Why the Medicare Reform Bill Is Bad Legislation

Published January 1, 2004

Just how bad is the recently passed Medicare reform bill? At the risk of ruining your day, allow me to draw your attention to some fairly depressing new research from the National Center for Policy Analysis (NCPA):

  • Even without the bill, we have made promises we can never keep. Estimates of the present value of the unfunded liability of elderly entitlement programs range from a low of $44 trillion by the American Enterprise Institute to a high of $60 trillion by The Brookings Institution. That’s trillion, not billion. In a new NCPA study, Medicare/Social Security Trustee Thomas Saving and his colleagues put the estimate at $50 trillion–about five times the size of our economy and 10 times our official national debt.
  • How much will a drug benefit increase our future obligations? Former U.S. Treasury economists Jagadeesh Gokhale and Kent Smetters estimate the present value of the Senate bill (in perpetuity) at $12 trillion, greater than the unfunded liability in Social Security.
  • Of the $400 billion we will spend on drugs for senior citizens over the next 10 years, how much will actually buy drugs seniors otherwise would not have had? NCPA Senior Fellow Andrew Rettenmaier and his colleagues estimate the figure is $25 billion; the Congressional Budget Office reached a similar conclusion. For every $16 taxpayers pay, about $1 will go for drugs seniors currently are not getting. The rest will replace money now being spent by state governments, large employers, Medigap insurers, and seniors themselves.
  • Everyone on both sides of the debate has been assuming seniors on their own pay higher prices for drugs than do large insurance companies. Rettenmaier and his colleagues discovered that conventional wisdom simply isn’t true. Most of the time seniors and insurers pay about the same. When there is a significant difference, seniors are twice as likely to pay less for their drugs than do HMOs.

Empowering HSAs

The silver lining in the Medicare reform bill is Health Savings Accounts (HSAs). (See “Congress Passes Far-Reaching MSA Reform.”) When the legislation becomes effective on January 1, 250 million non-elderly Americans will acquire the right to have a tax-free HSA.

HSAs will be the most flexible, consumer-friendly accounts yet devised. They will herald a massive shift of power and money from large, impersonal bureaucracies to individual patients.

The concept of HSAs is neither conservative nor liberal; it’s empowering. HSAs will appeal to liberals who want an alternative to HMO rationing, and should also appeal to conservatives who want an alternative to government rationing.

The new law is not perfect. But the inclusion of HSAs can revolutionize the medical marketplace. The new age of consumer-driven health care will be a vast improvement over the choices we have today.

John C. Goodman is president of the National Center for Policy Analysis. His email address is [email protected].