We Need Efficiency, Choice, Not Relic of Central Planning Medicare at the crossroads CON


Today marks the 30th birthday for one of the federal government's largest and most costly programs -- Medicare, the huge national health insurance program that covers more than 37 million elderly and disabled Americans.

Created in 1965 as part of the "Great Society" expansion of domestic social programs, Medicare emerged as a compromise measure among members of Congress who wanted to establish a full-scale national health insurance system. Thus, at its inception, the basic design of the Medicare system was grounded in the presumed efficacy of central planning. Medicare was heralded by proponents as both "historic" and "fiscally responsible." Now, however, Medicare is essentially bankrupt, and its ability to maintain the quality of its services is in doubt. What is not in doubt is the harsh reality that liberals must face up to: Medicare is anything but a fiscally responsible program.

According to the 1995 report of the Medicare trustees, a federal government board composed of three Clinton administration Cabinet members and two private citizens, the hospitalization insurance trust fund is projected to be insolvent by the year 2002. Equally important, the cost of the Medicare Supplemental Medical Insurance program is exploding. And while recent surveys show that most elderly Americans are under the impression that they paid for their health benefits, the truth is that the system is already heavily subsidized by the taxpayers. Worse, unless there are significant changes in the Medicare program, the future taxation on working families necessary to sustain or restore the current level of Medicare benefits would be enormous.

In 1965, when Medicare was enacted, there were almost six workers for every retiree. Today, there are only four workers for every retiree. And by 2030, when the nation's 77 million baby boomers are well into their retirement, there will be only two workers for every retiree. The Committee for Economic Development, a Washington-based public policy institution, warns that future payroll taxes, not counting federal, state or local taxes, just to finance Medicare and Social Security, could consume up to 28 percent of a worker's paycheck by that time.

There's a solution to this looming crisis. A solution based on free-market principles allowing for consumer choice among competing plans offering different benefits. One prominent model for the reform of the Medicare program, recommended by Heritage scholars, is the Federal Employees Health Benefits Program, the system that currently serves 1.6 million retired Congress members and federal workers.

Members of Congress increasingly realize that the quick fixes for the Medicare system, including various types of caps on spending and cost shifting, will no longer work. Serious policy-makers in Washington realize that the mounting problems with Medicare, its economic inefficiency and exploding costs, are fundamentally and inherently structural. The Medicare trustees have declared, "The Medicare program is clearly unsustainable in its present form." Many members of Congress are searching for ways to save health insurance benefits for the elderly by changing the structure of the current Medicare program, changing it from the highly bureaucratic government program that it is today into a dynamic system based on consumer choice and competition.

Planning and price controls

While federal government officials have not been successful in accurately projecting the true costs of the Medicare program, they have had even less success in controlling them. Instead of relying upon price competition, consumer choice and market forces to control costs, members of Congress have relied on an array of complex price controls. Since the inception of the Medicare program, Congress has adopted 75 options to cut reimbursement to doctors alone. This system of controls has ranged from the merely crude -- such as freezes on physician reimbursement -- to the increasingly complex and even downright bizarre. But the eternal quest of government bureaucrats is to find the "right price" for thousands of different medical procedures and treatments or specialists and other providers. In some instances, Medicare pays doctors, hospitals and other health care providers too much; in other cases, too little. Such a system encourages doctors, hospitals and other medical providers to engage in more or less elaborate attempts to "game" the price control system. Despite often outrageous demonstrations of professional cleverness on the part of doctors and hospitals, Medicare's systems of price controls, no matter how elaborate, have proven largely ineffective in controlling the overall costs of the program. But, like all such systems of private controls, they have proven very effective in shifting rising Medicare costs over to the less regulated private health insurance system serving workers and their families.

All of the incentives of the current Medicare system are designed to drive costs up. With the advent of the Medicare program in 1965, Congress created a generous new entitlement to health care services without sufficient incentives to offset the increased demand for services already highly popular with the elderly.

Just how expensive will it be to refinance Medicare under the current debate? The 1995 trustees report provides some sobering information on how payroll taxes (which fund the hospitalization insurance program) would have to rise to keep the program afloat without reform: "To bring the HI program into actuarial balance even for the first 25 years," a new 1.3 percent payroll tax would have to be added on top of the current 2.9 percent Medicare payroll tax. Based on the trustees' estimates for revenues under the current tax rate, this would raise payroll taxes and hence the cost of employing Americans -- by an estimated $263 billion over five years and $388 billion over seven years. A worker earning $45,000 would have to pay an additional payroll tax of $585 per year. To achieve long-term actuarial balance of the hospitalization insurance trust fund without reforming the program -- that is, to put it on a permanently sound footing -- an immediate additional payroll tax of 3.52 percent would need to be levied on top of today's 2.9 percent rate. That would raise taxes by $711 billion over five years and $1,050 trillion over seven years. The payroll taxces of a worker earning $45,000 would increase by $1,584 per year.

A new model

If members of Congress want to retain the single-payer, government-run structure of the Medicare program, they must resort to either much higher taxes or even more draconian controls on doctors and hospitals, including a direct limitation of available services, in a fashion not unlike the British National Health Service.

For example, while coverage for end stage renal dialysis is an entitlement in Medicare, it is simply unavailable to elderly citizens in the British national health system. But this is a clear public policy choice.

If private employer-based insurance is not the best model for the reform of the Medicare system, Congress can always examine its own system, the popular Federal Employees Health Benefits Program (FEHBP). This is the option proposed by the Heritage Foundation as a model for reform. It is also the model now proposed by the American Medical Association. Moreover, the ideal of transforming Medicare into a system that resembles FEHBP is attractive to a broader range of policy analysts, including those associated with the Progressive Policy Institute, the think tank of the moderate Democratic Leadership Council, and the Brookings Institution, the liberal think tank. The federal employees plan has a number of advantages. Unlike Medicare, congressional and federal retirees can pick and choose from a wide variety of plans and options. Unlike Medicare enrollees, retired members of Congress and federal workers can personally pocket the savings resulting from their choices. In Medicare, of course, there are no meaningful choices. And, in terms of economic efficiency, Medicare's bureaucratic and highly centralized system cannot even begin to compete with the market-based system that covers retired members of Congress and federal employees.

This special program for retired members of Congress and retired federal workers and their families not only has a much broader range of choices, a better package of benefits, including catastrophic coverage and prescription drugs, but also a superior record in controlling health care costs. While Medicare costs have been rising almost 11 percent per year, this year's overall private sector costs rose just 4.4 percent and FEHBP premium costs actually declined by 3.3 percent. Since the free-market forces of consumer choice and competition have proven to work well for Congress and retired members of Congress, there is no reason why the FEHBP model couldn't work for our nation's elderly.

John C. Liu is the senior health care policy analyst for the Heritage Foundation.

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