The rapid growth in health care spending means that an increasing share  of the nation’s output, as measured by GDP, will be devoted to the  production of health care services and goods. Within the next 10 years, the first baby  boomers will begin to retire, putting increasing pressure on the federal  budget. Demographic Trends And Expected Rise in Health Care Costs Drive Medicare’s Long-Term Financing Problem

As you know, Medicare consists of two parts—HI and SMI. Labor force growth will continue  to decline and by 2025 is expected to be less than a third of what it is  today. This slowing labor  force growth is not always recognized as part of the Medicare debate, but  it is expected to affect the ability of the federal budget and the economy to  sustain Medicare’s projected spending in the coming years. HI’s Trust Fund Faces Cash Flow Problems Long before the HI Trust Fund Is Projected to Be Insolvent

Current projections of future HI income and outlays illustrate the timing  and severity of Medicare’s fiscal challenge. This pressure will only increase when Social Security also  experiences negative cash flow and joins HI as a net claimant on the rest  of the budget. The projected exhaustion date of the HI Trust Fund is a commonly used  indicator of HI’s financial condition. For example, the Balanced  Budget Act of 1997 modified the home health benefit, which resulted in  shifting a portion of home health spending from the HI Trust Fund to SMI. To obtain budget balance, massive  spending cuts, tax increases, or some combination of the two would be  necessary. Neither slowing the growth of discretionary  spending nor allowing the tax reductions to sunset eliminates the  imbalance. In addition, while additional economic growth would help ease  our burden, the projected fiscal gap is too great for us to grow our way out  of the problem. As HI trust fund assets are redeemed to pay Medicare benefits and SMI  expenditures continue to grow, the program will constitute a claim on real  resources in the future. The Medicare benefit package, largely designed in 1965, provides virtually  no outpatient drug coverage. In particular, the addition of a  benefit that has the potential to be extremely expensive—such as  prescription drug coverage—should be focused on meeting the needs  deemed to be of the highest priority. As I continue to maintain, acting  prudently means making any benefit expansions in the context of overall  program reforms that are designed to make the program more sustainable  over the long term instead of worsening the program’s financial future. Medicare Reforms Should Realign Incentives, Improve Transparency, and Strengthen Accountability

In recent years, leading proposals have been made to restructure Medicare  that have included greater reliance on private health plans and reforms to  the traditional fee-for-service program. Experience with Medicare’s private health plan  alternative, called Medicare+Choice, suggests that details matter if  competition is to produce enhanced benefits for enrollees and savings for  the program. This means  designing a program that will encourage beneficiaries to select health plan  options most likely to generate program savings. For example, incentives for health  plan efficiency exist, but any efficiency gains achieved do not produce  Medicare savings. As we contemplate the forecast for Medicare’s fiscal condition and its  implications, we must also remember that the sources of some of its  problems—and its solutions—are outside the program and are universal to  all health care payers.
Why GAO Did This Study

We are pleased to be here today as Congress examines Medicare's financial health and consider the budgetary and economic challenges presented by an aging society. The Comptroller General has been particularly attentive to the sustainability challenges faced by the nation's two largest entitlement programs--Medicare and Social Security--for more than a decade since he served as a public trustee for these programs in the early 1990s. The recent publication of the 2003 Trustees' annual report reminds us, once again, that the status quo is not an option for Medicare. If the program stays on its present course, in 10 years Hospital Insurance (HI) Trust Fund outlays will begin to exceed tax receipts, and by 2026 the HI trust fund will be exhausted. It is important to note that trust fund insolvency does not mean the program will cease to exist; program tax revenues will continue to cover a portion of projected expenditures.1 However, Medicare is only part of the broader health care financing problem that confronts both public programs and private payers. The unrelenting growth in health care spending is producing a health care sector that continues to claim an increasing share of our gross domestic product (GDP).

What GAO Found

Despite the grim outlook for Medicare's financial future, fiscal discipline imposed on Medicare through the Balanced Budget Act of 1997 (BBA) continues to be challenged, and interest in modernizing the program's benefit package to include prescription drug coverage and catastrophic protection continues to grow. Such unabated pressures highlight the urgency for meaningful reform. As we deliberate on the situation, we must be mindful of several key points. The traditional measure of HI Trust Fund solvency is a misleading gauge of Medicare's financial health. Long before the HI Trust Fund is projected to be insolvent, pressures on the rest of the federal budget will grow as HI's projected cash inflows turn negative and grow as the years pass. Moreover, a focus on the financial status of HI ignores the increasing burden Supplemental Medical Insurance (SMI)--Medicare part B--will place on taxpayers and beneficiaries. GAO's most recent long-term budget simulations continue to show that demographic trends and rising health care spending will drive escalating federal deficits and debt, absent meaningful entitlement reforms or other significant tax or spending actions. To obtain budget balance, massive spending cuts, tax increases, or some combination of the two would be necessary. Neither slowing the growth of discretionary spending nor allowing the tax reductions to sunset will eliminate the imbalance. In addition, while additional economic growth will help ease our burden, the potential fiscal gap is too great to grow our way out of the problem. Since the cost of a drug benefit would boost spending projections even further, adding drug coverage when Medicare's financial future is already bleak will require difficult policy choices that will mean trade-offs for both beneficiaries and providers. Just as physicians take the Hippocratic oath to "do no harm," policymakers should avoid adopting reforms that will worsen Medicare's long-term financial health. Our experience with Medicare--both the traditional program and its private health plan alternative--provides valuable lessons that can guide consideration of reforms. For example, we know that proposals to enroll beneficiaries in private health plans must be designed to encourage beneficiaries to join efficient plans and ensure that Medicare shares in any efficiency gains. We also recognize that improvements to traditional Medicare are essential, as this program will likely remain significant for some time to come.