Unsustainable Medicare

Saturday, May 5, 2007

THE RELEASE last week of the annual report of the Medicare trustees underscores an unavoidable fact that too many politicians have nonetheless been avoiding for too long: Of all the entitlement programs, Medicare is on the most dangerously unsustainable financial course, squeezed simultaneously by rising health-care costs and an aging population.

When Congress passed the Medicare prescription drug bill four years ago, it included a mechanism designed to call attention to runaway spending in the health care program for seniors and the disabled. Medicare is funded by a combination of payroll taxes (hospital costs) and general revenue (doctor's visits and prescription drug costs). Bureaucratic alarms sound if the Medicare trustees project that the share of funds to be drawn from the general Treasury is set to exceed 45 percent in the near future. That alarm sounded for the first time last year and was repeated again last week. The second warning requires that the president -- in the budget he will submit early next year -- propose changes to reduce Medicare's drain on the Treasury. Under the law, Congress must quickly consider those remedies, though it doesn't have to act.

This is an especially blunt instrument to deal with an especially large problem, and the Bush administration's proposed solution, to require automatic cuts, is too crude. The challenge facing Medicare isn't how it's funded, it's how much it costs. Indeed, the program was designed to be financed in a hybrid fashion, and the very prescription drug bill that included the arbitrary 45 percent trigger tilted the mix more toward general revenue.

President Bush, to his credit, has proposed some ways of taming the Medicare monster. In this year's budget, he calls for $66 billion in Medicare cuts over the next five years. Of this, $10 billion would come from requiring higher-income beneficiaries -- $80,000 in annual income, $160,000 for a couple -- to pay higher premiums for prescription drug coverage, as they do now for their basic coverage, and by ending the indexing of this income test. The income ceiling may require adjustment, but for now this is a sensible proposal; in any event, higher premiums for the better-off should have been part of the plan from the start. Also worth discussing are the administration's proposals to cut payments to hospitals, nursing homes and other providers. But Democrats have greeted the proposals with more hostility than interest.

The administration can be faulted for insisting on retaining an expensive, lopsided payment scheme by which private insurance plans "competing" with traditional Medicare receive a government subsidy for doing so. These private plans have been growing rapidly, and they now cover one in five beneficiaries. That would be fine if such "Medicare Advantage" plans were competing on a level playing field, but they're not: The government is paying them on average 12 percent more than traditional fee-for-service providers. The Medicare policy board that advises Congress has endorsed leveling this playing field. The higher payments, according to the Congressional Budget Office, amount to $65 billion over five years, and $160 billion over 10. No wonder the companies that market these plans are lobbying so furiously to keep their undue Medicare advantage.


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