The politics and realities of Medicare

Public Interest, Summer, 2004 by Eric Cohen

TRYING to understand the economics of Medicare is a difficult business, but nearly everyone agrees that things do not look good. In March 2004, the Medicare Board of Trustees issued its annual report on the financial health of Medicare Part A, which funds primarily hospital expenses, and Medicare Part B, which funds outpatient care. The prognosis was grim: The Hospital Insurance (HI) "trust fund is projected to be exhausted in 2019-7 years earlier than estimated in last year's report.... The long-range projections for HI continue to show a very substantial imbalance.... The Part B premium and corresponding general revenue transfers will need to be increased sharply for 2005 to match projected costs." To fix this "imbalance," the report concluded, "would require very substantial increases in revenues and/or reductions in benefits."

The Medicare Modernization Act (MMA), signed into law in December 2003, has no doubt made this financial crisis even worse. The new law provides partial prescription drug coverage for all desiring seniors--with an estimated cost between $395 billion and $534 billion over the next decade, before most of the drug-hungry baby boomers even retire. Many analysts believe these estimates are already far too low, and that policy makers have conveniently avoided discussing the benefit's costs in the second decade and beyond. The bill also includes a combination of other reforms: higher premiums for wealthy seniors who participate in Part B; rule changes that allow more private health plans to offer Medicare coverage; subsidies for employers that continue drug coverage for retirees; medical savings accounts for people of all ages; and a six-city "demonstration project" of voucher-style competition starting in 2010, which many analysts believe will be killed before it begins.

None of these additional reforms changes the fundamental character of Medicare as a government-funded and government-run entitlement program, though the ideas behind them may be significant in shaping efforts at large-scale reform in the future. And all of these additional measures are over-shadowed by the new drug benefit that begins in 2006--the largest expansion of Medicare since the program was created in 1965. Specifically, the new benefit will cover 75 percent of drug costs between $250 and $2,250, provide no coverage between $2,250 and $5,100 (the so-called "hole in the doughnut"), and cover 95 percent of drug costs of $5,100 and over. Participation in the program is voluntary; the benefit will be administered by publicly approved private companies; and the premiums are estimated to cost $35 per month, with different private-sector plans competing to offer the best drug prices, and each plan required to offer drugs in every therapeutic category.

Not surprisingly, the debate over MMA was politically bitter and complex in legislative terms. It was pushed hard by the Bush administration, the Republican establishment, and some moderate Democrats--who saw it as the best way to give seniors the drug benefit they desire (a political plus), without breaking the bank or engineering a government take-over of the drug industry. The law was bitterly opposed by the majority of Democrats, who believe the drug benefits are too small and the "pay-off" to pharmaceutical companies too big; and it was attacked by many conservatives, who believe it will expand the grip of the welfare state and eventually lead to price controls, tax hikes, and a slowed economy.

MMA is a significant achievement, and in many ways an improvement. It corrects a genuine gap in Medicare, a program that was created before prescription drugs were a central part of modern medicine. And it significantly helps those seniors who are currently ineligible for Medicaid but still too poor to buy prescription drugs without economic hardship.

But one can also understand why so many people--Left, Right, and center--see the bill as irresponsible or inadequate, and why no one really believes it is what Medicare needs over the long-term. "We are building a new expansion onto a house that's teetering on a cliff," says Republican Senator Don Nickles. "It cynically uses the elderly's need for prescription drugs as a Trojan horse to reshape Medicare," says Democratic Senator Ted Kennedy. "Medicare has become pork barrel. It plays to retirees' desires and raises their discretionary income. The question of generational justice is nearly absent," says centrist columnist Robert J. Samuelson. The new law expands an entitlement that is already the fastest growing part of the federal budget. It leaves middle-class citizens with significant drug bills to pay, and thus invites future demands to "sweeten the benefits." And it punts the hardest social questions down the road--not only about the economics of Medicare, but about the intersection of modern medicine, an aging society, and the character of American society as a whole. These deeper questions are what lie at the core of the Medicare "crisis."