductions in provider payments would eventually risk access to
Medicare if providers stopped accepting Medicare patients.  Such
increases in cost-sharing, which eventually could become very large in
order to adhere to the 45-percent limit, could risk access for those
who could not afford the payments.

  *  Converting some or all of Medicare into a voucher system under
which Medicare would pay a fixed dollar amount per person to subsidize
the purchase of private-sector health insurance that covered those
benefits.  To avoid exceeding the 45-percent level, the value of the
vouchers would have to be capped at a growth rate slower than the
growth rate of medical care costs, causing beneficiaries to shoulder
an increasing share of these costs over time;

  *  Gradually increasing the age at which persons would become
eligible for benefits under some or all of Medicare, which would
result in substantial numbers of people in their mid-to-late 60s
becoming uninsured; or

  *  Gradually and indefinitely raising payroll taxes.

One factor adding to the severity of the cuts that would be needed
ultimately to maintain the 45-percent level is that, at the insistence
of the pharmaceutical industry, both the House and Senate bills bar
the federal government from using Medicare's vast purchasing power to
negotiate lower prices for drugs than the private health care plans
that would administer the drug benefit could secure themselves.  There
is little question that the federal government could negotiate better
prices.  Because the legislation would prohibit more effective cost
containment in the new drug benefit, the proposed "cost containment"
trigger mechanism would likely lead to deeper reductions in Medicare
benefits over time.



Problems in the Design of the Mechanism

The remainder of this analysis examines four key issues in the design
of the proposal - apart from the general-revenue financing limit -
that warrant attention and raise major concerns.

1.  Reaching the Arbitrary 45 Percent Target Does Not Make Medicare
Insolvent

Under the proposal, when the Medicare trustees prepare the annual
trigger report, they would include an "official" presentation of
Medicare finances that lumps all parts of Medicare together with
Medicare Part A and assumes that general-fund financing can not exceed
the arbitrary 45-percent limit.

Such a presentation would have no basis in fact.  Under current law -
and even under this proposal - the general fund is not prohibited from
paying Part B and Part D benefits when general-fund financing exceeds
45 percent.  Yet the Trustees would be required to pretend such a
prohibition existed for purposes of determining when all of Medicare
would become "insolvent" and for calculating the program's "unfunded
liability."

Such a presentation would make Medicare's "unfunded liability" look
perhaps three or four times as large as it actually is.  The actuaries
might speak of tens of trillions of dollars of unfunded liabilities in
Medicare.  This type of bogus accounting would likely lead to years of
scare messages that all of Medicare will collapse unless radical
changes are made in it.

There is no need for such artificial accounting, which is unrelated to
the proposed trigger.  Even if one agreed to a trigger that would be
pulled when general-fund financing is projected to reach 45 percent of
total program costs, a projection that the 45-percent threshold will
be hit would not mean that Medicare would be insolvent and unable to
pay full benefits; it would only mean that the arbitrary benchmark
would be reached. The proposed requirement that the Medicare trustees
issue insolvency and unfunded liability projections based on the
arbitrary 45-percent limit seems to be ideologically motivated.

If the proposed trigger is included in the conference agreement, the
requirement that the Trustees issue a calculation of Medicare's
financial status each year based on these inappropriate assumptions
should be dropped.

2.  The Pay-As-You-Go Rule Should Not be Imposed Solely on Medicare
Benefits

In addition to triggering a presidential recommendation for
legislation to alter Medicare, a Trustees' projection that
general-fund financing will reach 45 percent of total program costs
also would trigger the automatic reinstitution of a version of the
Pay-As-You-Go rule.  At this stage of the negotiations, two competing
proposals regarding how this rule would work are under consideration.
Under the more sensible approach (which is advocated by Senator Max
Baucus), the Pay-As-You-Go rule would be triggered budget-wide, so
that no new tax cuts, legislation increasing Medicare costs, or
legislation increasing the cost of any other entitlement could be
enacted unless it were fully offset.  The Senate could waive this Rule
only by a three-fifths vote.

But under the alternative approach being pushed by the Senate Budget
Committee chairman Don Nickles and apparently the Administration, the
Pay-As-You-Go rule would be reinstated for Medicare benefits only.
Unlimited additional tax cuts would continue to be allowed without
being subject to the Pay-As-You-Go rule.  As a consequence, the nation
's long-term fiscal problems - which stem from the imbalance between
revenues and expenditures - could continue to worsen.

If a Pay-As-You-Go rule is to be reinstated, it should be done
across-the-board.  It is inequitable to reinstate Pay-As-You-Go for
Medicare benefits only, while allowing additional, unlimited tax cuts
for the well-off or additional increases in other entitlement
programs.

The rising cost of Medicare should not be thought of as a problem in
isolation from the rest of the budget.  Increases in Medicare
expenditures would not present a budgetary problem if other costs were
naturally declining or revenue growth were especially robust.  Growing
Medicare costs are a problem because the overall budget is projected
to run unsustainably large deficits for the foreseeable future,
especially after the baby boomers retire - a problem that will be
caused by the combination of large and growing tax cuts, rapid growth
in health care costs, and the retirement of the baby boom generation.
If a Pay-As-You-Go provision is to be reinstituted, it consequently
should apply to all entitlement and tax legislation as it did in the
1990s, not solely to Medicare.

Moreover, the Pay-As-You-Go rule that worked successfully through most
of the last decade allowed increases in entitlement programs to be
enacted if they were fully paid for by offsetting reductions in any
other entitlement program or by revenue increases.  Under the new
proposal, by contrast, legislation improving Medicare coverage or
benefits would not be allowed even if it were fully offset by other
entitlement reductions or revenue increases.  Medicare improvements
would be barred, even if made in response to medical research or the
development of new medical procedures or treatments that improve
health or save lives, unless financed by cuts elsewhere in Medicare.



3.  Trust Fund Interest Earnings Should Not Be Considered a "General
Revenue Subsidy"

The proposal would treat the interest earnings on the balances in the
Part A trust fund as a general fund subsidy that is part of the
general-fund financing that would be subject to the 45-percent
threshold.  Yet these earnings are not a subsidy from the general
fund.

The Part A trust fund balances currently total about $250 billion, and
CBO projects them to grow to almost $550 billion by 2013.  These
balances are invested in Treasury securities and earn interest.  The
interest earnings are essential; interest is the way in which $1 in
payroll taxes that is collected today but intended for future benefits
can hold its value until it is eventually needed.

These interest earnings represent "dedicated revenues," rather than a
subsidy from the general fund.  It is easy to see why this is so.
Suppose the Medicare Part A trust fund invested its balances in
private financial markets rather than in Treasury securities.  Those
balances would still accrue earnings.  Yet the general fund would not
be involved.  The balances are invested in Treasury securities rather
than in private financial markets because that is what federal law
requires.  That does not make the interest earnings a subsidy given to
the trust fund from the rest of the government.

Moreover, the general fund would have to pay the same amount of
interest even if no trust fund balances were invested in Treasury
securities.  If the general fund of the Treasury did not borrow from
the Part A trust fund to help finance general fund deficits and debt,
it would have to borrow the same amount from the public instead and
would have to pay interest on it.  Borrowing from the Part A trust
fund (and paying interest on the borrowed funds) does not increase
total general fund spending.

Despite this, under the proposed trigger, the interest that the Part A
trust fund earns on its balances would be counted as part of the
general fund financing that would be subject to the 45-percent
threshold.  Medicare surely faces serious fiscal challenges in future
decades.  But this dubious accounting of the trust fund's interest
income would make Medicare's financing hole look more dire than it
truly is.  Furthermore, this accounting maneuver would cause the
45-percent threshold to be hit between five and seven years earlier
than it otherwise would be reached, and ultimately would necessitate
more drastic changes in Medicare to hold general-fund financing to 45
percent of total Medicare costs.

If the trigger proposal is pursued, this indefensible treatment of the
trust fund's interest earnings as though they were a troublesome and
unaffordable subsidy from the general fund should be dropped.

4.  Rules for Considering Legislative Proposals Developed in Response
to the 45-Percent Trigger

A final key issue involves the procedures governing Senate floor
consideration of the Medicare legislation that the President would
submit, or the Finance Committee would report, in response to a
projection that the 45-percent level would be reached.  After the
Medicare trustees issued a projection for the second time that the
45-percent level would be reached within the next seven years, the
President would have to include a recommendation in his budget and
submit legislative language within 15 days after that.  The committees
of jurisdiction, such as the Senate Finance Committee, would have to
report the President's legislation or some variation of it by June 30.
There is disagreement among conferees regarding the rules that then
should govern the consideration of this legislation on the Senate
floor.

As noted above, there appears to be no way to prevent general-fund
financing from exceeding 45 percent of total Medicare costs on a
long-term basis other than through radical changes in Medicare that
would be highly controversial and represent unprecedented changes in
the program.  It is important that such proposals be considered
carefully and fully debated.  Such changes would be large and affect
millions of Americans.  They would best be made on a bipartisan basis.

During negotiations on the cost containment mechanism, some Republican
negotiators have proposed that such legislation be exempt from full
Senate debate, with the time for debate circumscribed and the
potential for a filibuster eliminated.  This would be a mistake.  One
positive aspect of the threat of a filibuster is that it provides
strong incentives for policymakers to reach bipartisan compromise on
controversial legislation.  By contrast, legislation that is exempt
from filibuster can be pushed through the Senate on a narrow
party-line basis.  That would not be a healthy way to make sweeping
changes in a program as consequential as Medicare and would likely
lead to bitterness, recriminations, and years of effort to reverse the
changes.  A filibuster-proof procedure might be appropriate in the
face of an immediate crisis.  But the 45-percent threshold related to
general-revenue financing that the "cost containment" proposal would
establish is arbitrary, and no immediate insolvency crisis actually
would threaten.

A provision to limit debate on legislation produced in response to a
report that the 45-percent threshold would be reached does not appear
in the current draft of the cost containment proposal being discussed
by Senate conferees.  Senator Nickles reportedly called for such a
provision last week, however, and according to some reports, House
conferees and the Administration are advocating such a provision.