Summary: The President's Medicare reform proposal is an important first step in the debate over how the country will deal with the explosive costs of medical care for older Americans in the coming decades. The President has included a first step toward Medicare reform as part of a broader plan that would use a significant share of the surplus to pay down the debt, ultimately lowering interest rate costs and spurring economic growth. The President would use 13 percent of the projected budget surpluses during the next 15 years to help shore up the Medicare Hospital Insurance Trust Fund and to offset the cost of the proposed prescription drug benefit. Although the surplus "transfer" in the form of additional Treasury securities would extend the Fund's solvency, this move would represent a significant departure from the long-standing use of payroll taxes to finance the Fund. GAO is concerned that without underlying program reform, the transfers would simply extend the Fund's solvency on paper but do nothing to make Medicare more sustainable--that is, they would not reduce the program's projected share of gross domestic product or the federal budget. More importantly, the proposed transfer, by extending the solvency of the Hospital Insurance program through 2027, well into the baby boomers' retirement years, could end up masking the Fund's underlying condition and remove any sense of urgency among policymakers to address the program's underlying fiscal imbalance. The President wants to make two major program changes to Medicare. First, he would have Medicare's health plans compete on the basis of price. However, the administration has yet to provide specifics on the design and implementation of this proposal. Second, the President would add a prescription drug benefit. GAO is concerned about (1) the cost of the benefit and who would be targeted, (2) the fact that some costs now borne by employers and retirees could become the responsibility of taxpayers, (3) uneven impact across states, and (4) obstacles to the government realizing savings from the use of pharmacy benefit managers.
