What Medicare Reform Plan?

The new Medicare Trustees' report once again brings home how out of kilter the whole system is. Rather than try to solve the problem, however, the Clinton administration would hide it by reallocating Medicare expenditures from the Hospital Insurance (HI) trust fund - which by law must be solvent to pay benefits - to Medicare's Supplementary Medical Insurance (SMI) program, where general revenues automatically plug any funding gap, no matter how large. There, presumably, the spending will vanish in the sea of other budgetary red ink.

The Republicans are to be commended for their greater honesty: Their proposed savings would actually come from restraining spending. But not even the GOP dares to acknowledge the full magnitude of Medicare's funding shortfall and to come clean about how much must be saved to "save" the program.

First of all, the GOP plan would merely extend the solvency of the HI trust fund for about five years beyond the 2001 bankruptcy date announced by Medicare's trustees. In the context of a program that promises benefits spanning a lifetime, and whose official definition of solvency is trust-fund balance over 75 years, this seems underwhelming.

Moreover, even over the near term, the GOP plan - though more responsible than the administration's - falls far short of the HI savings required to keep this "self-financing" program from adding to the federal deficit. As we have argued before, the only economically sensible way to look at Medicare is to jettison the metaphysics of trust-fund accounting, which allows politicians to count the system's paper assets as genuine savings, and to look instead at Medicare's operating balance - that is, the annual difference between its outlays and earmarked tax revenues.

On a cash basis, HI is already running an annual deficit of $17 billion, a shortfall that will rise to $41 billion by 2000, the last year the program is officially projected to be solvent. Over the next six years, HI's cash deficits will total a cumulative $230 billion. This represents the HI savings Congress must find to keep HI from adding to the deficit.

Logically, we should include SMI in this calculation, since it too affects the budget balance. Remember: SMI's earmarked revenues (beneficiary premiums) now amount to only one-quarter of SMI costs. The remainder is filled in by a Treasury subsidy. A sensible test of SMI's financial stability is whether its subsidy will remain constant as a share of gross domestic product. This test shows that, under (GDP) current law, SMI's cumulative cash shortfall will be $100 billion over the next six years.

Amazingly, in light of the looming Medicare costs, the monthly SMI premium paid by beneficiaries was allowed to drop from $46.10 per month in 1995 to $42.50 per month beginning January 1996, when Congress and the president failed to take action to hold the premium to prior levels. As a result, the premium fell from covering 31.5 percent of program costs to 25 percent. The impact on SMI financing and the budget will be $5 billion in 1996 and $40 billion over the next six years. Last autumn, congressional attempts to raise, then to freeze the premium elicited howls of protest. The premium rollback was scarcely noted.

Medicare's projected cash shortfall is thus $330 billion - twice what the GOP would save in HI and SMI and three times what the administration would save. These figures, of course, refer to the budget debate's myopic six-year time horizon. They say nothing about the vast sums we would need to save to stabilize Medicare when the Baby Boomers retire. To get an idea of just how large these sums are, consider that even the "Draconian" GOP plan would still leave Medicare on track to double as a share of GDP by 2025.

* Martha Phillips is executive director of The Concord Coalition in Washington.