Renegotiating the social contract - Eye on Washington - President Bush is working to reinvent Social Security, Medicare, and Medicaid

Healthcare Financial Management, April, 2003 by Jeanne Schulte Scott

Not since the halcyon days of Lyndon Johnson's Great Society has so much fundamental change been suggested to the three pillars of the American social contract: Social Security, Medicare, and Medicaid.

Riding a wave of confidence following last year's election sweep and betting that his popularity in the aftermath of September 11 will remain strong, President Bush has begun an ambitious effort to reinvent these three programs. In the process, he may change forever the nation's guarantee of benefits to its elderly, disabled, and poor. Bush's vision for future U.S. social welfare policy represents a fundamental shift in thinking about these programs.

In Bush's vision for these programs, individuals would control more of the investment of both money and energy in the maintenance of the nation's social safety net. Citizens would be given the option of investing some of their Social Security taxes in the stock market. The elderly would be encouraged to rely more heavily on private health plans and less on the government for their Medicare health benefits. The states would have far more power to determine who receives what benefits, and at what cost, under the Medicaid program.

President Bush would have the nation move away from the egalitarian philosophy that has governed the nation's social fabric in the past--the philosophy wherein everyone, regardless of income or social status, receives the same benefits through these programs. If the administration's vision for Medicare and Social Security is adopted, we may have shifted our beliefs that everyone should have the same core benefits from the same government-managed system.

These are changes of the highest magnitude--and yet the nation seems slow to realize what is hap pening. Buried as these proposals have been in the rhetoric about war with Iraq, the search for terrorists in our midst, and the ever-changing colors of homeland security alerts, their impact is only gradually dawning on the body politic. Unlike Bill Clinton with his 1,400 page document about health care in 1993 and Newt Gingrich with his "Contract with America," President Bush has been almost mum about his intentions. He has meted out his proposals piece by piece. Each item, standing alone, is debated as if it were an isolated proposal. But taken in their full context, the outlines of this social revolution are becoming very clear.

Administration officials and their allies in Congress, including some centrist Democrats, say such changes are essential to "modernize" these doddering old government programs and to stem the growth in entitlement spending. Medicare, Medicaid, and Social Security accounted for 42 percent of all federal spending last year, and that share is expected to grow significantly, especially after 2011 when the first baby-boomers start becoming eligible for benefits. But critics worry that these proposals will also mean less security, fewer guaranteed benefits, and more financial risk for beneficiaries. The Bush plans, they say, are essentially an effort to limit the federal government's financial responsibilities and to cap what is now an open-ended guarantee of specific benefits. In their view, the Bush proposal follows the course of several major U.S. corporations that are changing employee benefit programs from a defined-benefit to a defined-contribution structure.

Change Is Necessary and Inevitable

President Bush's State-of-the-Union Medicare proposal is going back to the drawing board for modifications after being thoroughly lambasted by almost everyone, including members of the president's own party. That plan would have encouraged many beneficiaries to leave traditional Medicare and join private health plans in order to receive prescription drug benefits. Bush now wants to allow a drug benefit for some poorer beneficiaries who choose to stay in the traditional Medicare program.

Traditional Medicare is one of the last bastions of fee-for-service medicine, but most politicians, Democrat and Republican, recognize that it cannot last in its present structure if a drug benefit is added. Democrats may try to milk the dissatisfaction any change will create for their political advantage, but even they recognize the need for redesigning the program, from both a financing and delivery standpoint.

Medicaid: Bailing out the States?

And when it comes to Medicaid, the current financial state of the states is abysmal. Forty-five of the 50 states are facing budget deficits reaching into the billions, with a substantial part directly linked to rising Medicaid costs. Citing the model of the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 ("the welfare law"), HHS secretary Tommy Thompson says states can be trusted with far more authority to decide who receives what benefits. The Bush proposal would offer states vast new power to reduce, eliminate, or expand health benefits for low-income people, including many who are elderly or disabled.

In return for the flexibility and a temporary increase in federal assistance, states would eventually have to accept a limit on the federal contribution to the program's cost. The choice would be up to the states; they could stay with the existing program or accept the administration's carrot and stick. Administration officials say the plan would allow states to stretch scarce resources during fiscal crises. Critics assert it would replace entitlement to health care for the poor with a block grant to the states, just when the number of uninsured individuals is rising.