- The Washington Times - Friday, September 1, 2000

Today, most politicians not only want to "save Medicare," but to expand Medicare. This speaks volumes about the political power of a broad-based entitlement.

Rather than protecting senior citizens against the costs of catastrophic illness, as was the original spin from proponents, Medicare always has dealt more with regular, predictable health care expenses. Along with Medicaid, Medicare has been a primary reason for the shift in health care expenditures from the private sector to government.

In 1960, 75 percent of national health care expenditures were financed by the private sector, versus 25 percent by the government. Private, out-of-pocket payments covered 48.7 percent. By 1998, the private sector's share had fallen to 54.5 percent, with out-of-pocket funding plummeting to 17.4 percent, while government's share grew to 45.5 percent.

When a third party picks up the tab, buyer and seller possess few incentives to be concerned about costs. In addition, consumers have every incentive to consume more and more of the good. Prices rise.

From 1968 to 1998, Medicare expenditures increased at an average annual rate of 14.8 percent, compared with an annual average increase of 5.3 percent in the consumer price index. As a share of total federal outlays, Medicare spending rose from 2.2 percent in 1967 to 12.9 percent in 1998. Likewise, Medicare grew from 0.41 percent of GDP in 1967 to 2.53 percent in 1998.

On the tax side, Medicare Part A, Hospital Insurance, resulted in 36 tax increases from 1966 to 2000. Meanwhile, major revenues supporting Medicare Part B, Supplementary Medical Insurance, were supposed to be split 50-50 between beneficiaries premiums and general tax revenues. By 1998, this split hit 24 percent from premiums and 76 percent from general revenues.

In turn, while national health care expenditures rose at an annual average rate of 7 percent between 1929 and 1965 (the year Medicare and Medicaid were passed), the rate jumped to 11 percent between 1965 and 1996. If one factors out the war decade of the 1940s, the average annual rate for 1929-1940 and 1950-1965 equaled 5.5 percent, half that of the 1965-1996 period.

Of course, part of the increase in health care spending since 1965 should be celebrated, as it reflects new treatments and extended lifetimes. But much reflects third-party-payer ills.

Despite these woes, politicians insist on "saving Medicare." For example, President Clinton and most in Congress stand ready to dump huge chunks of projected budget surpluses over the coming 15 years into Medicare. This amounts to a massive de facto tax increase assuming that budget surpluses should be returned to the taxpayers. Medicare would not be reformed in the least.

Instead, the latest craze is to expand Medicare coverage to prescription drugs. It is worth noting that, as of 1997, private funding covered 85.3 percent of national expenditures on drugs and other medical nondurables, versus 94.5 percent in 1970. Meanwhile, private out-of-pocket payments over this period dropped from 89 percent to 48.7 percent. The continuing relatively high level of private financing is positive, but the dramatic drop in out-of-pocket payments serves as a warning.

If government moves in to pick up much of the tab for prescription drugs, the third-party payment problem will worsen, leading to higher costs not only for taxpayers but also for all health care consumers. Government price controls and restricted choice would be inevitable.

Real Medicare/health care reform means correcting third-party payer woes. First, Medicare's deductible should be increased substantially and limits on Medicare reimbursements removed, shifting the program to a kind of catastrophic insurance plan.

Retirees also should be allowed to opt out of Medicare, and receive a health care voucher. Individuals would then shop around for the insurance coverage they deem best.

Finally, consumers need complete access to tax-free medical savings accounts (MSAs) tied to traditional, high-deductible catastrophic insurance. Government regulations limiting access to MSAs and dictating how MSAs work need to be wiped away.

Funds would be deposited, tax free, by an individual and/or his employer into an MSA. During the year, the individual would remove funds for medical services, with any leftover money rolled into an individual retirement account (IRA). If MSA funds were depleted during the year, and whatever deductible met, then the catastrophic insurance plan would kick in. Accumulated savings could be tapped upon retirement to purchase high-deductible insurance.

In terms of the current Medicare system, and those individuals in the future still unable to accumulate enough savings for health care needs in their senior years, the aforementioned voucher option would be available.

With these reforms, consumers would be in control, and health care inflation would be restrained. Rather than looking ahead to ever-rising taxes tied to today's Medicare program and the various schemes for expansion, both individuals and businesses could count on lower taxes as dependence upon government for health care would be greatly reduced.

Raymond J. Keating is chief economist with the Small Business Survival Committee and co-author of the new book, "U.S. by the Numbers: Figuring What's Left, Right, and Wrong with America State by State."

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