Skip to main content

Advanced Search

Advanced Search

Current Filters

Filter your query

Publication Types



Newsletter Article


McClellan Urges Congress to Enact Proposed Medicare Cuts to Ease Solvency Woes

MAY 2, 2006 -- Congress could improve the dire financial outlook for Medicare portrayed by the program's trustees Monday by enacting cuts proposed earlier this year by the Bush administration, the head of the Medicare program said Tuesday. Those cuts along with higher Part B premiums for affluent beneficiaries and payment incentives to improve quality and efficiency would lessen the need for harsher measures later, Centers for Medicare and Medicaid Services Administrator Mark B. McClellan told a forum sponsored by the American Enterprise Institute (AEI).

Neither the House nor the Senate so far has shown any interest in adopting Medicare cuts proposed by the administration totaling $36 billion over five years. The fiscal 2007 budget resolution passed by the Senate does not call for Medicare cuts, nor does the budget resolution pending in the House.

When asked if the trustees' warning that the hospital trust fund will become insolvent in 2018 would give the proposed cuts new life on Capitol Hill, McClellan said the administration is making a new effort to build interest in the proposal.

But when asked if the administration has received any signals from key lawmakers that they now might be open to the cuts, McClellan said, "It's only been one day."

Meanwhile, other speakers at the AEI event on the Medicare trustees' report warned that the dire financial predictions for the future of the program in fact might be too optimistic.

And while many analysts have emphasized that older Americans are benefiting at the expense of younger Americans from current Medicare obligations, speakers noted that beneficiaries themselves will face big financial burdens under Medicare in coming years.

Fast-rising spending on Part B of the program, which covers various forms of care outside the hospital, might mean many years of significant annual increases in Part B premium deductions from Social Security checks, indicated Richard Foster, Medicare's chief actuary.

Foster noted that because of problems with the Medicare physician payment formula, doctors are in line for payment cuts of five percent per year through 2015 and perhaps for a few years after that as well. Foster said the cost of erasing those cuts, along with other factors, in turn contributes to double-digit increases in the premiums beneficiaries must pay for Part B. The trustees' report projected an 11 percent increase in Part B premiums in 2007.

By 2040, 45 percent of Social Security benefit checks will go to pay premiums for Part B and for Part D, the Medicare drug benefit, said another speaker, Texas A&M University economist Thomas Saving, who serves as one of the Medicare trustees.

Another trustee, Syracuse University professor John L. Palmer, said that a typical elderly couple now has a yearly income of $35,000 and must spend 20 percent of that on out-of-pocket health care costs. In 25 years that percentage easily could climb over 50 percent, he said. "So it's a big problem for beneficiaries too," Palmer said of Medicare's rising costs. And the figure illustrates why shifting costs to Medicare beneficiaries as a solution to the program's fiscal crunch will be difficult, he said.

But the analysts also had plenty of warnings for the impact of Medicare's rising costs on taxpayers and the federal budget. In 25 years, half of all federal income tax revenues will have to be applied to Medicare and Medicaid, Saving said.

Foster noted that by 2030, there will be 2.4 workers paying payroll taxes into the Medicare hospital trust fund for every Medicare beneficiary—down from the current figure of four workers for each beneficiary . After 2030, the ratio goes down to two workers per beneficiary.

Meanwhile, 2011, the year baby boomers begin entering the program and swelling its costs, "is getting closer and closer and frankly we're not doing much about it," Foster said.

Foster said that one piece of good news in the report released Monday is that the net cost it projects to the federal government of the Medicare drug benefit over the next decade is 20 percent lower than trustees predicted a year ago. Instead of $1.1 trillion, trustees now project a cost of about $880 billion. About four percentage points of the 20 percentage point drop stem from higher-than-expected price breaks negotiated by Medicare drug plans, he said. Smaller-than-expected enrollment accounts for a comparable portion of the 20 percentage point drop.

Last year, trustees projected an enrollment of 37 million of Medicare's 43 million beneficiaries in the drug coverage and this year they are projecting enrollment of 31 million. McClellan noted, however, that of the remaining 12 million beneficiaries, about half have existing coverage because they are still working or have drug coverage through the Department of Veterans Affairs, among other sources of coverage. Slower-than-expected increases in drug spending, in part owing to greater-than-expected generic drug use, also were a major reason for the 20 percent drop in projected spending.

Palmer noted that the overall Medicare spending projections in the report assume that health cost growth will exceed the increase in the Gross Domestic Product by 1.4 percent per year 25 years from now and by zero percent in 75 years, down from 2.3 percent now. But trustees do not specify how this drop in "excess cost growth" will happen, Palmer noted.

He added that the tools and knowledge do not exist right now to put into effect this assumed reduction. So there is a great deal of optimism in the projections, Palmer said. Former Congressional Budget Office Director Douglas Holtz-Eakin said analysts do not now understand what part of "excess cost growth" may be beneficial forms of increased health care spending and should try to answer that question to better understand what to do about Medicare. By comparison, Social Security is relatively easy to fix, he said. "We should probably fix the easy one" while trying to understand Medicare better, he said.

But Holtz-Eakin said presidential candidates aren't going to be able to keep ducking the Medicare cost problem, what he referred to as "kicking the can down the road." Even a president "with a very strong leg can't get us to 2016" without dealing with Medicare, he said.

Publication Details