Prescription Drugs: Increasing Medicare Beneficiary Access and Related
Implications (Testimony, 02/15/2000, GAO/T-HEHS/AIMD-00-99).
Pursuant to a congressional request, GAO discussed options for
increasing Medicare beneficiaries' access to prescription drugs,
focusing on the: (1) factors contributing to the growth in prescription
drug spending and efforts to control that growth; and (2) design and
implementation issues to be considered regarding proposals to improve
seniors' access to affordable prescription drugs.
GAO noted that: (1) the Medicare benefit package provides virtually no
coverage; (2) in 1996, almost one third of beneficiaries had
employer-sponsored health coverage, as retirees, that included drug
benefits; (3) more than 10 percent of beneficiaries received coverage
through Medicaid or other public programs; (4) to protect themselves
against drug costs, the remainder of Medicare beneficiaries can choose
to enroll in a Medicare Choice plan with drug coverage or purchase a
Medigap policy; (5) however, the availability, breadth, and price of
such coverage is changing as the costs of expanded prescription drug use
drives employers, insurers, and managed care plans to adopt new
approaches to control the expenditures for this benefit; (6) over the
past 5 years, prescription drug expenditures have grown substantially,
both in total and as a share of all health care outlays; (7)
prescription drug spending grew an average of 12.4 percent per year from
1993 to 1998, compared with a 5 percent annual growth rate for health
care expenditures overall; (8) total drug expenditures have been driven
up by the following factors: (a) both greater utilization of drugs and
the substitution of higher-priced new drugs for lower-priced existing
drugs; (b) private insurance coverage for drugs; (c) biotechnology
advances and a growing knowledge of the human immune system; and (d)
advertising of drugs; (9) all of these factors suggest the need for
effective cost control mechanisms; (10) a common technique to manage
pharmacy care and control costs is to use a formulary, which can affect
how frequently a drug is prescribed and purchased and, therefore, can
affect its market share; (11) another way in which the market has been
transformed is through the use of pharmacy benefit managers by health
plans and insurers to administer and manage prescription drug benefits;
(12) expanding access to more affordable prescription drugs could
involve either subsidizing prescription drug coverage or allowing
beneficiaries access to discounted pharmaceutical prices; (13) the
design of a drug coverage option, as well as its implementation, will
determine the effect of the option on beneficiaries, Medicare or federal
spending, and the pharmaceutical market; (14) a new benefit would need
to be crafted to balance competing concerns about the sustainability of
Medicare, federal obligations, and the hardship faced by some
beneficiaries; and (15) the effect of granting some beneficiaries access
to discounted prices will hinge on details such as the price of the
drugs after the discount, how discounts are determined and secured, and
which beneficiaries are eligible.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: T-HEHS/AIMD-00-99
TITLE: Prescription Drugs: Increasing Medicare Beneficiary Access
and Related Implications
DATE: 02/15/2000
SUBJECT: Drugs
Pharmaceutical industry
Health care programs
Health insurance
Elder care
Aid for the elderly
Health insurance cost control
IDENTIFIER: Medicare Program
Medigap
Medicare Choice Program
Medicaid Program
Federal Supply Schedule
Medicare Hospital Insurance Trust Fund
Supplementary Medical Insurance Trust Fund
Social Security Program
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Tuesday, February 15, 2000
GAO/T-HEHS/AIMD-00-99
Prescription drugs
Increasing Medicare Beneficiary Access and Related Implications
Statement of David M. Walker
Comptroller General of the United States
Testimony
Before the Subcommittee on Health, Committee on Ways and Means, House of
Representatives
United States General Accounting Office
GAO
Prescription Drugs: Increasing Medicare Beneficiary Access and Related
Implications
Mr. Chairman and Members of the Subcommittee:
I am pleased to be here today as you discuss options for increasing Medicare
beneficiaries' access to prescription drugs. There are growing concerns
about gaps in the Medicare program, most notably the lack of outpatient
prescription drug coverage, which may leave Medicare's most vulnerable
beneficiaries with high out-of-pocket costs that they may not be able to
afford. In 1996, almost a third of Medicare beneficiaries lacked
prescription drug coverage. The remaining two-thirds had at least some drug
coverage through other sources-most commonly employer-sponsored health
plans. Although the proportion of beneficiaries who had drug coverage rose
between 1995 and 1996, recent evidence indicates that this trend of
expanding drug coverage is unlikely to continue. Moreover, the burden of
prescription drug costs falls most heavily on the Medicare beneficiaries who
lack drug coverage or those who have substantial health care needs. In 1999,
an estimated 20 percent of Medicare beneficiaries had drug costs of $1,500
or more-a substantial sum for those lacking some form of insurance to
subsidize the purchase.
At the same time, however, long-term cost pressures facing the Medicare
program are considerable. There appears to be an emerging consensus that
substantive financing and programmatic reforms are necessary to put Medicare
on a sustainable footing for the future. These fundamental program reforms
are vital to reducing the program's growth, which threatens to absorb
ever-increasing shares of the nation's budgetary and economic resources.
Thus, proposals to help seniors with the costs of prescription drugs should
be carefully crafted to avoid further erosion of the projected financial
condition of the Medicare program, which, according to its trustees, is
already unsustainable in its present form.
On the one hand, you must grapple with the hard choices involved in making
the Medicare program sustainable for future generations. On the other, you
are faced with the plight of many seniors who cannot afford the medical
miracles that may be achieved through access to pharmaceutical advances.
Expanding Medicare's benefit package could address the latter. However, a
recent study suggests that such an expansion could add between 7.2 and 10
percent annually to Medicare's costs. Increased spending of that magnitude
would only exacerbate the tough choices that will be required to put
Medicare on sustainable footing for the future.
You are considering these issues at a historic crossroad. After nearly 30
years of deficits, the combination of hard choices and remarkable economic
growth has led to a budget surplus. We appear-at least for the near
future-to have slain the deficit dragon. In its most recent projections, the
Congressional Budget Office (CBO) shows both unified and on-budget surpluses
throughout the next 10 years. While this is good news and even superior to
the projections made last year, it does not mean that hard choices are a
thing of the past. First, it is important to recognize that by their very
nature projections are uncertain. This is especially true today because, as
CBO notes, it is too soon to tell whether recent boosts in revenue reflect a
major structural change in the economy or a more temporary divergence from
historical trends. Indeed, CBO points out that assuming a return to
historical trends and slightly faster growth in Medicare would change the
on-budget surplus to a growing deficit. This means we should treat surplus
predictions with caution. Current projected surpluses could well prove to be
fleeting, and thus appropriate caution should be exercised when creating new
entitlements that establish permanent claims on future resources.
Moreover, while the size of future surpluses could exceed or fall short of
projections, we know that demographic and cost trends will, in the absence
of meaningful reform, drive Medicare spending to levels that will prove
unsustainable for future generations of taxpayers. Accordingly, we need to
view this period of projected prosperity as an opportunity to address the
structural imbalances in Medicare, Social Security, and other entitlement
programs before the approaching demographic tidal wave makes the imbalances
more dramatic and possible solutions more painful.
As the foregoing suggests, the stakes associated with Medicare reform are
high for the program itself and for the rest of the federal budget, both now
and for future generations. Current policy decisions can help us prepare for
the challenges of an aging society in several important ways: (1) reducing
public debt to increase national savings and investment, (2) reforming
entitlement programs to reduce future claims and free up resources for other
competing priorities, and (3) establishing a more sustainable Medicare
program that delivers effective and affordable health care to our seniors.
My remarks today will focus on Medicare beneficiaries' access to
prescription drugs and the environment in which you consider increasing that
access. Two proposals before you, one offered in the President's budget and
the other contained in the Breaux-Frist bill, would incorporate Medicare
prescription drug coverage in the context of larger Medicare reform. Other
proposals that focus only on increasing access to affordable prescription
drugs are also being considered. These proposals would either subsidize
prescription drug coverage or lower prices faced by beneficiaries without
coverage. To put these proposals in context, I will discuss the factors
contributing to the growth in prescription drug spending and efforts to
control that growth. I will also discuss design and implementation issues to
be considered regarding proposals to improve seniors' access to affordable
prescription drugs. I then will repeat my message about the Medicare
program's current financial condition and its long term sustainability.
But before I turn to the specifics, let me reiterate that although people
want unfettered access to health care, and some have needs that are not
being met, health care costs compete with other legitimate priorities in the
federal budget, and their projected growth threatens to crowd out future
generations' flexibility to decide which of these competing priorities will
be met. Thus, in making important fiscal decisions for our nation,
policymakers need to consider the fundamental differences between wants,
needs, and what both individuals and our nation can afford. This concept
applies to all major aspects of government, from major weapons system
acquisitions to issues affecting domestic programs. It also points to the
fiduciary and stewardship responsibility that we all share to ensure the
sustainability of Medicare for current and future generations within a
broader context of also providing for other important national needs and
economic growth. We have an opportunity to use our unprecedented economic
wealth and fiscal good fortune to address today's needs but an obligation to
do so in a way that improves the prospects for future generations. This
generation has a responsibility to future generations to reduce the debt
burden they will inherit, to provide a strong foundation for future economic
growth, and to ensure that future commitments are both adequate and
affordable. Prudence requires making the tough choices today while the
economy is healthy and the workforce is relatively large.
Rising Drug Spending Elevates Beneficiary Access Concerns and the Importance
of Cost-Control Efforts
Rise in Prescription Drug Spending
Table 1: National Expenditures for Prescription Drugs, 1993-98
Prescription drug Annual growth in Annual growth in all
prescription drug health care
Year expenditures expenditures expenditures
(in billions)
(percent) (percent)
1998 $90.6 15.4 5.6
1997 $78.5 14.0 4.7
1996 $68.9 12.9 4.6
1995 $61.0 10.6 4.8
1994 $55.2 9.0 5.5
1993 $50.6 8.7 7.4
Average annual growth between
12.4 5.0
1993 and 1998.
Source: Health Care Financing Administration (HCFA), Office of the Actuary.
Total drug expenditures have been driven up by both greater utilization of
drugs and the substitution of higher-priced new drugs for lower-priced
existing drugs. Private insurance coverage for prescription drugs has likely
contributed to the rise in spending, because insured consumers are shielded
from the direct costs of prescription drugs. In the decade between 1988 and
1998, the share of prescription drug expenditures paid by private health
insurers rose from almost a third to more than half. (See fig. 1.) The
development of new, more expensive drug therapies-including new drugs that
replace old drugs and new drugs that treat disease more effectively-also
contributed to the drug spending growth by boosting the volume of drugs used
as well as the average price for drugs used. The average number of new drugs
entering the market each year rose from 24 at the beginning of the 1990s to
33 now. Similarly, biotechnology advances and a growing knowledge of the
human immune system are significantly shaping the discovery, design, and
production of drugs. Advertising pitched to consumers has also likely upped
the use of prescription drugs. A recent study found that the 10 drugs most
heavily advertised directly to consumers in 1998 accounted for about 22
percent of the total increase in drug spending between 1993 and 1998.
Between March 1998 and March 1999, industry spending on advertising grew 16
percent to $1.5 billion. All of these factors suggest the need for effective
cost control mechanisms to be in place under any option to increase access
to prescription drugs.
Note: Out-of-pocket expenditures include direct spending by consumers for
prescription drugs, such as coinsurance, deductibles, and any amounts not
covered by insurance. Out-of-pocket premiums paid by individuals are not
counted here.
Source: HCFA, Office of the Actuary.
Current Medicare Beneficiary Drug Coverage
In 1996, almost a third of Medicare beneficiaries lacked drug coverage
altogether. (See fig. 2.) The remaining two-thirds had at least some drug
coverage-most commonly through employer-sponsored health plans. The
proportion of beneficiaries who had drug coverage rose between 1995 and
1996, owing to increases in those with Medicare HMOs, individually purchased
supplemental coverage, and employer-sponsored coverage. However, recent
evidence indicates that this trend of expanding drug coverage is unlikely to
continue.
Note: "All Other" includes coverage under non-risk Medicare HMOs,
state-based plans, the Department of Defense, and the Department of
Veteran's Affairs.
Source: HCFA, based on the 1996 Medicare Current Beneficiary Survey.
Although employer-sponsored health plans provide drug coverage to the
largest segment of the Medicare population with coverage, there are signs
that this could be eroding. Fewer employers are offering health benefits to
retirees eligible for Medicare and those that continue to offer coverage are
asking retirees to pay a larger share of costs. The proportion of employers
offering health coverage to retirees eligible for Medicare declined from 40
percent in 1993 to 28 percent in 1999. This decline is at least in part due
to the rise in the cost of providing this coverage, which grew about 21
percent from 1993 to 1999. At the same time, the proportion of employers
asking retirees to pay the full cost of their health coverage increased from
36 percent to 40 percent.
In 1999, 13 percent of Medicare beneficiaries obtained prescription drug
coverage through a Medicare+Choice plan, up from 8 percent in 1996.
Medicare+Choice plans have found drug coverage to be an attractive benefit
that beneficiaries seek out when choosing to enroll in managed care
organizations. However, owing to rising drug expenditures and their effect
on plan costs, the drug benefits the plans offer are becoming less generous.
Many plans restructured drug benefits in 2000, increasing enrollees'
out-of-pocket costs and limiting their total drug coverage.
Beneficiaries may purchase Medigap policies that provide drug coverage,
although this tends to be expensive, involves significant cost-sharing, and
includes annual limits. Standard Medigap drug policies include a $250
deductible, a 50 percent coinsurance requirement, and a $1,250 or $3,000
annual limit. Furthermore, Medigap premiums have been increasing in recent
years. In 1999, the annual premium for one type of Medigap policy with a
$1,250 annual limit on drug coverage, ranged from approximately $1,000 to
$6,000.
All beneficiaries who have full Medicaid benefits receive drug coverage that
is subject to few limits and low cost-sharing requirements. For
beneficiaries whose incomes are slightly higher than Medicaid standards, 14
states currently offer pharmacy assistance programs that provided drug
coverage to approximately 750,000 beneficiaries in 1997. The three largest
state programs accounted for 77 percent of all state pharmacy assistance
program beneficiaries. Most state pharmacy assistance programs, like
Medicaid, have few coverage limitations.
The burden of prescription drug costs falls most heavily on the Medicare
beneficiaries who lack drug coverage or who have substantial health care
needs. Drug coverage is less prevalent among beneficiaries with lower
incomes. In 1995, 38 percent of beneficiaries with income below $20,000 were
without drug coverage, compared to 30 percent of beneficiaries with higher
incomes. Additionally, the 1995 data show that drug coverage is slightly
higher among those with poorer self-reported health status. At the same
time, however, beneficiaries without drug coverage and in poor health had
drug expenditures that were $400 lower than the expenditures of
beneficiaries with drug coverage and in poor health. This might indicate
access problems for this segment of the population.
Even for beneficiaries who have drug coverage, the extent of the protection
it affords varies. The value of a beneficiary's drug benefit is affected by
the benefit design, including cost-sharing requirements and benefit
limitations. Evidence suggests that premiums are on the rise for
employer-sponsored benefits, Medigap policies, and most recently,
Medicare+Choice plans. Although reasonable cost sharing serves to make the
consumer a more prudent purchaser, copayments, deductibles, and annual
coverage limits can reduce the value of drug coverage to the beneficiary.
Harder to measure is the effect on beneficiaries of drug benefit
restrictions brought about through formularies designed to limit or
influence the choice of drugs.
Cost-Control Approaches Are Reshaping the Pharmaceutical Market
A common technique to manage pharmacy care and control costs is to use a
formulary. A formulary is a list of prescription drugs, grouped by
therapeutic class, that a health plan or insurer prefers and may encourage
doctors to prescribe. Decisions about which drugs to include in a formulary
are based on the drugs' medical value and price. The inclusion of a drug in
a formulary and its cost can affect how frequently it is prescribed and
purchased and, therefore, can affect its market share.
Formularies can be open, incentive-based, or closed. Open formularies are
often referred to as "voluntary" because enrollees are not penalized if
their physicians prescribe nonformulary drugs. Incentive-based formularies
generally offer enrollees lower copayments for the preferred formulary or
generic drugs. Incentive-based or managed formularies are becoming more
popular because they combine flexibility and greater cost-control features
than open formularies. A closed formulary limits insurance coverage to the
formulary drugs and requires enrollees to pay the full cost of nonformulary
drugs prescribed by their physicians.
Another way in which the market has been transformed is through the use of
pharmacy benefit managers (PBM) by health plans and insurers to administer
and manage prescription drug benefits. PBMs offer a range of services,
including prescription claims processing, mail-service pharmacy, formulary
development and management, pharmacy network development, generic
substitution incentives, and drug utilization review. PBMs also negotiate
discounts and rebates on prescription drugs with manufacturers.
Expanding Access to Prescription Drugs Involves Difficult Design Decisions
The relative merits of any approach should be carefully assessed. We suggest
that the following five criteria be considered in evaluating any option. (1)
Affordability: an option should be evaluated in terms of its effect on
public outlays for the long term. (2) Equity: an option should provide
equitable access across groups of beneficiaries and be fair to affected
providers. (3) Adequacy: an option should provide appropriate beneficiary
incentives for prudent utilization, support standard treatment options for
beneficiaries, and not impede effective and clinically meaningful
innovations. (4) Feasibility: an option should incorporate such
administrative essentials as implementation and cost and quality monitoring
techniques. (5) Acceptance: an option should account for the need to educate
the beneficiary and provider communities about its costs and the realities
of trade-offs required by significant policy changes.
Adding a Medicare Benefit
Benefit cost-control provisions for the traditional Medicare program may
present some of the thorniest drug benefit design decisions. Recent
experience provides two general approaches. One would involve the Medicare
program obtaining price discounts from manufacturers. Such an arrangement
could be modeled after Medicaid's drug rebate program. While the discounts
in aggregate would likely be substantial, this approach lacks the
flexibility to achieve the greatest control over spending. It could not
effectively influence or steer utilization because it does not include
incentives that would encourage beneficiaries to make cost-conscious
decisions. The second approach would draw from private sector experience in
negotiating price discounts from manufacturers in exchange for shifting
market share. Some plans and insurers employ PBMs to manage their drug
benefits, including claims processing, negotiating with manufacturers,
establishing lists of drug products that are preferred because of efficacy
or price, and developing beneficiary incentive approaches to control
spending and use. Applying these techniques to the entire Medicare program,
however, would be difficult because of its size, the need for transparency
in its actions, and the imperative for equity for its beneficiaries.
Medicaid Programs Rely on Rebates and Have Limited Utilization Controls
As the largest government payer for prescription drugs, Medicaid drug
expenditures account for about 17 percent of the domestic pharmaceutical
market. Before the enactment of the Medicaid drug rebate program under the
Omnibus Budget Reconciliation Act of 1990 (OBRA), state Medicaid programs
paid close to retail prices for outpatient drugs. Other large purchasers,
such as HMOs and hospitals, negotiated discounts with manufacturers and paid
considerably less.
The rebate program required drug manufacturers to rebate to state Medicaid
programs a percentage off of the average price wholesalers pay
manufacturers. The rebates were based on a percentage reduction that
reflects the lowest or "best" prices the manufacturer charged other
purchasers and the volume of purchases by Medicaid recipients. In return for
the rebates, state Medicaid programs must cover all drugs manufactured by
pharmaceutical companies that entered into rebate agreements with HCFA.
After the rebate program's enactment, a number of market changes affected
other purchasers of prescription drugs and the amount of the rebates that
Medicaid programs received. Drug manufacturers substantially reduced the
price discounts they offered to many large private purchasers, such as HMOs.
Therefore, the market quickly adjusted by increasing drug prices to
compensate for rebates obtained by the Medicaid program.
Although the states have received billions of dollars in rebates from drug
manufacturers since OBRA's enactment, state Medicaid directors have
expressed concerns about the rebate program. The principal concern involves
OBRA's requirement to provide access to all the drugs of every manufacturer
that offers rebates, which limits the utilization controls Medicaid programs
can use at a time when prescription drug expenditures are rapidly
increasing. Although the programs can require recipients to obtain prior
authorization for particular drugs and can impose monthly limits on the
number of covered prescriptions, they cannot take advantage of other
techniques, such as incentive-based formularies, to steer recipients to less
expensive drugs. The few cost-control strategies available to state Medicaid
programs can add to the administrative burden on state Medicaid programs.
Other Payers Employ Various Techniques to Control Expenditures
Other payers, such as private and federal employer health plans and
Medicare+Choice plans, have taken a different approach to managing their
prescription drug benefits. They typically use beneficiary copayments to
control prescription drug use, and they use formularies to both control use
and obtain better prices by concentrating purchases on selected drugs. In
many cases, these plans and insurers retain a PBM's services to manage their
pharmacy benefit and control spending.
Beneficiary cost-sharing plays a central role in attempting to influence
drug utilization. Copayments are frequently structured to influence both the
choice of drugs and the purchasing arrangements. While formulary
restrictions can channel purchases to preferred drugs, closed formularies,
which provide reimbursement only for preferred drugs, have generated
substantial dissatisfaction among consumers. As a result, many plans link
their cost-sharing requirements and formulary lists. The fastest growing
trend today is the use of a formulary that covers all drugs but that
includes beneficiary cost-sharing that varies for different drugs-typically
a smaller copayment for generic drugs, a larger one for preferred drugs, and
an even larger one for all other drugs. Reduced copayments have also been
used to encourage enrollees using maintenance drugs for chronic conditions
to obtain them from particular suppliers, like a mail-order pharmacy.
Plans and insurers have turned to PBMs for assistance in establishing
formularies, negotiating prices with manufacturers and pharmacies,
processing beneficiaries' claims, and reviewing drug utilization. Because
PBMs manage drug benefits for multiple purchasers, they often may have more
leverage than individual plans in negotiating prices through their greater
purchasing power.
Traditional fee-for-service Medicare has generally established reimbursement
rates for services like those provided by physicians and hospitals and then
processed and paid claims with few utilization controls. Adopting some of
the techniques used by private plans and insurers might help better control
costs. However, how to adapt those techniques to the characteristics and
size of the Medicare program raises questions.
Negotiated or competitively determined prices would be superior to
administered prices only if Medicare could employ some of the utilization
controls that come from having a formulary and differential beneficiary
cost-sharing. In this manner, Medicare would be able to negotiate
significantly discounted prices by promising to deliver a larger market
share for a manufacturer's product. Manufacturers would have no incentive to
offer a deep discount if all drugs in a therapeutic class were covered on
the same terms. Without a promised share of the Medicare market, these
manufacturers might reap greater returns from charging higher prices and by
concentrating marketing efforts on physicians and consumers to influence
prescribing patterns.
Implementing a formulary and other utilization controls could prove
difficult for Medicare. Developing a formulary involves determining which
drugs are therapeutically equivalent so that several from each class can be
included. Plans and PBMs currently make those determinations
privately-something that would not be possible for Medicare, which must have
transparent policies that are determined openly. Given the stakes involved
in selecting drugs, one can imagine the intensive efforts to offer input to
and scrutinize the selection process.
Medicare may also find it impossible to delegate this task to one or
multiple PBMs. A single PBM contractor would likely be subject to the same
level of scrutiny as the program. Such scrutiny could compromise the
flexibility PBMs have used to generate savings. An alternative would be to
grant flexibility to multiple PBMs that are each responsible only for a
share of the market. Contracting with multiple PBMs, though, raises other
issues. If each PBM has exclusive responsibility for a geographic area,
beneficiaries who need certain drugs could be advantaged or disadvantaged
merely because of where they live. If multiple PBMs operated in each area,
beneficiaries could choose one to administer their drug benefit. This raises
questions about how to inform beneficiaries of the differences in each PBM's
policies and whether and how to risk-adjust payments to PBMs for differences
in the health status of the beneficiaries using them.
Extending Federal Price Discounts to Beneficiaries
Typically, federal agencies obtain prescription drugs at prices listed in
the federal supply schedule (FSS) for pharmaceuticals. FSS prices represent
a significant discount off the prices drug manufacturers charge wholesalers.
Under the Veterans Health Care Act of 1992, drug manufacturers must make
their brand-named drugs available to federal agencies at the FSS price in
order to participate in the Medicaid program. The act requires that the FSS
price for VA, DOD, the Public Health Service, and the Coast Guard be at
least 24 percent below the price that the manufacturers charge wholesalers.
Although most federal prescription drug purchases are made at FSS prices, in
some cases, federal agencies are able to purchase drugs at even lower
prices. For example, VA has used national contracts awarded on a competitive
basis for specific drugs considered therapeutically interchangeable. These
contracts enable VA to obtain larger discounts from manufacturers by
channeling greater volume to certain pharmaceutical products.
Providing Medicare beneficiaries access to the lowest federal prices could
result in important out-of-pocket savings to those without coverage who are
paying close to retail prices. However, concerns exist that extending
federal discounts to Medicare beneficiaries could lead to price increases to
federal agencies and other purchasers since the discount is based on prices
determined by manufacturers. Federal efforts to lower Medicaid drug prices
demonstrate the potential for this to occur. While it is not possible to
predict how federal drug prices would change if Medicare beneficiaries are
given access to them, the larger the market that seeks to take advantage of
these prices, the greater the economic incentive would be for drug
manufacturers to raise federal prices to limit the impact of giving lower
prices to more purchasers.
Expanding Benefits Needs to Be Considered in Light of Larger Medicare Fiscal
Concerns
Medicare's Financial Condition
Source: 1999 Annual Report, Board of Trustees of the Federal Hospital
Insurance Trust Fund.
When the program has a cash deficit, as it did from 1992 through 1998,
Medicare is a net claimant on the Treasury-a threshold that Social Security
is not currently expected to reach until 2014. To finance these cash
deficits, Medicare drew on its special issue Treasury securities acquired
during the years when the program generates a cash surplus. In essence, for
Medicare to "redeem" its securities, the government must raise taxes, cut
spending for other programs, or reduce the projected surplus. Outlays for
Medicare services covered under Supplementary Medical Insurance
(SMI)-physician and outpatient hospital services, diagnostic tests, and
certain other medical services and supplies-are already funded largely
through general revenues.
Although the Office of Management and Budget (OMB) has recently reported a
$12 billion cash surplus for the HI program in fiscal year 1999 due to lower
than expected program outlays, the long-term financial outlook for Medicare
is expected to deteriorate. Medicare's rolls are expanding and are projected
to increase rapidly with the retirement of the baby boomers. Today's elderly
make up about 13 percent of the total population; by 2030, they will
comprise 20 percent as the baby boom generation ages and the ratio of
workers to retirees declines from 3.4 to 1 today to roughly 2 to 1.
Without meaningful reform, the long-term financial outlook for Medicare is
bleak. Together, Medicare's HI and SMI expenditures are expected to increase
dramatically, rising from about 12 percent in 1999 to about a quarter of all
federal revenues by mid-century. Over the same time frame, Medicare's
expenditures are expected to double as a share of the economy, from 2.5 to
5.3 percent, as shown in figure 4.
Source: 1999 Annual Report, Board of Trustees of the Federal Hospital
Insurance Trust Fund and 1999 Annual Report, Federal Supplementary Insurance
Trust Fund.
The progressive absorption of a greater share of the nation's resources for
health care, like Social Security, is in part a reflection of the rising
share of elderly population, but Medicare growth rates also reflect the
escalation of health care costs at rates well exceeding general rates of
inflation. Increases in the number and quality of health care services have
been fueled by the explosive growth of medical technology. Moreover, the
actual costs of health care consumption are not transparent. Third-party
payers generally insulate consumers from the cost of health care decisions.
In traditional Medicare, for example, the impact of the cost-sharing
provisions designed to curb the use of services is muted because about 80
percent of beneficiaries have some form of supplemental health care coverage
(such as Medigap insurance) that pays these costs. For these reasons, among
others, Medicare represents a much greater and more complex fiscal challenge
than even Social Security over the longer term.
When viewed from the perspective of the entire budget and the economy, the
growth in Medicare spending will become progressively unsustainable over the
longer term. Our updated budget simulations show that to move into the
future without making changes in the Social Security, Medicare, and Medicaid
programs is to envision a very different role for the federal government.
Assuming, for example, that the Congress and the President adhere to the
often-stated goal of saving the Social Security surpluses, our long-term
model shows a world by 2030 in which Social Security, Medicare, and Medicaid
increasingly absorb available revenues within the federal budget. Under this
scenario, these programs would absorb more than three-quarters of total
federal revenue. (See fig. 5.) Budgetary flexibility would be drastically
constrained and little room would be left for programs for national defense,
the young, infrastructure, and law enforcement.
*The "Eliminate non-Social Security surpluses" simulation can only be run
through 2066 due to the elimination of the capital stock.
Notes:
Revenue as a share of GDP during the simulation period is lower than the
1999 level due to unspecified permanent policy actions that reduce revenue
and increase spending to eliminate the non-Social Security surpluses.
Medicare expenditure projections follow the Trustees' 1999 intermediate
assumptions. The projections reflect the current benefit and financing
structure.
Source: GAO's January 2000 analysis.
When viewed together with Social Security, the financial burden of Medicare
on future taxpayers becomes unsustainable, absent reform. As figure 6 shows,
the cost of these two programs combined would nearly double as a share of
the payroll tax base over the long term. Assuming no other changes, these
programs would constitute an unimaginable drain on the earnings of our
future workers.
Source: 1999 Annual Report, Board of Trustees of the Federal Hospital
Insurance Trust Fund, and 1999 Annual Report, Board of Trustees of the
Federal Old Age and Survivors Disability Insurance Trust Funds.
While the problems facing the Social Security program are significant,
Medicare's challenges are even more daunting. To close Social Security's
deficit today would require a 17 percent increase in the payroll tax,
whereas the HI payroll tax would have to be raised 50 percent to restore
actuarial balance to the HI trust fund. This analysis, moreover, does not
incorporate the financing challenges associated with the SMI and Medicaid
programs.
Early action to address the structural imbalances in 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 the reform begins, the greater the
savings will be as a result of the effects of compounding.
The actions necessary to bring about a more sustainable program will no
doubt call for some hard choices. Some suggest that the size of the
imbalances between Medicare's outlays and payroll tax revenues for the HI
program may well justify the need for additional resources. One possible
source could be general revenues. Although this may eventually prove
necessary, such additional financing should be considered as part of a
broader initiative to ensure the program's long-range financial integrity
and sustainability.
What concerns us most is that devoting general funds to the HI trust fund
may be used to extend HI's solvency without addressing the hard choices
needed to make the whole Medicare program more sustainable in economic or
budgetary terms. Increasing the HI trust fund balance alone, without
underlying program reform, does nothing to make the Medicare program more
sustainable-that is, it does not reduce the program's projected share of GDP
or the federal budget. From a macroeconomic perspective, the critical
question is not how much a trust fund has in assets but whether the
government as a whole has the economic capacity to finance all Medicare's
promised benefits-both now and in the future. We must keep in mind the
unprecedented challenge facing future generations in our aging society.
Relieving them of some of the financial burden of today's commitments would
help preserve some budgetary flexibility for future generations to make
their own choices.
If more fundamental program reforms are not made, we fear that general fund
infusions would interfere with the vital signaling function that trust fund
mechanisms can have for policymakers about underlying fiscal imbalances in
covered programs. The greatest risk is that dedicating general funds to the
HI program will reduce the sense of urgency that impending trust fund
bankruptcy provides to policymakers by artificially extending the solvency
of the HI program. Furthermore, increasing the trust fund's paper solvency
does not address cost growth in the SMI portion of Medicare, which is
projected to grow even faster than HI in coming decades, assuming no
additional SMI benefits.
The issue of the extent to which general funds are an appropriate financing
mechanism for the Medicare program would remain important under financing
arrangements that differed from those in place in the current HI and SMI
structures. For example, under approaches that would combine the two trust
funds, a continued need would exist for measures of program sustainability
that would signal potential future fiscal imbalance. Such measures might
include the percentage of program funding provided by general revenues, the
percentage of total federal revenues or gross domestic product devoted to
Medicare, or program spending per enrollee. As such measures were developed,
questions would need to be asked about the appropriate level of general
revenue funding. Regardless of the measure chosen, the real question would
be what actions should be taken when and if the chosen cap is reached.
Long-Term Fiscal Policy Choices
As we know, there have been a variety of proposals to use the surpluses for
purposes other than debt reduction. Although these proposals have various
pros and cons, we need to be mindful of the risk associated with using
projected surpluses to finance permanent future claims on the budget,
whether they are on the spending or the tax side. Commitments often prove to
be permanent, while projected surpluses can be fleeting. For instance,
current projections assume full compliance with tight discretionary spending
caps. Moreover, relatively small changes in economic assumptions can lead to
very large changes in the fiscal outlook, especially when carried out over a
decade. In its January 2000 report, CBO compared the actual deficits or
surpluses for 1986 through 1999 with the first projection it had produced 5
years before the start of each fiscal year. Excluding the estimated impact
of legislation, CBO stated that its errors in projecting the federal surplus
or deficit averaged about 2.4 percent of GDP in the fifth year beyond the
current year. For example, such a shift in 2005 would mean a potential swing
of about $285 billion in the projected surplus for that year.
Although most would not argue for devoting 100 percent of the surplus to
debt reduction over the next 10 years, saving a good portion of our
surpluses would yield fiscal and economic dividends as the nation faces the
challenges of financing an aging society. Our work on the long-term budget
outlook illustrates the benefits of maintaining surpluses for debt
reduction. Reducing the publicly held debt reduces interest costs, freeing
up budgetary resources for other programmatic priorities. For the economy,
running surpluses and reducing debt increase national saving and free up
resources for private investment. These results, in turn, lead to stronger
economic growth and higher incomes over the long term.
Over the last several years, our simulations illustrate the long-term
economic consequences flowing from different fiscal policy paths. Our models
consistently show that saving all or a major share of projected budget
surpluses ultimately leads to demonstrable gains in GDP per capita. Over a
50-year period, GDP per capita is estimated to more than double from present
levels by saving all or most of projected surpluses, while incomes would
eventually fall if we failed to sustain any of the surplus. Although rising
productivity and living standards are always important, they are especially
critical for the 21st century, for they will increase the economic capacity
of the projected smaller workforce to finance future government programs
along with the obligations and commitments for the baby boomers' retirement.
Concluding Observations
The Congress and the President may ultimately decide to include some form of
prescription drug coverage as part of Medicare. Given this expectation and
the future projected growth of the program, some additional revenue sources
may in fact be a necessary component of Medicare reform. However, it is
essential that we not take our eye off the ball. The most critical issue
facing Medicare is the need to ensure the program's long range financial
integrity and sustainability. The 1999 annual reports of the Medicare
Trustees project that program costs will continue to grow faster than the
rest of the economy. Care must be taken to ensure that any potential
expansion of the program be balanced with other programmatic reforms so that
we do not worsen Medicare's existing financial imbalances.
Current budget surpluses represent both an opportunity and an obligation. We
have an opportunity to use our unprecedented economic wealth and fiscal good
fortune to address today's needs but an obligation to do so in a way that
improves the prospects for future generations. This generation has a
stewardship responsibility to future generations to reduce the debt burden
they will inherit, to provide a strong foundation for future economic
growth, and to ensure that future commitments are both adequate and
affordable. Prudence requires making the tough choices today while the
economy is healthy and the workforce is relatively large. National saving
pays future dividends over the long term, but only if meaningful reform
begins soon. Entitlement reform is best done with considerable lead-time to
phase in changes and before the changes that are needed become dramatic and
disruptive. The prudent use of the nation's current and projected budget
surpluses combined with meaningful Medicare and Social Security program
reforms can help achieve both of these goals.
GAO Contacts and Acknowledgments
(201032/935352)
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