From the perspectives of the program, the federal budget, and the  economy, Medicare in its present form is not sustainable. Under the  Trustees’ 2003 intermediate assumptions, program outlays are expected to  begin to exceed program tax revenues in 2013. Neither the decline  in the cash surpluses nor the cash deficits will affect the payment of  benefits, but the negative cash flow will place increased pressure on the  federal budget to raise the resources necessary to meet the program’s  ongoing costs. The gap between HI income and costs shows the severity of HI’s financing  problem over the longer term. 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. At the same time,  the demographic trends and projected rates of growth in health care  spending I have described will mean rapid growth in entitlement spending. At the same time, annual rates of growth in entitlement  spending will begin to rise. As Bleak Fiscal Future Looms, Efforts to Address Medicare Coverage Gaps Are Being Considered

Despite a common awareness of Medicare’s current and future fiscal  plight, pressure has been building to address recognized gaps in Medicare  coverage, especially the lack of a prescription drug benefit and protection  against financially devastating medical costs. Under  the Trustees’ 2003 intermediate assumptions, the present value of HI’s  actuarial deficit is $6.2 trillion, a 20-percent increase from the prior year. Beneficiaries may fill this coverage gap in  various ways. Those policies that include drug coverage  tend to be expensive and provide only limited benefits. Under Medicare, beneficiaries have no limit on their  out-of-pocket costs attributable to cost sharing. Recently, several proposals have been made to add a prescription drug  benefit to the Medicare program. Private Sector Strategies for Controlling Drug Expenditures May Be Instructive for Medicare

Some proposals to add a Medicare outpatient prescription drug benefit  look to private sector strategies as a means to administer a drug benefit  and control costs. In considering the application of  these findings to Medicare, we are reminded that Medicare’s unique role  and nature may temper how the strategies and potential efficiency gains  afforded by private sector PBMs may be transferred to benefit the  program. Health plans can steer their beneficiaries’  purchases to specific drugs through the use of a formulary—that is, a list  of prescription drugs that health plans encourage physicians to prescribe  and beneficiaries to use. Concluding Observations

Medicare’s financial challenge is very real and growing.
Why GAO Did This Study

The House Committee on Ways and Means is holding a hearing on modernizing Medicare and integrating prescription drugs into the program. There are growing concerns about gaps in the Medicare program, most notably the lack of outpatient prescription drug coverage, which may leave Medicare's most vulnerable beneficiaries with high out-of-pocket costs. At the same time, Medicare already faces a huge projected financial imbalance that has worsened significantly in the past year. This statement discusses the challenges of adding a drug benefit to Medicare in the context of the program's current and projected financial condition. It also examines program design issues to be considered with respect to administering any proposed drug benefit. Specifically, it discusses how private sector health plans have used entities called pharmacy benefit managers (PBM) to control drug benefit expenditures.

What GAO Found

The recent publication of the 2003 Medicare Trustees' annual report reminds us that Medicare in its current condition--without a prescription drug benefit--is not sustainable. At the same time there are growing concerns about gaps in the Medicare program, most notably the lack of outpatient prescription drug coverage, that may leave Medicare's most vulnerable beneficiaries with high out-of-pocket costs. The Hospital Insurance (HI) portion of Medicare faces a huge projected financial imbalance that has worsened significantly in the past year. Under the Trustees' 2003 intermediate estimates, the present value of HI's actuarial deficit is $6.2 trillion--a 20 percent increase over the prior year. Beginning in 2013, HI's program outlays are expected to begin to exceed program tax revenues, putting increased pressure on the federal budget to raise the resources necessary to meet program costs. In addition, Supplementary Medical Insurance is projected to place an increasing burden on taxpayers and beneficiaries. GAO's long-term budget simulations show that, absent meaningful entitlement reforms, demographic trends and rising health care spending will drive escalating federal deficits and debt. Neither slowing the growth of discretionary spending nor allowing the 2001 tax reductions to sunset will eliminate the imbalance. While additional economic growth will help ease our burden, the potential fiscal gap is too great to grow our way out of the problem. The application of basic health insurance principles to any proposed benefit could help moderate the cost for both beneficiaries and taxpayers. These include beneficiary protections against the risk of catastrophic medical expenses and premium contributions and cost-sharing arrangements that encourage beneficiaries to be cost conscious. The private sector's use of PBMs to control drug expenditures may be instructive for Medicare, but the program's unique role and nature may moderate how such entities would be used and the potential efficiency gains afforded in attempting to transfer PBM-like strategies to Medicare.