2005: A Bad Year for Health Policy

Published February 1, 2006

The initial implementation problems of the Medicare drug benefit that went into effect January 1 are being spun by some as reflective of a structural flaw: the inclusion of free-market competition and choice. Plans offering the Medicare drug benefit have multiplied beyond all expectation–2,900 of them nationwide.

Opponents argue there is too much choice, saying it is confusing seniors, angering them, and making it difficult for them to choose the “right” plan.

Political columnist Harold Meyerson, for example, titled his op-ed piece on the topic, “Bewilder Thy Father and Mother” (Washington Post, November 30, 2005). Choice among many alternatives introduces complexity, says Meyerson, which is both bewildering and economically inefficient. The value of the European style “single payer” alternative, he claims, is its simplicity: It rescues us from complexity (and its resulting inefficiency); it’s also said to be cheaper.

This is a curious line of reasoning that we normally do not extend to other sectors of the economy. Monopoly is good for you, the argument assumes, as long as it’s a government monopoly.

Choice Is Lost

While most seniors clearly do find the unexpected range of choice in drug options confusing, it’s worth clearing up a few misconceptions.

First, the problem with the drug program is its structure as a weird benefit designed by Congress, with absolutely no analogue in the private market. It is also universal, which means it is crowding out all other coverage. The left is wrong to imply that the drug program, with its much-criticized “donut hole,” or coverage gap, is somehow the product of a free-market approach to health care policy.

Second, the critics misunderstand the concept of choice. Real choice implies the personal option to keep what you have and what you like. It is the right to be free of coercion. The reality in this remarkable case is that almost half of the entire pool of eligible Medicare beneficiaries–those who are in employer-based retirement plans and those in Medicaid–will have no personal choice at all in their drug options. If employers decide they no longer wish to offer drug coverage and dump retirees into the government program, they can do that.

Retirees have no say in the matter. Why? Because the employer-based system is not a consumer-based system: Employees and retirees get what their employer gives them, whether they like it or not. In this case, most retirees like their existing retirement coverage, but regardless of their wishes, they probably won’t be able to keep it.

Anxiety Was Unnecessary

For persons eligible for Medicaid, their opinion about either Medicaid or the Medicare drug program doesn’t make any difference: Congress says they are going into the Medicare drug program. Period.

The anxiety of millions of seniors is understandable. They never liked this legislation, they don’t understand it, and the dynamics of a universal entitlement do not let them keep what they want or what they have. It crowds out existing coverage. The result is vast uncertainty among seniors and a political backlash against the White House and the congressional Republicans.

None of this was necessary. It all could have been avoided with a targeted drug benefit for seniors who did not have coverage, especially those on low incomes. But the congressional Republican leadership aligned itself with Sen. Edward Kennedy’s (D-MA) basic agenda and created a universal drug entitlement.

Agenda Hasn’t Changed

The carping will go on over the next few months, well into the next congressional election. But the left’s agenda will be what it has always been: Impose price controls on drugs, fill up the notorious donut hole with even more federal subsidies, and tighten up the regulations on private plans to drive them out of the program once and for all.

The nation is now committed to plunging, eyes-open, arms up, and screaming, into the greatest entitlement expansion since the Great Society. The nation is committing to paying for trillions of dollars in drug benefits and trillions more that have been promised in total Medicare benefits, which nobody on Capitol Hill or elsewhere has yet figured out how to pay for.

Economists at The Heritage Foundation estimate that if we decide to actually make up the $30 trillion Medicare shortfall (that’s the size of the long-term unfunded liability of the program) through tax increases, that would amount to an equivalent Medicare payroll tax jump from the current 2.9 percent of payroll to 13.4 percent right away. Taxes would have to rise still higher in subsequent years.

That kind of taxation would sharply reduce disposable income, cut investment spending, retard capital formation, and cost the economy in jobs and productivity. The Heritage numbers crunchers, using the best economic modeling on the market, are working on calculating the economic impact of not paying the taxes and going straight into debt. Not a good alternative.

Outlook Better in 2006?

For health policy, 2005 was a disappointing year overall. The Medicare mess has deepened and Congress has shown no willingness to act responsibly. The federal insurance market reform proposal authored by Rep. John Shadegg (R-AZ), which would have allowed individuals and families to buy health insurance across state lines, was reported out of committee but has not even come to the floor of the House of Representatives for a vote. The Tax Reform Commission proposed capping the tax exclusion on health benefits, but it stopped short of suggesting serious reform. The Medicaid Commission has yet to signal any intention to promote serious structural reform.

Nonetheless, there are reasons for optimism. For example:

  • On Medicare, Senator John McCain (R-AZ), Congressman Jeff Flake (R-AZ), and 100 members of the House Republican Study Committee introduced legislation last fall to delay implementation of the drug benefit. The bills were still in committee when the drug benefit went into effect on January 1, but the mounting fiscal crisis will soon force some serious action on Medicare; it’s unavoidable.
  • On Medicaid, the largest health care program, with 53 million enrollees and total costs of approximately $300 million, there are some interesting state initiatives. South Carolina and Florida have introduced new options for Medicaid recipients, including health savings accounts, and are promoting choice and competition among providers to improve access to care among the poorest citizens. The big task is to promote long-term care insurance among the middle class, so that nursing home care doesn’t become just another middle-class entitlement. If we do not control middle-class entitlements, we are going to shred the safety net for the poor.

HSAs Showing Promise

Health savings accounts are also taking off. There are more than a million of these policies now in effect nationwide, and the number is rapidly growing. They are broadly affordable, and about 30 percent of the policy holders are Americans who were previously uninsured. Meanwhile, Gov. Mitt Romney (R) of Massachusetts is trying to enact an innovative insurance reform characterized by reduced regulation, defined contributions for health insurance coverage, and a robust system of private health plan competition.

One of every seven dollars in the United States is spent on medical goods and services. In the past few decades, the role of personal spending has declined in health care, except for third-party payment cost-shifting to employees by employers through higher deductibles and copays.

The bigger transition, at least in terms of coverage numbers, seems to be from a highly regulated, employment-based, third-party payment system to a third-party-based government-managed system, as evidenced by the enrollment increases in Medicare and Medicaid. Congress is aiding and abetting this continued expansion of the government’s role in health care.

Robert Moffit ([email protected]) is director of the Center for Health Policy Studies at The Heritage Foundation, Washington, DC. Adapted with permission from AAPS News, January 2006.

For more information …

“The Economic and Fiscal Effects of Financing Medicare’s Unfunded Liabilities,” by Tracy L. Foertsch, Ph.D. and Joseph R. Antos, Ph.D., Center for Data Analysis Report #05-06, is available online at http://www.heritage.org/Research/HealthCare/cda05-06.cfm.