I was recently asked to share my thoughts about the future of Medicare with the Senate Finance Committee. I thought the readers of Modern Healthcare might be interested in what I told them.

My assessment is drawn from my experience as HHS secretary and as a trustee of the Medicare Trust Fund from January 2005 to January 2009. During this service and since, I've been candid in my assessment. Medicare is drifting toward disaster. These are strong and appropriate words. The fundamental problem is that Medicare's dominant fee-for-service structure rewards volume, not quality.

Unfortunately, the Patient Protection and Affordable Care Act has weakened, not strengthened, the program. In what I have characterized as an illusion, the ACA has made matters worse by creating the perception of progress, thereby deferring real reform. Real reform would put the program on a sound financial footing so future generations of seniors will benefit from a solvent Medicare program.

While the most recent Medicare trustees report claims that the trust fund will not be depleted until 2029, the reality is that the system will be insolvent far sooner. The problem begins with double-counting or the mixing of trust funds with the general treasury in order to say health reform pays its way.

How does this work? The Medicare provisions in ACA (which the actuary says are unlikely to occur) lower spending out of the Trust Fund, which extends their solvency. Medicaid and new credits create new costs to the general treasury. If the Medicare savings stay in the trust funds, then the general treasury cannot use those savings to offset the new costs of Medicaid and credits. If the Medicare savings are used, then the solvency of the trust funds is not extended.

The same dollar can't be spent twice—a point both the Congressional Budget Office and Medicare's actuaries have made in their cost estimates. The Medicare cuts can be used to improve the capacity of the government to finance benefits in the future, or they can be used to pay for another entitlement. Not both. On paper, the Medicare trust fund looks to have additional reserves because of the peculiarities of government accounting. But Congress has already spent the money on something else.

What's needed is a new vision for the Medicare program. Instead of micromanaging prices, the federal government should provide oversight of a marketplace in which cost-conscious seniors make decisions by choosing from among competing insurance and delivery system options.

More specifically, a Medicare system solvent through the 21st century would have three characteristics. First, value-of-care must replace volume-of-care as Medicare's most rewarded virtue. Second, Medicare parts A and B should operate like part D. Costs for Medicare Part D have come in much lower than expected because genuine price competition drives down costs much more than any payment regulation ever can. Third, each generation would carry its share of the load.

Until we make these changes, Medicare will continue to drift toward disaster. Our nation has made a promise to provide healthcare to our seniors. To keep this commitment we must change.

Michael Leavitt
Former HHS secretary
Former Environmental Protection Agency administrator
Former governor of Utah
Founder and chairman
Leavitt Partners