Analysis: Medicare fix most difficult

WASHINGTON, Feb. 17 (UPI) -- All three major U.S. entitlement programs -- Social Security, Medicare and Medicaid -- are in financial trouble as the baby boomer generation heads into retirement, but fixing Medicare might be the most difficult.

States are being asked to come up with solutions for Medicaid -- and serve as testing grounds for those ideas. Social Security's money issues are more long-range than immediate. Medicare's troubles will arrive more quickly, more harshly and go straight to the issue of what type of healthcare system Americans want across generations -- for young and for old.

In hearings this week on Capitol Hill, lawmakers debated all three programs as they began to sort through tough choices. President George W. Bush's fiscal year 2006 budget proposal calls for private accounts for Social Security and a net reduction of $45 billion over 10 years in Medicaid. The president's budget left Medicare alone as the new prescription drug benefit is to take effect next year and he has vowed to veto any attempt to change it.

In one sense, analysts said, it is good to look at all three entitlements together. They all represent on some level tax payments from one generation -- workers -- to another -- retirees. The solutions for Social Security are shaping up as privatization and higher taxes, but for Medicare and Medicaid it becomes more complex because they provide healthcare services, not merely a check in the mail.

Sen. Kent Conrad, D-N.D., ranking minority member on the Senate Budget committee, told a hearing Thursday it was stunning to hear that Medicare, which covers more than 42 million beneficiaries, and Medicaid, which provides healthcare to some 46 million poor children, women, disabled and elderly, will by 2050 eat up over 20 percent of the gross domestic product.

"It's time for all of us to come forward with our best ideas," he said.

Thomas Saving, an economics professor at Texas A&M University and a member of the Social Security, Medicare and Medicaid Board of Trustees, told the committee that total future tax revenues, looking out as far as estimates go, are pegged at $99.3 trillion. Of that, $61.6 trillion -- roughly two-thirds -- is Medicare and Medicaid.

The brighter picture is Medicaid, however, as Health and Human Services Secretary Michael Leavitt told the Senate Finance committee, "Medicaid does not suffer from lack of solutions or information -- it is a deficit of decision."

In the hearings this week, the key issues outlined included:

--More than 7 million beneficiaries have entered Medicaid since 2001, mostly because of the poor economy, helping to double program expenditures -- now at more than $300 billion -- in 10 years.

--Most states must balance their budgets, so increases in Medicaid, along with tight fiscal times, are forcing them to reduce benefits and cut coverage for optional populations.

--Annual prescription-drug costs are increasing by double-digit percentages, far more than inflation.

--Half of Medicaid beneficiaries are children, yet they account for only $1 out of $8 spent, while 10 percent are elderly in nursing homes and they account for 25 percent of expenditures.

--States are extracting billions of dollars in improper federal-match money by using creative billing and loopholes in the law.

Solutions for Medicaid presented at the hearings included (see sidebar):

--Finding ways to encourage people to save more money for their future healthcare expenses.

--Allowing states to experiment with creative plans to expand their Medicaid programs.

--Focusing more resources on treating the chronically ill, who account for about 5 percent of the Medicaid population, but eat up 50 percent of the Medicaid dollars.

--Improving the healthcare industry's productivity so best practices result in the most cost-efficient and effective care.

--Tightening rules allowing seniors to divest assets to qualify for Medicaid to pay for long-term nursing-home care.

Leavitt said the administration has proposed spending billions of dollars to insure more children through Medicaid programs and is not proposing to cap or limit federal Medicaid spending on mandatory-coverage populations. He added, however, one key to Medicaid's future is giving states more flexibility in how they spend their Medicaid dollars, so they can expand coverage to uninsured poor people who normally would not qualify for benefits.

"We are not proposing any block grants or involuntary limits on optional populations, but states are reducing coverage to those optional beneficiaries," he told the Finance committee. "We want more coverage, not less. Yes, we can provide coverage ... with existing resources."

Leavitt has scheduled meetings with the nation's governors and with state Medicaid directors to work together to craft legislation to address some of the most serious problems.

Leavitt also said CMS was having "awkward conversations" with the states regarding appropriately characterizing Medicaid services for billing and intergovernmental transfers, a loophole in the law the states have used to rachet up their program spending artificially to increase the amount of federal reimbursement money.

Unlike Medicaid, the solutions for Medicare are not quite so neatly packaged.

Saving said the problem with a government-entitlement program such as Medicare is there is no incentive to reduce healthcare costs by developing cheaper ways of providing quality care. Medicare approves a treatment or device and sets a payment rate. Beneficiaries are not required to shop for competitive prices, so there is no incentive for the industry to try to capture market share by providing something cheaper but just as effective.

"That's why it makes Medicare reform so difficult," he said. "The notion of price matters to people if they are paying for it."

Fewer workers paying Medicare taxes, more beneficiaries, seniors living longer and using more healthcare services, and increasing costs will send Medicare spending soaring. It already is eating up the surplus generated by tax revenues in the Part A Hospital Trust Fund. By 2024, total Medicare spending will exceed Social Security and it will become 50 percent larger than Social Security by 2050.

The Bush administration has said the Medicare Modernization Act of 2003, which brought drug coverage to the program, will reduce program costs over time through disease management, more focused and preventive care, and by bringing competitive bidding to Medicare Advantage plans. Just how much that will affect spending remains uncertain.

This week, however, even as lawmakers noted what one referred to as a looming train wreck, they remained fixated on costs in the new Medicare Part D, which provides prescription drug coverage for seniors. That program alone has been estimated to cost $720 billion over its first 10 years and Saving said it has a $16 trillion unfunded liability if cost are projected out to 75 years.

It is difficult, however, for government and think-tank policy analysts to see how the changes Democrats and even some Republicans want to make -- such as legalizing drug reimportation from Canada and allowing HHS to negotiate lower Medicare drug prices with pharmaceutical companies -- will make enough of a dent in bringing down overall costs over time.

Saving reminded lawmakers it is not necessarily the level of spending that makes a difference -- it is the rate of spending growth that needs to be addressed.

Sen. Olympia Snowe, R-Maine, said HHS needs negotiating authority to lower drug costs, but Leavitt said the administration is convinced the MMA, through managed-care prescription coverage and drug-only insurance plans, will provide "a rigorous and active market," where the insurers do the negotiating with pharmaceutical companies to bring in the lowest prices for beneficiaries. Because plans will compete for Medicare business, they have an incentive to offer the best prices.

Saving told the Budget committee, however, he is not a big fan of government negotiation.

In researching drug prices the Veterans Administration has negotiated with Big Pharma for discounts, he found "individuals who paid for drugs entirely on their own actually got lower prices than any of the negotiated prices we've seen."

Conrad, even as he acknowledged the problem with the entitlements, said given the fact that just six years ago the government was predicting huge surpluses, "I've got grave doubts about these projections." He said the forecasts are being made based on a 1.8 percent growth in the economy, but the economy actually has been growing at 3.4 percent.

Democrats, meanwhile, have not offered their own overall Medicare reform plan -- and that remains a difficult task, because Medicare, as an entitlement, is a hallmark of Democratic party philosophy. Reforms, therefore, tend to, by default, end up looking like privatization and Republican-styled solutions.

Still on the horizon are savings for the program by making healthcare more efficient -- through electronic healthcare records, pay-for-performance reimbursement for physicians, best practices, and other efforts simply to squeeze out excess costs in the system. There also is talk of including Health Savings Accounts in Medicare as an option.

The alternatives to any major structural shift, however, include a range of politically distasteful choices for both parties -- such as tax increases, benefit cuts, eligibility-age changes or making seniors pay more for Medicare.

As far as reform goes, Medicaid has plans, while Medicare is still searching.

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