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White House Office of Management and Budget
February, 2003

Bush FY 2004 Medicare Budget


One of the President’s top priorities is to address the problems confronting the Medicare program and make Medicare secure for future generations.  In July 2001, the President announced a framework to strengthen Medicare. The President believes any Medicare modernization package should follow these principles.

Principles for Strengthening and Improving Medicare
  • All seniors should have the option of a subsidized prescription drug benefit as part of modernized Medicare.
  • Modernized Medicare should provide better coverage for preventive care and serious illnesses.
  • Today’s beneficiaries and those approaching retirement should have the option of keeping the traditional plan with no changes.
  • Medicare should make available better health insurance options, like those available to all federal employees.
  • Medicare legislation should strengthen the program’s long-term financial security.
  • The management of the government Medicare plan should be strengthened to improve care for seniors.nb
  • Medicare’s regulations and administrative procedures should be updated and streamlined, while instances of fraud and abuse should be reduced.
  • Medicare should encourage high-quality health care for all seniors.

   Medicare will spend over $250 billion in 2004 on health care for approximately 41 million senior and disabled citizens.  However, the number of elderly and disabled who have insurance coverage through Medicare is not a sufficient measure of the success of the program.  In the last 40 years, health care services and delivery have advanced in the private marketplace while the Medicare program has remained in the 1960’s.

   With its cumbersome structure, the Medicare program is unable to adapt to the changing health care marketplace, let alone be an innovative leader.  Medicare’s out of date benefit does not provide a prescription drug benefit or catastrophic coverage.  Medicare’s private plan options are shrinking under the weight of insufficient payments and stultifying regulations.  Worse yet, Medicare is not financially secure for the retirement of the Baby Boom generation.  As discussed in “The Real Fiscal Danger” chapter of this volume, Medicare has enormous liabilities that put beneficiaries at risk.  The actuaries estimate that when we look at the full view of Medicare from a budget perspective, the net liability is $13.3 trillion in net present value terms.  This reflects the difference between Medicare payments to the public and Medicare receipts from the public. 

Major Deficiencies in Medicare

    Preventive Care.  Medicare’s coverage of treatments proven to prevent illnesses and save lives is insufficient.  For those preventive services Medicare does cover, beneficiaries may face costs in the hundreds of dollars each year in copayments.

    Health Plan Options.  Medicare+Choice, the program designed to give seniors plan options, including prescription drug coverage, is shrinking due to insufficient payments that bear little relation to increasing health care costs.  Where they are available, private plan options give seniors

    Prescription Drugs.  Prescription drugs are an increasingly important part of modern medicine, helping to relieve pain, cure disease, and enhance the lives of millions of Americans.  Medicare does not cover most outpatient prescription drugs, even though these drugs often replace more expensive hospital care. According to a recent Health Affairs study, 22 percent of all seniors surveyed reported going without one or more doses of medication due to costs, with this share rising to 35 percent among those seniors without any drug coverage at all.

If they are not happy with the service they are receiving, they can simply switch to a different plan.  The decline of Medicare+Choice has left beneficiaries with few, if any, health plan options other than the government-managed fee-for-service program.

    Cost-Sharing and Catastrophic Coverage.   Medicare fails to protect beneficiaries against major out-of-pocket expenditures, hitting the sickest, poorest beneficiaries the hardest.  Thus, most beneficiaries must obtain supplemental coverage to fill in Medicare’s gaps.  Much of the existing supplemental coverage, however, is antiquated and poorly tailored to meet today’s health care needs.  For example, Medigap—which covers about one-quarter of Medicare beneficiaries—covers a far higher share of the up-front deductibles and cost-sharing than many other private plans, yet few Medigap plans offer prescription drug coverage and even that coverage is thin.  According to the U.S. General Accounting Office (GAO), Medicare expenditures for beneficiaries with Medigap insurance were about $2,000 higher than for beneficiaries with Medicare only.

    Major Elements of Medicare Modernization.  The President’s Budget builds upon the President’s framework.  The budget dedicates $400 billion over 10 years for Medicare modernization including protection against catastrophic costs, better private options for all beneficiaries, and prescription drug coverage.

    Providing Access to Prescription Drug Coverage.  The drug benefit would protect beneficiaries against high drug expenses and low-income beneficiaries would receive additional assistance.  Beneficiaries would have a choice of plans that offer benefits by using some or all of the tools widely available in private drug plans to lower drug costs and improve quality of care. This benefit would support the continuation of the prescription drug coverage that many beneficiaries already receive through employer-sponsored plans and private health insurance plans. 

    More Choice Through Health Plan Competition.  In the short-term, Medicare+Choice’s administrative pricing system must be reformed to link plan payments to the rising costs of health care services provided by the plans, particularly prescription drugs.  Medicare’s coverage will be improved to give beneficiaries the same kind of reliable health care options that all federal employees and many other Americans enjoy.  The foundation must be a market-based system in which private plans can bid to provide coverage for beneficiaries at a competitive price.  Those beneficiaries who elect a less costly option should be able to keep most of the savings—so in some cases a beneficiary may pay no premium at all. 

    Modernized Fee for Service.  Medicare’s benefit package needs to be updated to reflect better the modern-day insurance offered in the private sector.  A rationalized system of cost-sharing would end the program’s current system of penalizing patients who need acute care.  An improved system should also provide catastrophic coverage, ensuring that beneficiaries are protected against high out-of-pocket costs caused by serious illnesses. 

    A Truthful View of Medicare’s Fiscal Status.  Given the financial challenges faced by Medicare in the future, the Congress must be extremely careful that legislative changes not add to the long-term unfunded promises faced by the program, which stand at a staggering $13.3 trillion.

   Versions of Medicare legislation considered in the 107th Congress would have made progress in expanding beneficiary access to prescription drug coverage, but no bill met the President’s principles for strengthening and improving Medicare or did enough to modernize the program for the 21st Century.

    Provider Payment Issues.  In 2002, Medicare payments to physicians decreased over five percent as a result of a statutorily defined payment formula.  The formula would require additional decreases in payments for the next several years.  The budget proposes to adjust the physician payment formula for actual data in the current and previous update systems.  These adjustments would substantially improve physician payment rates. The Administration will work with the Congress to monitor payment issues for other providers.  Credible sources such as the Medicare Payment Advisory Commission (MedPAC) and the GAO have found that many providers are being paid in excess of adequate returns.  The Administration will consider how savings from provider payment adjustments could be used to help support a comprehensive Medicare modernization package.

Additional Medicare Improvements
  • The Administration will pursue legislation to ensure Medicare more accurately reimburses for covered outpatient drugs, and the cost of administering them.

  • Medicare and the Federal Employees Health Benefits Program jointly finance health insurance for about 2.1 million federal retirees and their dependents.  The Administration will work with stakeholders to better coordinate these two programs and look to the practices of the private sector to ensure high quality, cost-conscious choices for retirees.

  • There is limited information available on the quality of care provided to Medicare beneficiaries nationwide, and many providers struggle to find resources for quality improvement.  Today, groundbreaking efforts are underway in the Medicare program to provide public information on the quality of care delivered in hospitals and nursing homes.  This information will help consumers make more informed health care choices and enable providers to improve their quality of care.  These efforts are part of a larger goal of quality improvement throughout the health care sector.

    Centers for Medicare and Medicaid Services (CMS) Program Management.  Medicare Appeals Reform.  The budget includes $129 million for the processing of Medicare appeals.  The adjudicative function currently performed by Administrative Law Judges at the Social Security Administration would be transferred to CMS.  In addition, the Administration proposes several legislative changes to the Medicare appeals process that would give CMS flexibility to reform the appeals system. These changes will enable CMS to respond to beneficiary and provider appeals in an efficient and effective manner. 

This document is not necessarily endorsed by the Almanac of Policy Issues. It is being preserved  in the Policy Archive for historic reasons.

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