Medicare: Higher Expected Spending and Call for New Benefit
Underscore Need for Meaningful Reform (22-MAR-01, GAO-01-539T).
In determining how to reform the Medicare program, much is at
stake--not only the future of Medicare itself but also assuring
the nation's future fiscal flexibility to pursue other important
national goals and programs. Engaging in a comprehensive effort
to reform the Medicare program and put it on a sustainable path
for the future would help fulfill this generation's stewardship
responsibility to succeeding generations. It would also help to
preserve some capacity for future generations to make their own
choices for what role they want the federal government to play.
Updating Medicare's benefit package may be a necessary part of
any realistic reform program. Such changes, however, need to be
considered in the context of Medicare's long-term fiscal outlook
and the need to make changes in ways that will promote the
program's longer-term sustainability. Specifically, it must be
acknowledged that adding prescription drug coverage to the
Medicare program would have a substantial impact on program
costs. At the same time, many beleive it is needed to ensure the
financial well-being and health of many of its beneficiaries. The
challenge will be in designing and implementing drug coverage
that will minimize the financial implications for Medicare while
maximizing the positive effect of such coverage on Medicare
beneficiaries. Most importantly, any substantial benefit reform
should be coupled with other meaningful program reforms that will
help to ensure the long-term sustainability of the program.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-01-539T
ACCNO: 164634
TITLE: Medicare: Higher Expected Spending and Call for New
Benefit Underscore Need for Meaningful Reform
DATE: 03/22/2001
SUBJECT: Cost analysis
Future budget projections
Health care costs
Health care programs
Health insurance
Health insurance cost control
Managed health care
Risk management
Medicaid Program
Medicare Choice Program
Medicare Hospital Insurance Trust Fund
Medicare Program
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GAO-01-539T
For Release on Delivery Expected at 2: 30 p. m. Thursday, March 22, 2001
GAO- 01- 539T
MEDICARE Higher Expected Spending and Call for New Benefit Underscore Need
for Meaningful Reform
Statement of David M. Walker Comptroller General of the United States
Testimony
Before the Committee on Finance, U. S. Senate
United States General Accounting Office
GAO
Page 1 GAO- 01- 539T
Chairman Grassley, Ranking Member Baucus, and Members of the Committee:
I am pleased to be here today as you consider the need to strengthen and
modernize the Medicare program. In previous testimony before this Committee,
I have consistently stressed that without meaningful reform, demographic and
cost trends will drive Medicare spending to unsustainable levels but that
today's projected surpluses provide an opportunity to act before these
trends make needed changes more painful and disruptive.
Although Medicare's short- term outlook has improved since I last testified,
this should not distract us from focusing on the more important long- term
perspective. The Medicare Trustees' latest projections incorporate more
realistic assumptions about long- term health care spending and, as a
result, the long- term outlook for Medicare's financial future has
deteriorated substantially since the last Trustees' Annual Report. The
Medicare Trustees and the Congressional Budget Office (CBO) now agree that
spending will grow faster than was previously predicted. At the same time,
the fiscal discipline imposed through the Balanced Budget Act of 1997 (BBA)
continues to be challenged, while interest in modernizing the Medicare
benefits package to include prescription drug coverage has increased. As a
result, the need for meaningful Medicare reform is even clearer today.
We must capitalize on momentum gathering in this Committee and elsewhere to
take action to adopt effective cost containment reforms alongside potential
benefit expansions. It is important that any benefit expansion efforts be
coupled with adequate program reforms so as not to worsen Medicare's long-
range financial condition. Ultimately, any comprehensive Medicare reform
must confront several fundamental challenges. In summary:
Our long- term budget simulations show that demographics and health care
spending will drive projected long- term deficits and debt. Our January 2001
long- term simulations show that even if all unified surpluses are saved-
which no one expects will occur- large and persistent deficits will return
in the long term absent policy change.
? Medicare spending is likely to grow faster than previously estimated. The
Medicare Trustees are now projecting that, in the long- term, Medicare costs
will eventually grow at 1 percentage point above per- capita gross domestic
product (GDP) each year- about 1 percentage point faster than the previous
assumption. Accordingly, as estimated by the Office of the
Page 2 GAO- 01- 539T
Actuary at the Health Care Financing Administration, (HCFA), the estimated
net present value of future additional resources needed to fund Part A
Hospital Insurance (HI) benefits over the next 75 years increased from $2.6
trillion last year to $4.6 trillion- an increase of more than 75 percent.
? Measurement of Medicare's sustainability can no longer be merely the
traditional measure of HI Trust Fund solvency that has been used to assess
the program's financial status. Both Part A expenditures financed through
its Trust Fund and Part B Supplementary Medical Insurance (SMI) expenditures
financed through general revenues and beneficiary premiums must be taken
into consideration.
? Since the cost of a drug benefit will boost these spending projections
even further, adding drug coverage under Medicare's already dark financial
cloud will require difficult policy choices that will likely have a
significant effect on beneficiaries, the program, and the marketplace.
? Properly structured reforms to promote competition among health plans can
help make beneficiaries more cost conscious. However, improvements to
traditional fee- for- service (FFS) Medicare are also critical, as it will
likely remain dominant for some time to come.
? Fiscal discipline is difficult, but the continued importance of
traditional Medicare underscores the need to base adjustments to provider
payments on hard evidence rather than anecdotal information and to carefully
target relief where it is both needed and deserved.
? Reform of Medicare's management, which is on the table as discussions of
Medicare program reforms proceed, similarly will require carefully targeted
efforts to ensure that adequate resources are appropriately coupled with
increased accountability.
? Ultimately, we will need to look at broader health care reforms to balance
health care spending with other societal priorities. In doing this, it is
important to look at the entire range of federal policy tools- tax policy,
spending, and regulation. It is also important to note the fundamental
differences between health care wants, which are virtually unlimited, from
needs, which should be defined and addressed, and overall affordability, of
which there is a limit.
The new consensus that Medicare is likely to cost more than previously
estimated serves to reinforce the need to take prompt action. Realistically,
reforms to address the Medicare program's huge long- range financial
imbalance will need to proceed incrementally. In addition, efforts to
Page 3 GAO- 01- 539T
update the program's benefits package will need careful and cautious
deliberation. This is especially important in connection with a potential
prescription drug benefit, as this coverage represents one of the
fastestgrowing expenditures for public and private health plans. Therefore,
the time to begin these difficult, but necessary, incremental steps is now.
As I have previously testified before this Committee, Medicare as currently
structured is fiscally unsustainable. While many people have focused on the
improvement in the HI Trust Fund's shorter- range solvency status, the real
news is that Medicare's long- term outlook has worsened significantly during
the past year. A new consensus has emerged that previous program spending
projections have been based on overly optimistic assumptions and that actual
spending will grow faster than has been assumed.
First, let me talk about how we measure Medicare's fiscal health. In the
past, Medicare's financial status has generally been gauged by the projected
solvency of the HI Trust Fund, which covers primarily inpatient hospital
care and is financed by payroll taxes. Looked at this way- and based on the
latest Trustees' report- Medicare is viewed as solvent through 2029. (See
fig. 1). Medicare's Long- Term
Outlook Has Worsened
Traditional HI Trust Fund Solvency Measure Is a Poor Indicator of Medicare's
Fiscal Health
Page 4 GAO- 01- 539T
Figure 1: Medicare's Hospital Insurance Trust Fund Faces Cash Deficits as
Baby Boomers Retire
Note: Projections are based on the intermediate assumptions of the 2001 HI
Trustees' Report.
Source: GAO analysis of data from the Office of the Actuary, Health Care
Financing Administration.
However, HI trust fund solvency does not measure the growing cost of the
Part B Supplementary Medical Insurance (SMI) component of Medicare, which
covers outpatient services and is financed through general revenues and
beneficiary premiums. Part B accounts for somewhat more than 40 percent of
Medicare spending and is expected to account for a growing share of total
program dollars.
In addition, HI trust fund solvency does not mean the program is financially
healthy. Although the trust fund is expected to remain solvent until 2029,
HI outlays are predicted to exceed HI revenues beginning in 2016. As the
baby boom generation retires and the Medicare- eligible population swells,
the imbalance between outlays and revenues will increase dramatically. Thus,
in 15 years the HI trust fund will begin to experience a growing annual cash
deficit. At that point, the HI program must redeem Treasury securities
acquired during years of cash surplus. Treasury, in turn, must obtain cash
for those redeemed securities either through increased taxes, spending cuts,
increased borrowing, retiring less debt, or some combination thereof.
Clearly, it is total program spending- both Part A and Part B- relative to
the entire federal budget and national economy that matters. This total
-600 -400
-200 0
200 400
600 FY1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
Billions of 2000 dollars Cash surplus/ deficit HI trust fund balance
Cash deficits reemerge in
2016 Trust fund depleted
in 2029
Page 5 GAO- 01- 539T
spending approach is a much more realistic way of looking at the combined
Medicare program's sustainability. In contrast, the historical measure of HI
trust fund solvency cannot tell us whether the program is sustainable over
the long haul. Worse, it can serve to distort the timing, scope, and
magnitude of our Medicare challenge.
Besides looking at total program spending, any assessment of Medicare's
financial condition must acknowledge that absent meaningful program reforms,
program cost growth will likely be greater than has been previously
projected. A technical panel advising the Medicare Trustees recently
recommended assuming that future per- beneficiary costs for both HI and SMI
eventually will grow at a rate 1 percentage point above GDP growth- about 1
percentage point higher than had previously been assumed. 1 That
recommendation was consistent with a similar change CBO made to its Medicare
and Medicaid long- term cost growth assumptions last year. 2 In their new
estimates published on March 19, 2001, the Trustees adopted the technical
panel's long- term cost growth recommendation. 3 The Trustees note in their
report that this new assumption substantially raises the long- term cost
estimates for both HI and SMI. In their view, incorporating the technical
panel's recommendation yields program spending estimates that represent a
more realistic assessment of likely long- term program cost growth. (See
fig. 2.)
Under the old assumption (the Trustees' 2000 best estimate intermediate
assumptions), total Medicare spending consumes 5 percent of GDP by 2063.
Under the new assumption (the Trustees' 2001 best estimate intermediate
assumptions), this occurs almost 30 years sooner- 2035- and by 2075 Medicare
consumes over 8 percent of GDP, compared with 5.3 percent under the old
assumption. The difference clearly demonstrates the dramatic implications of
a 1 percentage point increase in annual Medicare spending over time.
1 Technical Review Panel on the Medicare Trustees Reports, Review of
Assumptions and Methods of the Medicare Trustees' Financial Projections
(Dec. 2000). As the panel noted, for many years the Medicare projections
have been based on an assumption that in the long run, average per-
beneficiary costs would increase at about the same rate as program
underlying funding sources. For HI, this meant that expenditures were
assumed to increase at the same rate as average hourly earnings. For SMI,
this meant that per- beneficiary costs were assumed to grow at the same rate
as per- capita GDP.
2 CBO, The Long- Term Budget Outlook (Oct. 2000). 3 See 2001 Annual Report
of the Board of Trustees of the Federal Hospital Insurance Trust Fund (March
2001) and 2001 Annual Report of the Board of Trustees of the Federal
Supplementary Medical Insurance Trust Fund (March 2001). New Estimates
Increase
Urgency of Reform Efforts
Page 6 GAO- 01- 539T
Figure 2: Medicare Spending as a Share of GDP Under Old and New Assumptions
Note: Data are gross outlays as projected under the Trustees' intermediate
assumptions.
Source: GAO analysis of data from the 2000 and 2001 HI and SMI Trustees
Reports.
Figure 3 reinforces the need to look beyond the HI program. HI is only the
first layer in this figure. The middle layer adds the SMI program, which is
expected to grow faster than HI in the near future. By the end of the 75-
year projection period, SMI will represent almost half of total estimated
Medicare costs.
If federal Medicaid spending is also considered, an even more complete
picture of the future health care entitlement burden emerges. Including
Medicaid, federal health care costs will grow to 14.5 percent of GDP from
today's 3.5 percent. Taken together, the two major government health
programs- Medicare and Medicaid- represent an unsustainable burden on future
generations. In addition, this figure reflects only the federal government's
share- the burden of states' Medicaid matching costs on state budgets is
another fiscal challenge. According to a recent National Governors
Association statement, increased Medicaid spending has already made it
difficult, if not impossible, for states to increase funding for other
priorities.
0 2
4 6
8 10
2000 2010 2020 2030 2040 2050 2060 2070 2075 Percent of GDP
2000 Trustees 2001 Trustees
Page 7 GAO- 01- 539T
Figure 3: Medicare and Medicaid Spending as a Share of GDP
Notes: 1. Medicare data are gross outlays as projected under the Trustees'
2001 intermediate assumptions.
2. Federal Medicaid data based on CBO's October 2000 long- term budget
outlook. Source: GAO analysis of data from the Congressional Budget Office
and the March 2001 HI and SMI Trustees Reports.
When viewed from the perspective of the federal budget and the economy, the
growth in health care spending will become increasingly unsustainable over
the longer term. 4 Our message remains the same as in my earlier appearances
before this Committee: to move into the future with no changes in federal
health and retirement programs is to envision a very different role for the
federal government in the future. Assuming, for example, that Congress and
the President adhere to the often- stated goal of saving the Social Security
surpluses, our long- term simulations show a world by 2030 in which Social
Security, Medicare, and Medicaid absorb
4 See Long- Term Budget Issues: Moving from Balancing the Budget to
Balancing Fiscal Risk (GAO- 01385T, Feb. 6, 2001). Given CBO's October 2000
long- term health cost estimates and the Medicare technical panel's higher
long- term cost growth recommendation, we incorporated higher long- term
health care cost growth consistent with the Medicare technical panel's
recommendation into our January 2001 updates of our long- term simulations.
0 2
4 6
8 10
12 14
16 2000 2010 2020 2030 2040 2050 2060 2070 2075
Percent of GDP HI SMI Medicaid
Page 8 GAO- 01- 539T
most of the available revenues within the federal budget. Under this
scenario, these programs would require more than three- quarters of total
federal revenue even without adding a prescription drug benefit. 5 (See fig.
4.)
Figure 4: Composition of Federal Spending as a Share of GDP Under the
“Save the Social Security Surpluses” Simulation
Notes: 1. Revenue as a share of GDP declines from its 2000 level of 20. 6
percent to 19.3 percent due to unspecified permanent policy actions that
reduce revenue and increase spending to eliminate the non- Social Security
surpluses.
2. The Save the Social Security Surpluses simulation can be run only through
2055 due to the elimination of the nation's capital stock.
Source: GAO's January 2001 analysis.
Little room would be left for other federal spending priorities such as
national defense, education, and law enforcement. Absent changes in the
structure of Medicare and Social Security, sometime during the 2040s
government would do nothing but mail checks to the elderly and their health
care providers. Accordingly, substantive reform of the Medicare and Social
Security programs remains critical to recapturing our future fiscal
flexibility. As our long- term budget simulations show, this is true even if
the entire projected surplus is saved. (See fig. 5.)
5 The “Save the Social Security Surplus” simulation assumes that
tax cuts and/ or spending increases equal to the size of the on- budget
surplus are enacted.
0 10
20 30
40 50
2000 2030 2050 Percent of GDP Net interest Social Security Medicare &
Medicaid All other spending
Revenue
Page 9 GAO- 01- 539T
Figure 5: Unified Deficits as a Share of GDP Under Alternative Policy
Simulations
*Data end when deficits reach 20 percent of GDP. Source: GAO's January 2001
analysis.
Higher cost estimates are not the only reason why early action to address
the daunting challenges of Medicare is critical. First, ample time is
required to phase in the reforms needed to put this program on a more
sustainable footing before the baby boomers retire. Second, timely action to
bring costs down pays large fiscal dividends for the program and the budget.
The high projected growth of Medicare in the coming years means that the
earlier reform begins, the greater the savings will be as a result of the
effects of compounding.
Beyond reforming the Medicare program itself, maintaining an overall
sustainable fiscal policy and strong economy is vital to enhancing our
nation's future capacity to afford paying benefits in the face of an aging
society. Decisions on how we use today's surpluses can have wide- ranging
impacts on our ability to afford tomorrow's commitments. As I have testified
before, you can think of the budget choices you face as a portfolio of
fiscal options balancing today's unmet needs with tomorrow's fiscal
challenges. At the one end- with the lowest risk to the long- range fiscal
position- is reducing publicly held debt. At the other end- offering the
greatest risk- is increasing entitlement spending without fundamental
program reform.
Reducing publicly held debt helps lift future fiscal burdens by freeing up
budgetary resources encumbered for interest payments, which currently
-5 0
5 10
15 20
2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 2065 2070
2075 Percent of GDP
Save Unified Surpluses* Save the Social Security
Surpluses*
Page 10 GAO- 01- 539T
represent more than 12 cents of every federal dollar spent, and by enhancing
the pool of economic resources available for private investment and long-
term economic growth. This is particularly crucial in view of the known
fiscal pressures that will begin bearing down on future budgets in about 10
years as the baby boomers start to retire. However, as noted above, debt
reduction is not enough. Our long- term simulations illustrate that, absent
entitlement reform, even saving all projected unified surpluses will
ultimately be insufficient to prevent the return of large persistent
deficits.
Despite common agreement that, without reform, future program costs will
consume growing shares of the federal budget, there is also a mounting
consensus that Medicare's benefit package should be expanded to cover
prescription drugs, which will add billions to the program's cost. Thus, to
contain spending while revamping benefits, the Congress is considering
proposals to fundamentally reform Medicare. Our work on the nuts and bolts
of the Medicare program provides, I believe, some considerations that are
relevant to your discussion regarding the potential addition of a
prescription drug benefit, various Medicare reform options based on
competition, effective implementation and refinement of new policies, and
improving program management. I make these observations ever mindful of the
need to ensure the program's sustainability for the longer term.
Among the major policy challenges facing the Congress today is how to
reconcile Medicare's unsustainable long- range financial condition with the
growing demand for an expensive new benefit- namely, coverage for
prescription drugs. It is a given that prescription drugs play a far greater
role in health care now than when Medicare was created. Today, Medicare
beneficiaries tend to need and use more drugs than other Americans. However,
because adding a benefit of such potential magnitude could further erode the
program's already unstable financial condition, we face difficult choices
about design and implementation options that will have a significant impact
on beneficiaries, the program, and the marketplace.
Let's examine the current status regarding Medicare beneficiaries and drug
coverage. About a third of Medicare beneficiaries have no coverage for
prescription drugs. Some beneficiaries with the lowest incomes receive
coverage through Medicaid. Some beneficiaries receive drug coverage through
former employers, some can join Medicare+ Choice plans that offer drug
benefits, and some have supplemental Medigap coverage that pays for drugs.
However, significant gaps remain. For example, Benefit Expansions
Will Need to Be Accompanied by Meaningful Reform
Adding a Fiscally Responsible Prescription Drug Benefit Will Entail Multiple
Trade- Offs
Page 11 GAO- 01- 539T
Medicare+ Choice plans offering drug benefits are not available everywhere
and generally do not provide catastrophic coverage. Medigap plans are
expensive and have caps that significantly constrain the protection they
offer. Thus, beneficiaries with modest incomes and high drug expenditures
are most vulnerable to these coverage gaps.
Overall, the nation's spending on prescription drugs has been increasing
about twice as fast as spending on other health care services, and it is
expected to keep growing. Recent estimates show that national per- person
spending for prescription drugs will increase at an average annual rate
exceeding 10 percent until at least 2010. As the cost of drug coverage has
been increasing, employers and Medicare+ Choice plans have been cutting back
on drug benefits by raising enrollees' cost- sharing, charging higher
copayments for more expensive drugs, or eliminating the benefit altogether.
It is not news that adding a prescription drug benefit to Medicare will be
costly. However, the cost consequences of a Medicare drug benefit will
depend on choices made about its design- including the benefit's scope and
financing mechanism. The details of its implementation will also have a
significant impact on beneficiaries, program spending, and the
pharmaceutical market. Experience suggests that some combination of enhanced
access to discounted prices, targeted subsidies, and measures to make
beneficiaries aware of costs may be needed. Any option would need to balance
concerns about Medicare sustainability with the need to address what will
likely be a growing hardship for beneficiaries in obtaining prescription
drugs.
As you consider the options to add a drug benefit, fiscal prudence argues
for balancing this action with the adoption of meaningful Medicare spending
reforms. Before the 107 th Congress are two leading proposals, popularly
known as Breaux- Frist I and Breaux- Frist II. Both proposals are based on a
model in which a competitive process determines the amount that the
government and beneficiaries pay to participating health plans. Currently,
Medicare follows a complex formula to set payment rates for Medicare+ Choice
plans, and plans compete primarily on the richness of their benefit
packages. Medicare permits plans to earn a reasonable profit, equal to the
amount they can earn from a commercial contract. Efficient plans that keep
costs below the fixed payment amount can use the
“savings” to enhance their benefit packages, thus attracting
additional members and gaining market share. Under this arrangement,
competition Reform Options Based on
Competition Offer Advantages but Contain Limitations
Page 12 GAO- 01- 539T
among Medicare plans may produce advantages for beneficiaries, but the
government reaps no savings. 6 , 7
In contrast, the competitive premium approach of both Breaux- Frist
proposals offers certain advantages. Instead of having the government
administratively set a payment amount and letting plans decide- subject to
some minimum requirements- the benefits they will offer, plans would set
their own premiums and offer at least a required minimum Medicare benefit
package. Under both proposals, beneficiaries would generally pay a portion
of the premium and Medicare would pay the rest. Plans operating at lower
cost could reduce premiums, attract beneficiaries, and increase market
share. Beneficiaries who joined these plans would enjoy lower out- of-
pocket expenses. Unlike today's Medicare+ Choice program, the premium
support approach provides the potential for taxpayers to benefit from the
competitive forces. As beneficiaries migrated to lowercost plans, the
average government payment would fall.
A key difference between the two Breaux- Frist proposals is in how the
program's contribution is determined. Under Breaux- Frist I, traditional
Medicare would, like the other plans, have to set a premium price. The
amount of the program contribution would be based on the average of the
traditional plan's premium price and the prices set by the other plans.
Under Breaux- Frist II, the program contribution would be based on the
traditional plan's premium price alone. Under either version, Medicare costs
would be more transparent: beneficiaries could better see what they and the
government were paying for in connection with health care expenditures. More
importantly, both beneficiaries and the government would share in the
savings if plans lower premiums to gain market share.
Experience with the Medicare+ Choice program reminds us that competition in
Medicare has its limits. First, not all geographic areas are able to support
multiple health plans. Medicare health plans historically have had
difficulty operating efficiently in rural areas because of a sparseness of
both beneficiaries and providers. In 2000, 21 percent of rural beneficiaries
had access to a Medicare+ Choice plan, compared to 97 percent of urban
beneficiaries. Second, separating winners from losers is a
6 Beginning in 2003, plans can use savings to reduce beneficiaries' Part B
premiums. Plans choosing to do so must share a portion of these savings with
the program.
7 In fact, the government has been losing money on the Medicare+ Choice
program. Medicare pays more, on average, for beneficiaries enrolled in
managed care plans than if these individuals had remained in traditional
Medicare. See Medicare+ Choice: Payments Exceed Cost of Fee- for- Service
Benefits, Adding Billions to Spending (GAO/ HEHS- 00- 161, Aug. 23, 2000).
Page 13 GAO- 01- 539T
basic function of competition. Thus, under a competitive premium approach,
not all plans would thrive, requiring that provisions be made to protect
beneficiaries enrolled in less successful plans.
The fundamental nature of proposed Medicare reforms, such as adding a drug
benefit or reshaping the program's design, makes monitoring the effects of
these changes a necessary responsibility. Today, however, major difficulties
exist in measuring the effects of Medicare policies in a comprehensive and
timely manner, making it difficult to assess the appropriateness of both
program expenditures and provision of services.
Although Medicare is the nation's largest third- party payer, some of its
vital information systems are decades old and operate on software no longer
commonly used. These systems house a wealth of health and payment data but
lack the flexibility to generate the kind of prompt and reliable reports
that other large payers use to ensure health care quality and efficiency.
This dearth of timely, accurate, and useful information hinders effective
policymaking. This shortcoming is particularly significant in a program
where small rate changes developed from faulty estimates can mean billions
of dollars in overpayments or underpayments.
Our work on BBA payment reforms shows the importance of data- driven
analyses in determining the impact of policy changes. Providers affected by
BBA- mandated lower rates, lower rate increases, or altogether new payment
systems blamed the BBA for their financial difficulties and pressured the
Congress to undo some of the act's payment reforms. The Congress responded
by making adjustments in subsequent legislation, but the affected providers
argue that more changes are needed and call for higher payments on the basis
of anecdotal evidence. Medicare analysts were ill- equipped to address these
concerns through objective analysis because the necessary program data were
not readily available. Our own reviews of BBA provisions and their impact
showed that payments generally were adequate to cover providers' Medicare
costs and ensure beneficiary access, although we identified areas where
refinements would improve the appropriateness of rates to individual
providers.
The lesson is that better information, promptly generated, can help
policymakers understand the budgetary impact of policy changes and
distinguish between desirable and undesirable consequences. Such information
could, for example, reveal whether across- the- board rate increases are
warranted or will result in overly generous payments for some and inadequate
payments for others. Based on good data, refinements can help ensure that
payments are not only adequate in the Effective Implementation
Requires Capacity to Assess and Refine New Policies
Page 14 GAO- 01- 539T
aggregate but also fairly targeted to protect individual beneficiaries and
providers. The BBA experience underscores the need to rely on hard data and
objective analyses rather than assertions and anecdotes. It also argues for
the Congress to ensure that adequate resources are secured for efforts
underway to modernize Medicare's information systems and conduct needed
research and analyses.
The extraordinary challenge of developing and implementing Medicare reforms
should not be underestimated. Our look at health care spending projections
shows that, with respect to Medicare reform, “getting it wrong”
will have severe consequences. To get it right, effective program design
will need to be coupled with competent program management. With that goal in
mind, questions have been raised about the capacity of the Health Care
Financing Administration (HCFA)- Medicare's current steward- to administer
the Medicare program effectively. Our reviews of Medicare program activities
confirm the legitimacy of these concerns and suggest that changes may be
necessary to HCFA's focus, structure, resources, and operations.
Several proposals have been made to address HCFA management shortcomings.
One approach is to create an entity that would administer Medicare without
any non- Medicare responsibilities. The rationale for this view is that
HCFA's other responsibilities- administering Medicaid, the State Children's
Health Insurance Program, and other oversight, enforcement, and
credentialing programs- constitute a separate full- time job. In the
meantime, effective Medicare management requires monitoring the claims
payment and review activities of more than 50 contractors; setting thousands
of payment rates for the various providers of Medicarecovered services; and
administering consumer information and beneficiary protection activities for
the traditional fee- for- service component and Medicare+ Choice plans.
Alternative approaches would divide the administration of Medicare's
components between HCFA and an entirely new entity. The intention would be
to eliminate a conflict of interest that some perceive exists in having the
same agency manage both the traditional fee- for- service and the managed
care components.
More details would be necessary before the Congress could consider the
merits of one approach over another. Creating a new agency allows for a
fresh start, eliminating the need to reengineer established practices. The
downside is that it typically takes years before a new agency acquires the
personnel and infrastructure to become fully effective. In addition, it is
questionable whether the perceived advantages of dividing Medicare's
Effective Leadership and
Sufficient Capacity Are Critical to Success of Medicare Reform
Page 15 GAO- 01- 539T
administration would outweigh the inefficiencies that could result from
duplication or coordination difficulties.
Closely allied with the issue of agency restructuring is the question of
agency leadership. Frequent changes in HCFA leadership make it difficult for
the agency to develop and implement a consistent long- term vision. The
maximum term of a HCFA administrator is, as a practical matter, only as long
as that of the President who appointed him or her. Historically, their terms
have been much shorter. In the 24 years since HCFA's inception, there have
been 20 administrators or acting administrators, whose tenure has been, on
average, little more than 1 year. These short tenures have not been
conducive to carrying out whatever strategic plans or innovations an
individual may have developed for administering Medicare efficiently and
effectively. Other federal agencies offer a precedent for an administrator's
tenure to span presidential administrations. For example, the FBI director's
term is 10 years and the Social Security Administrator's term is 6 years. A
benefit of similarly lengthening the HCFA administrator's tenure would be to
better insulate the program from short- term political pressures.
No matter how well- conceived or how well- led, however, no agency can
function effectively without adequate resources and appropriate
accountability mechanisms. Over the years, HCFA's administrative dollars
have been stretched thinner as the agency's mission has grown. Adequate
resources are vital to support the kind of oversight and stewardship
activities that Americans have come to count on- inspection of nursing homes
and laboratories, certification of Medicare providers, collection and
analysis of critical health care data, to name a few. We and other health
policy experts, including several former HCFA administrators, contend that
too great a mismatch between the agency's administrative capacity and its
designated mandate will leave HCFA unprepared to handle Medicare reforms and
future population growth. In 1999, Medicare's operating expenses represented
less than 2 percent of the program's benefit outlays. Although private
insurers incur other costs, such as those for advertising, and seek to earn
a profit, they would not attempt to manage such a large and complex program
with so comparatively small an administrative budget.
It is not yet clear whether a successfully administered Medicare program
requires reengineering HCFA, creating an entirely new agency, or some
combination of the two options. What is clear, however, is that the
program's effective governance rests on finding a balance between
flexibility and accountability- that is, granting an entity adequate
flexibility to act prudently and ensuring that the entity can be held
Page 16 GAO- 01- 539T
accountable for its results- based decisions and their implementation.
Moreover, because Medicare's future will play such a significant role in the
future of the American economy, we cannot afford to settle for anything less
than a world- class organization to run the program. However, achieving such
a goal will require a clear recognition of the fundamental importance of
efficient and effective day- to- day operations.
In determining how to reform the Medicare program, much is at stake- not
only the future of Medicare itself but also assuring the nation's future
fiscal flexibility to pursue other important national goals and programs. I
feel that the greatest risk lies in doing nothing to improve the Medicare
program's long- term sustainability. It is my hope that we will think about
the unprecedented challenge facing future generations in our aging society.
Engaging in a comprehensive effort to reform the Medicare program and put it
on a sustainable path for the future would help fulfill this generation's
stewardship responsibility to succeeding generations. It would also help to
preserve some capacity for future generations to make their own choices for
what role they want the federal government to play. While not ignoring
today's needs and demands, we should remember that surpluses can also serve
as an occasion to promote the transition to a more sustainable future for
our children and grandchildren.
Updating Medicare's benefit package may be a necessary part of any realistic
reform program. Such changes, however, need to be considered in the context
of Medicare's long- term fiscal outlook and the need to make changes in ways
that will promote the program's longer- term sustainability. We must
remember that benefit expansions are often permanent, while the more belt-
tightening payment reforms- vulnerable to erosion- could be discarded
altogether. The BBA experience reminds us about the difficulty of
undertaking reform.
Specifically, we must acknowledge that adding prescription drug coverage to
the Medicare program would have a substantial impact on program costs. At
the same time, many believe it is needed to ensure the financial well- being
and health of many of its beneficiaries. The challenge will be in designing
and implementing drug coverage that will minimize the financial implications
for Medicare while maximizing the positive effect of such coverage on
Medicare beneficiaries. Most importantly, any substantial benefit reform
should be coupled with other meaningful program reforms that will help to
ensure the long- term sustainability of the program. In the end, the
Congress should consider adopting a Hippocratic oath for Medicare reform
proposals- namely, “Don't make the long- term outlook worse.”
Ultimately, we will need to engage in a much more fundamental Conclusions
Page 17 GAO- 01- 539T
health care reform debate to differentiate wants, which are virtually
unlimited, from needs, which should be defined and addressed, and overall
affordability, of which there is a limit.
We at GAO look forward to continuing to work with this Committee and the
Congress in addressing this and other important issues facing our nation. In
doing so, we will be true to our core values of accountability, integrity,
and reliability.
Chairman Grassley and Ranking Member Baucus, this concludes my prepared
statement. I will be happy to answer any questions you or other Members of
the Committee may have.
For future contacts regarding this testimony, please call William J.
Scanlon, Health Care Issues, at (202) 512- 7114 or Paul L. Posner, Federal
Budget and Intergovernmental Relations, at (202) 512- 9573. Other
individuals who made key contributions include Linda F. Baker, James C.
Cosgrove, Paul Cotton, Hannah F. Fein, James R. McTigue, and Melissa Wolf.
(290042) GAO Contacts and
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