On Reforming Medicare

Policy Backgrounders | Health

No. 151
Friday, February 04, 2000
by John Hoff

Recent History

"The Balanced Budget Act of 1997 created a commission to propose fundamental reform of Medicare"

In the spring of 1997, Medicare trustees warned that the Hospital Insurance (HI) Trust Fund - the trust fund for Medicare Part A, which pays for hospital care - would be exhausted in 2001. Congress responded with the Balanced Budget Act of 1997. This extended the predicted life of the Part A trust fund to 2008 by lowering the amounts paid hospitals, other providers and managed care plans and by shifting some expenses (particularly a portion of home health care costs) from Part A to Part B. Part B is the Supplementary Medical Insurance (SMI) portion of Medicare; it pays for physician and outpatient hospital services, diagnostic tests and certain other services. Part A is funded by a specifically dedicated payroll tax. Part B is funded through general income tax revenues (75 percent) and beneficiary premiums (25 percent). The amount available under Part B, therefore, is not limited to a finite sum.

Congress recognized that the financial health of the Part A trust fund was only one of the many issues confronting Medicare and that the Balanced Budget Act was only a short-term reprieve from the overall financial woes facing the program. Accordingly, the act also created the National Bipartisan Commission on the Future of Medicare, directing it to analyze the long-term financial condition of the program, identify its financial problems and recommend solutions. After a full year of in-depth analysis of the Medicare program by all 17 members, the commission produced a proposal supported by 10 of the 17 members.

"However, President Clinton did not support the Medicare reform proposal developed by the very commission he created."

However, ultimately President Clinton did not support the Medicare reform proposal developed by the very commission he created. Instead, the president told the American people that dedicating a portion of future government budget surpluses to the Part A trust fund could resolve Medicare's financial problems and permit the expansion of benefits. In January 1999, while the commission was deliberating, the president proposed transferring 15 percent of projected federal budget surpluses over the next 15 years to the Part A trust fund. He also proposed expanding Medicare to include a prescription drug benefit. And he proposed extending Medicare to 55-to-64-year olds - supposedly on a "budget neutral basis," meaning they would pay premiums to cover the cost of the coverage.

As the work of the commission was concluding, the Medicare trustees issued their 1999 report on the status of the Part A trust fund. Because of the Balanced Budget Act and the strong economy, the trustees pushed the estimated date of the depletion of the Part A trust fund from 2008 to 2015.

The effective message was that the budget "surplus" would solve Medicare's financial problems, enhance benefits and extend coverage without increased taxes. Medicare thus moved out of public debate, except where the debate focused on a new drug benefit. Yet the underlying problems remain. Medicare reform is essential and inevitable.

Beneficiaries, taxpayers, policy experts, Medicare administrators and providers all agree that Medicare needs to be reformed, but "Medicare reform" means entirely different things to different people.

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