News Release

March 5, 2003

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Will 21st Century Medicare Arrive During Our Lifetimes?

Yesterday, President Bush provided just a few more details for his proposed Framework to Modernize and Improve Medicare. In addressing problems of cost, quality, and access, the president promised more choice (greater access) and better benefits (higher quality). Yet he failed to explain convincingly how a three-legged version of Medicare (labeled as "Traditional Medicare," "Enhanced Medicare," and "Medicare Advantage") would be more affordable and sustainable (less costly).

Two out of three may seem close enough for government work because an antiquated Medicare system needs to be overhauled to provide better access to the more diverse benefits-options of competitive private markets. But the missing piece of this political puzzle remains cost. The taxpayers who would subsidize an ever-increasing share of Medicare spending, as well as future beneficiaries who would pay for the rest, deserve better answers. If the White House remains unable (or unwilling) to supply them, expecting members of Congress to do so will represent the triumph of hope over experience.

The president's vision of Enhanced Medicare suggests many of the policy elements that could deliver health care to seniors based on competition and consumer choice. However, the politically difficult transition to 21st Century Medicare remains hobbled by its proposed payment rules, which are ambiguous, if not arbitrary, and complex, if not contradictory.

The Bush administration chose to selectively subsidize the new health care choices it favors instead of allowing traditional Medicare to compete with private health-plan alternatives on a level playing field. This short-term policy expedient may help finesse immediate disruptions in current coverage patterns and temporarily hold off incorporation of an unsustainable drug benefit plan within an unreformed traditional Medicare program. But, apart from its uncertain political viability, the tactic is likely to deliver a future Medicare program that ratchets upward the costs of privately administered/publicly paid benefits and fails to provide cost-conscious economizing incentives across a common payment base.

Having told current seniors that traditional benefits are not good enough for them and that they deserve more, the Bush plan not only creates an upward political dynamic to pay more for Medicare benefits -- as long as they carry a "private sector" label -- it also risks a boomerang effect. Not far down the road, private-plan efficiencies will fail to outrun one-sided political promises and hit fiscal constraints. The Bush framework lacks sufficient cost-containment incentives to head off that scenario.

As reverse momentum eventually builds to retrace our steps, we will find ourselves on a course to re-regulate and restrict access to the very "enhanced" benefits that President Bush and other benefits modernizers initially promised to deliver. But that, of course, would be more of a political problem for future, rather than current, officeholders.

By trying to promise too much on the "new and improved" benefits side, the Bush plan does too little to establish a limited set of structural changes today that would lead to a combination of limits on taxpayer subsidies and expansion of benefits options, which, in turn, would require value-maximizing tradeoffs by individual Medicare beneficiaries.

Medicare payments on both sides of the spending equation (those going to beneficiaries as well as those going to health care providers) need to be linked more closely and comprehensively both to market prices and taxpayers' willingness to pay, rather than to hollow political promises and the administered price controls that follow them. Until they reflect this key ingredient, the latest set of proposed reforms remains likely to deliver more of the illusion of competitive, private-sector health care to seniors than its reality.