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THE MEDICARE 45% TRIGGER: WHAT IT IS AND WHY IT MATTERS
 


The Medicare Modernization Act of 2003 (MMA), best known for creating the Medicare Prescription Drug program, or Part D, included a little-discussed provision that could dramatically alter the entire Medicare program.  Referred to colloquially as "the 45% Trigger," the provision declares that if the Medicare Trustees' find, for two years in a row, that Medicare spending from general revenues (as contrasted with payroll taxes and premiums) is projected to exceed 45% of total Medicare spending for the current or following six years, it shall be treated as a "funding warning."  Such a finding triggers a statutory requirement that the President must submit legislation to Congress to address the funding situation.

The conditions established by the law have now occurred, and the President has sent proposed legislation to Congress. The law dictates elaborate special procedures for Congressional consideration of such legislation. Under the procedures, the President's proposal, or an alternative proposed by a member of Congress to address the same issues, is likely to be considered with a very short turnaround.

As anticipated, the President's proposals weaken benefits and other beneficiary protections.  The proposals are on top of the President's Fiscal Year 2009 budget proposals that include $183 billion in cuts from Medicare over a five-year period.  Specifically, proposals offered by the President would:
 

  1. Introduce principles of "value-based purchasing" of health care into the Medicare program
  2. Increase the use of income-based premiums for Medicare Part D (as already mandated for Medicare Part B by the MMA)
  3. Restrict patient access to courts to bring medical malpractice claims;

A future Weekly Alert will examine the President's legislative proposals in more detail.

The MMA's 45% Trigger is entirely arbitrary, and no such limit exists for any other governmental activity. It forces Medicare to rely primarily on payroll taxes and premiums rather than on the income taxes that produce general revenues, placing a greater burden on lower-income individuals than on middle- and upper-income individuals. Spending from general revenues for Medicare is no different from similar spending for education, housing, defense, or veterans' programs. All of these areas are 100% financed with general revenues.  The real issues concerning Medicare's future are how much health care costs increase and how the Medicare program is designed. The latter issue will be largely determined by the political will of Congress and the American people: in other words, whether health insurance for older people and people with disabilities through Medicare is viewed as a priority by Americans, and, if so, how it should be delivered.

We have reached the 45% Trigger in large part because the prescription drug benefit was funded only by general revenues (except for premiums for Part D plans).  That means that the billions of dollars in new expenses that fund Medicare Part D are applied toward the  45% limit. Generally, payroll taxes that go into a trust fund pay for Part A Medicare services, such as hospitalization and skilled nursing care.  With respect to physician visits, medical equipment, and prescription drugs provided under Parts B and D, premiums pay for about 25% of the costs while general revenues pay for about 75%.[1]  Over time, Congress has shifted Medicare usage from Part A services to services under Parts B and D.  For example, hospital and skilled nursing facility services, paid for mostly from the Medicare Trust Fund dollars, accounted for 53% of Medicare costs in 1993, 45% of costs in 2003 and 34% of costs in 2006.[2]  Prescription drug costs, not shown as a separate category in either 1993 or 2003, accounted for a full 12% of all Medicare spending in 2006, the first year of prescription drug coverage under Part D.[3]

Another reason we have reached the 45% Trigger is that Medicare costs, like private health care costs, have risen in recent years at a rate that is significantly higher than the consumer price index.  Wages do not rise as quickly as health care costs, so that payroll tax revenues, which fund the Part A Trust Fund, do not rise as much as overall program costs.  The Medicare payroll tax has not been increased in over 15 years, and thus far any ideas to do so have been ruled "off the table".

The President's proposed legislation does nothing to address one dramatic cost of the Medicare program:  payments to private "Medicare Advantage" plans which exceed those for a similar beneficiary in traditional Medicare by an average of 13%, and as much as 19%, and which cost every Medicare beneficiary an extra $2/month in Part B premiums.  The overpayments are estimated to cost $150 billion over 10 years[4].  This puts an undue burden on both trust fund and general revenue spending.

The issue of Medicare costs needs to be addressed by Congress and the President in ways that recognize that Medicare operates in the context of a larger health care system throughout which spending is rising as a percentage of Gross Domestic Product.  Some Medicare experts believe that part of the solution will involve increased taxes to generate needed revenues.  The 45% Trigger, however, dictates that needed revenues cannot come from the federal income tax that distributes the tax burden more fairly between rich and poor than other kinds of taxes.  Instead, the Trigger requires that Medicare revenues come from increased payroll taxes or premiums - both of which place a greater burden on lower income people - from increased beneficiary cost-sharing, or from reductions or other savings in payments to providers.  The 45% Trigger creates a significant obstacle to consideration of a wider array of options to improve and stabilize Medicare.

 
 


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