Analysis: Medicare Reform Measure Repeats Mistakes of 25 Years Ago

Published August 1, 2003

In 1988, President Ronald Reagan signed the Catastrophic Health Care Act–sweeping Medicare reform legislation meant to respond to what legislators saw as overwhelming demand for government-provided health care benefits.

But a revolt erupted once the public realized the new entitlement came with a steep price, with seniors expected to pay higher premiums for fewer benefits. The Act also employed means-testing to curtail benefits, so all but the lowest-income seniors shouldered new financial burdens under the plan.

Former House Ways and Means Committee Chairman Dan Rostenkowski (D-Illinois) was mobbed by more than 50 angry seniors in downtown Chicago. One senior citizen made media history by attacking Rostenkowski with her umbrella. Hundreds of thousands of letters protesting the new law were delivered to the floor of Congress.

In a rare and rapid about-face, Congress repealed the legislation within a year.

Misreading the Public

The Medicare reform legislation now under discussion in Congress has set the stage for a repeat of one of history’s most obvious policy-making blunders. While opinion polls report the public’s concern over the health care system as a whole and Medicare in particular, federal legislators have moved ahead on a schedule that appears to be set more by political priorities than by sound policy considerations.

According to Sue Blevins, founder and president of the Institute for Health Freedom in Washington, DC, “Congress seems to be reacting to what it thinks is the public’s overwhelming demand for more government regulation and intervention into the Medicare program.”

But, Blevins notes, citing a recent survey released by the Galen Institute (see “Seniors Worry about Drug Benefit,” page 1), “66 percent of respondents said they are worried a government-provided prescription drug benefit might mean some people could lose their private health care coverage and become dependent on government funding.

“That’s exactly what happened to seniors when Medicare was passed more than 30 years ago,” Blevins points out. “They lost their independence regarding health insurance options. And consequently, health care costs have skyrocketed for all.”

Blevins predicted already-weak support for the Medicare reform measure currently being debated in Congress will plummet once the public, and seniors in particular, realizes the $400 billion cost projection is nothing more than a down payment.

Seniors Given Short Shrift

When legislators crafted Medicare in 1965, they did not anticipate pharmaceutical treatments would become popular, effective alternatives to hospitalization and invasive surgery. So they didn’t include in Medicare coverage for drugs used in outpatient settings. Private-sector insurance plans long ago adapted to changes in health care by covering medications.

The positive spin lawmakers have put on the pending Medicare reform proposals obscures a financial reality awaiting seniors and all U.S. taxpayers: If a reform measure is passed, the nation will be exposed to potentially catastrophic costs that will be passed on to the grandchildren of today’s and tomorrow’s seniors.

The House and Senate still must reconcile the plans each chamber passed in late June. Both bills contain serious policy flaws:

  • Low-balling the costs. Though lawmakers claim they can provide drug coverage to seniors at a reasonable expense, they rely on accounting tricks that underestimate the real cost. The $400 billion cost over the next 10 years is achieved by delaying the effective date of the benefit for three years. In 10 years the expected cost more than doubles–the program would cost more than $900 billion in the subsequent 10 years.
  • Casting a wide net. Rather than target the prescription drug benefit to the one-fourth of seniors currently without drug coverage, both plans offer something for everyone in Medicare. That approach will encourage employers to drop drug insurance for the 31 percent of seniors who now get their drugs as a retirement benefit. The Congressional Budget Office estimates more than one-third of retirees would lose their company coverage and be forced into the Medicare plan.
  • Benefit gaps. Like 1988’s Catastrophic Health Care Act, the new reform proposals shift additional costs to seniors. In the Senate plan, recipients would pay their first $275 in drug costs out of pocket each year. Following that, the government picks up half the cost, but only until the annual drug bill hits $4,500. Then coverage stops until a senior has spent $3,700. Then the plan covers 90 percent of costs.
  • Wishing won’t make it so. Both bills hope to entice private insurers to compete with one another to offer stand-alone drug benefits. Private health insurance plans are expected to provide a needed benefit to seniors while keeping costs low and still turning a profit. It’s difficult to imagine how that can happen. Most brand-name drug companies already offer deeply discounted prescription drugs and prescription discount cards through their own assistance programs; they already discount drugs by 20 percent for state Medicaid beneficiaries; and they are under heavy pressure to offer additional rebates to state-run discount drug programs. It is unlikely they will agree to discount drugs for private insurance plans as well.
  • Reform in name only. Neither bill currently under consideration will bring Medicare spending under control. The Senate measure promotes no meaningful financial reforms, while the House postpones any meaningful change until 2010.

Unwanted Consequences

It’s anybody’s guess what Medicare reform will look like next week or next month, as Senate and House leaders try to reconcile the two measures. But if the result includes a prescription drug plan anything like what’s currently under consideration, the repercussions will be felt worldwide.

Writing in the “Health Care Symposium” feature of National Review‘s June issue, Grace-Marie Turner, president of the Galen Institute, warns, “today, the United States remains the only major nation in which the bulk of the health care market is not restricted by government price controls. Consequently, we pay a disproportionate share of development costs for new drugs and devices, bearing the burden for other rich countries such as Canada, Germany, France, and the U.K.

“If the United States, too, defaults to the failed European model [price controls], where are we–or they–to turn for medical innovation?”

Conrad F. Meier is managing editor of Health Care News. His email address is [email protected].