Bush Takes the First Step Toward Medicare Reform

The U.S. struggles under two enormous entitlement programs: Social Security and Medicare.

President Bush has long supported reforming Social Security by giving people the option of having their own personal retirement account. Now he has made it clear in his State of the Union address that he also wants to tackle the other crown jewel in the welfare state by reforming Medicare.

Medicare is a federal health insurance program that covers about 40 million seniors and disabled people. It was passed in 1965 as part of President Johnson’s quest to create more entitlement programs than FDR. And Medicare is facing the same dismal financial fate as Social Security.

In their most recent report, the Medicare trustees tell us that Medicare spending-both the Hospital Insurance (Part A) program that is funded by a 2.9% payroll tax and the Supplemental Medical Insurance (Part B) program that is funded by monthly deductions from seniors’ Social Security checks and from general revenues-is expected to grow from 2.4% of GDP in 2001 to 5.0% by 2035 and 8.6% by 2076.

While the Hospital Insurance trust fund currently is solvent, the trustees predict that by 2015 Part A will start spending more than it takes in. Then things really get bad. According to the trustees, "The HI trust fund fails by a wide margin to meet the trustees’ long-range test of close actuarial balance." To get the fund into balance over the next 75 years, "outlays would have to be reduced by 38% or income increased by 60% (or some combination of the two)."

Medicare needs to be reformed-now. The longer we wait, the more it will cost.

President Bush’s reform proposal is modeled after the Federal Employees Health Benefit Program (FEHBP). Members of Congress and federal employees have the option of a wide range of private-sector health insurance plans, including HMOs, Preferred Provider Organizations (PPOs) and traditional health insurance.

The idea is to give seniors similar options. They could stay in traditional Medicare or take their allotment of Medicare funds and purchase their own plan, spending more out of their own pocket if they want additional coverage. Think of it like school vouchers for health insurance.

Reports are the President wants those private-sector plans to include a prescription drug benefit, and that he is reluctant, and maybe unwilling, to create a stand-alone prescription drug benefit to be added on to Medicare, as the Democrats want to do.

What the President is proposing may work, but it will be rough sailing. Democrats will fight him every step of the way and if the administration isn’t careful, this plan could sink. What can the President do to increase his odds of success?

  • Ensure that seniors have real options among several private-sector plans, not just HMOs. Actually, Congress passed a program in 1997 called Medicare+Choice that was supposed to do exactly the same thing the President is proposing, and it has never worked because insurers, leery of the government’s heavy hand, simply didn’t offer many choices.
  • Ensure that the private-sector options are adequately funded. Congress cut back on reimbursements to the Medicare HMOs in 1997 and as a result several of them pulled out of the market, dropping more than 2 million seniors from their rolls and facing a barrage of criticism. It isn’t clear how many insurers are willing to repeat that fiasco.
  • Ensure that this is at least the first step down a road in which seniors will own their own policies. There is no personal property right in Social Security, nor in Medicare. That has to change. People need to have ownership and responsibility.
  • Medicare reform won’t come overnight and it won’t be cheap-$400 billion over 10 years in the Bush plan-but neither will reforming Social Security. However, if reform actually moves seniors from government-run care back to private insurance-a very big "if"-it will be a bargain.