	Medicare’s Long-Term Financial Future Looks Worse

As I have stated in other testimony, 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 we now have a more realistic view of Medicare’s long-term financial condition and the outlook is much bleaker. Looked at this way, Medicare—more precisely, Medicare’s Hospital Insurance trust fund—is described as solvent through 2029. New Estimates Increase Urgency of Reform Efforts

These figures reflect a worsening of the long-term outlook. Under the old assumption (the Trustees’ 2000 best estimate intermediate assumptions), total Medicare spending consumed 5 percent of GDP by 2063. 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. HI is only the first layer in this figure. 7.) Our long-term simulations illustrate that, absent entitlement reform, large and persistent deficits will return. Medicare’s Bleak Financial Outlook Drives Need for Meaningful Program and Management Reform

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. Today, Medicare beneficiaries tend to need and use more drugs than other Americans. Specifically, these proposals would move Medicare towards a model in which health plans compete on the basis of benefits offered and costs to the government and beneficiaries, making the price of health care more transparent. Our look at health care spending projections shows that, with respect to Medicare reform, small implementation problems can have huge consequences. In addition, CMS recently reorganized its structure to be more responsive to its customers.
Why GAO Did This Study

Although the short-term outlook of Medicare's hospital insurance trust fund improved in the last year, Medicare's long-term prospects have worsened. The Medicare Trustee's latest projections, released in March, use more realistic assumptions about health care spending in the years ahead. These latest projections call into question the program's long-term financial health. The Congressional Budget Office also increased its long-term estimates of Medicare spending. The slowdown in Medicare spending growth in recent years appears to have ended. In the first eight months of fiscal year 2001, Medicare spending was 7.5 percent higher than a year earlier. This testimony discusses several fundamental challenges to Medicare reform.

What GAO Found

Without meaningful entitlement reform, GAO's long-term budget simulations show that an aging population and rising health care spending will eventually drive the country back into deficit and debt. The addition of a prescription drug benefits would boost spending projections even further. Properly structured reform to promote competition among health plans could make Medicare beneficiaries more cost conscious. The continued importance of traditional Medicare underscores the need to base adjustments to provider payments on hard evidence rather than on anecdotal information. Similarly, reforms in the management of the Medicare program should ensure that adequate resources accompany increased expectations about performance and accountability. Ultimately, broader health care reforms will be needed to balance health care spending with other societal priorities.