V I E W P O I N T

Medicare Proposals in the President's 2007 Budget

Medicare is the federal health insurance program that provides coverage to 43 million Americans who are 65 and over, or who are younger than 65 and receiving Social Security disability payments. Medicare benefits for hospital, nursing home, home health, physician, managed care, hospice and other services in 2005 were expected to total $325 billion or 13 percent of the federal budget. (Congressional Budget Office, Medicare Baseline, March 2005).

On February 6, 2006, President Bush submitted his Fiscal Year 2007 Budget to the Congress. In presenting his budget, President Bush called for cutting entitlement programs, such as Social Security and Medicare, while once again proposing additional tax cuts which primarily would benefit the wealthy. The President's proposals to cut spending would reduce Medicare expenditures by $36 billion over five years and by $105 billion over ten years. The nonpartisan Congressional Budget Office (CBO) believes the President's proposals would result in even larger cuts than estimated by the Administration. A recent CBO analysis of the President's FY 2007 budget shows that the President's proposals would cut Medicare expenditures by $37 billion over five years and by $138 billion over ten years. The President is proposing cuts in payments to providers, automatic cuts in Medicare spending if an arbitrary spending cap is reached, and an increase in Part B premiums for higher-income Medicare beneficiaries.

Provider Cuts

The President's budget proposes reducing payments to providers in traditional Medicare. This would be done by cutting, freezing or slowing the growth of payments to providers including: hospitals (for both inpatient and outpatient services), skilled nursing facilities, home health, inpatient rehabilitation facilities, ambulances, laboratories, and durable medical equipment. The budget does not reduce overpayments to private Medicare Advantage plans.  

Automatic Reduction in Medicare Spending if 45 Percent Cap is Exceeded

A provision of the Medicare Modernization Act (MMA), which established the Medicare prescription drug program, required the Medicare trustees to project the point at which general revenues will finance at least 45 percent of Medicare's outlays. If the trustees project in two consecutive reports that the 45 percent cap will be reached within the next seven years (the current year and six subsequent years), it requires the President to submit a proposal for Congressional review that would receive expedited consideration in Congress. This “fast-track” process is only available for proposals that would shift costs to seniors or further cut payments to providers. According to the 2006 Medicare trustees' report, the 45 percent cap is projected to be reached in 2012 which would trigger Presidential action with the release of the 2007 report.

The President's budget would require an automatic reduction in the rate of Medicare growth if the 45 percent cap is exceeded, thus bypassing the need for a legislative proposal and Congressional action. The automatic reduction would begin as a four-tenths of a percent reduction to all provider payments in the year the threshold is exceeded, and would grow by four-tenths of a percent every year the shortfall continued to occur.

Eliminating the Inflation-Adjusted Thresholds for Means-Testing Part B Premiums

A provision of the prescription drug law requires Medicare beneficiaries with annual income over $80,000 and couples with annual income over $160,000 to pay higher Part B premiums beginning in 2007. Under current law, these income thresholds will be increased each year to reflect inflation. However, President Bush proposes to eliminate this adjustment so that more people would reach the thresholds each year and be required to pay higher Part B premiums. An example of the importance of indexing for inflation is the Alternative Minimum Tax (AMT), which was originally designed to only affect the wealthy but is increasingly borne by middle-income taxpayers.

NATIONAL COMMITTEE POSITION

The National Committee to Preserve Social Security and Medicare supports the Medicare program as an entitlement program with benefits available to all who are eligible and in need of services.

The National Committee is concerned that arbitrarily cutting payments to Medicare providers across-the-board could limit their willingness to serve Medicare beneficiaries.

The National Committee opposes the President's budget proposal which would lead to automatic across-the-board cuts to all Medicare providers . The National Committee opposed the establishment of the 45 percent cap in the MMA, even without automatic cuts, because it represents an arbitrary measure of the program's health and limits the consideration of solutions to the program's long-term shortfall. Further, it ignores Medicare's financing structure and prohibits the use of increased revenues to address problems facing both the Medicare program and the U.S. health care system.  

The National Committee opposes means-testing the Medicare Part B premium which undermines Medicare as a social insurance program. Under the President's budget proposal to eliminate indexing the income thresholds for inflation, more and more middle-income seniors will eventually pay much higher Part B premiums. This comes at a time when seniors are already facing the second largest Part B premium increase (in dollar terms) in the history of the Medicare program. In 2006, seniors' premiums increased by 13 percent to $88.50 a month.

Government Relations and Policy, May 2006