- The Washington Times - Wednesday, October 11, 2000

Medicare has emerged as the key domestic policy issue of this fall’s presidential cam paign. Both Vice President Al Gore and Gov. George Bush are blitzing the battleground states with campaign ads that trumpet their competing plans to offer prescription drug coverage for senior citizens. Unfortunately, both candidates miss the point about Medicare’s real problem.
For 35 years, the federal government has been unsuccessful in its battle to costs without paying for prescription drugs. Adding a monumentally expensive new drug benefit to a program whose costs have been out of control for decades may be politically popular, but it is fiscally irresponsible.
So, what is the truth about Medicare? Simply put, Medicare is unfair to today’s workers. Baby Boomers and Generation Xers perceive the nearly bankrupt program as an expensive entitlement for politically powerful senior citizens, not as something that will ever benefit them. Although today’s candidates for president won’t admit it, that perception is correct. Unless benefits are cut and out-of-pocket costs increased to the individuals covered by Medicare, the program is doomed to failure.
Medicare is based on the premise that the current working generation pays the taxes to support benefits for the current retired generation. In order for it to work properly, Medicare must have many more workers paying into it than retirees drawing out of it. As we all know, that formula is about to reverse itself. What happens then? Bankruptcy of the program and its eventual elimination.
It is a foregone conclusion that Medicare will be changed to prevent that from happening. Three general types of Medicare reform have been proposed: cuts in provider payments, higher taxes, and managed care. All four are politically viable in the short term because they don’t offend the senior citizens’ lobby. None, however, increases fairness for current workers. Without addressing the fairness issue addressed, workers’ support for Medicare payroll taxes will continue to erode.
Reductions in payments to health care providers, or more accurately, reductions in the growth of such payments, has been used to no avail throughout Medicare’s history. This unsuccessful policy has brought the system to the brink of bankruptcy, with no easy fix in sight. Health care providers defeat the intent of reducing the growth of payments by simply billing Medicare for more procedures and for more costly procedures. Moreover, the draconian cuts that are needed to keep Medicare afloat will inevitably result in reductions in the quality of care and in rejection of more Medicare patients by health care providers.
Increasing Medicare taxes is another solution often bandied about by those who believe that simply investing more money will somehow solve the problem. It won’t. To balance Medicare income and expenditures, it will eventually be necessary to double Medicare taxes. Doing so would damage the economy and increase unemployment. Future economic growth would be stunted, resulting in less Medicare tax revenues. The result? The system would go bankrupt anyway.
Managed care is often floated as the solution. Managed care, however, has been part of the Medicare system since 1984. Research shows it has cost money rather than saving any. It is disingenuous for candidates to propose more managed care in Medicare when the federal government has yet to find a way to make it work to contain costs.
If the reforms discussed here don’t address the real issue of unfairness in the Medicare program, what does?
First, let’s understand the underpinnings of this issue. Medicare is growing faster than taxes can support it, for two reasons. The first is the uncontrolled growth in the number of expenditures per beneficiary (recent favorable experience notwithstanding). The second is the aging of the Baby Boom generation. Nothing can be done about the latter, so something must be done about the former. But the reason for this uncontrolled growth is that like most persons in this nation who have health insurance, Medicare beneficiaries have too much coverage.
That is, they pay so little out of pocket directly to health care providers that there is no incentive for doctors or hospitals to be concerned about costs. Most Medicare beneficiaries pay almost nothing directly to a health care provider because they have Medicare supplement policies. Research shows that even modest Medicare copayments and deductibles could have a powerful impact on overutilization of health care services.
Research also shows that if all patients, not just Medicare recipients, were required to pay reasonable amounts out-of-pocket, the rate of increase in health care costs could actually be brought under control. Thus, genuine Medicare reform would have to result in greater out-of-pocket payments both for Medicare recipients and all patients. No other policy actually results in slowing the rate of growth of health care expenditures.
But don’t expect the candidates to discuss this type of reform. First, proposing such a policy would be political suicide. Second, most candidates do not have any understanding of the dynamics of health care and the powerful effect that out-of-pocket payments have on health care cost increases. Although such a policy would eventually result in fewer out-of-pocket costs, it will be perceived as a mere shifting of costs to beneficiaries.

Guy King, a member of the American Academy of Actuaries, served as chief actuary of the U.S. Health Care Financing Administration from 1978 until 1994.

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