Moments ago, President Bush fulfilled his legal obligation under the Medicare Modernization Act of 2003 (MMA) by submitting a Medicare cost containment proposal to Capitol Hill. MMA obligated the president to submit a proposal after the latest Medicare trustee report found that Medicare spending will exceed 45% of total outlays. This was a golden opportunity to take substantive steps to deal with the nation’s long-term entitlement problem, yet the proposal is a bit of a disappointment.

The White House plan consists of a codification of the administration’s “values based purchasing” initiative for medical goods and services and for greater employment of health information technology. It also extends the existing rules for means testing of premiums in Medicare Part B to Medicare Part D, the Medicare drug program. The administration also reiterated its medical liability reform policy. Heritage analyst Bob Moffit said, “Given the magnitude of the entitlement challenge, the administration’s response is a bit of a disappointment. It does not nearly go far enough.” The administration should have:

  • Proposed a fundamental change to the budget process to account for the long-term costs of Medicare and other entitlement programs as part of annual budgeting. That way these costs would be considered in the same way as the costs of other government programs, including national defense.
  • Proposed that Medicare and the other entitlement programs be put on a level playing field with discretionary programs, and subject to review every five years, with triggers to make automatic adjustments if they exceed the budgeted levels.

This is not to say that the president’s proposal contains bad policy. The proposal deserves full consideration, especially toward steps that would reduce the out-of-control costs for entitlements. The most important feature is the application of means-testing rules in Part B, the part of the program that pays doctors, to the Medicare Part D drug program. This would be a substantive step toward reducing the unsustainable costs of this program by reducing taxpayer subsidies to wealthy beneficiaries. Income relating benefits should be applied broadly across Medicare as a more rational cost-sharing structure for traditional Medicare, including the hospital program, that would vary co-payments on the basis of income.

As to the other reported elements of the president’s proposal, there is little argument against ensuring value for money in the purchase of medical goods and services, depending how that good intention is implemented, with all transactions facilitated by a greater reliance on information technology. Likewise, medical malpractice reform is certainly desirable, though, under the Constitution, such reform is a state, not a federal function.

A more robust Medicare agenda would make changes in the way we subsidize retirees, starting with the Baby Boomers, in the entire Medicare program, with more help going to poor seniors and less to wealthy seniors. More importantly, the president and Congress should start to transform the entire Medicare program into a defined contribution system, similar to the popular and successful Federal Employees Health Benefits Program, with a fixed, predictable and reliable government contribution to retirees’ health plans instead of today’s automatic payment to an open-ended entitlement.

The Medicare trigger, enacted in 2003, was supposed to curb the pressure on taxpayers, specifically Medicare’s increased reliance on general revenues and the $34 trillion unfunded liability. Without any change to Medicare, current and future taxpayers must somehow find $34 trillion to fund the benefits that we have promised senior citizens, particularly the Baby Boomers. Adding in Social Security’s obligations brings that total to $41 trillion.

The Medicare trigger is pulled when the Medicare trustees issue a funding warning to the president and Congress that the dedicated revenues — the Medicare taxes and premiums — are insufficiently funding the Medicare program, and that the drawn down of money from the federal treasury to keep the program operating is excessive, set in law at an amount that exceeds 45% of total outlays. The Medicare trustees have issued their warning last year, and the president and Congress must consider legislation this year, though, of course, they are not required to actually enact anything.

Watch Moffit talk about the importance of the Medicare trigger below: