The Right Prescription for Medicare Reform

In an election-year rush to satisfy impatient voters, politicians of both parties are endorsing ill-considered schemes to add a prescription drug benefit to Medicare. Fortunately, with Election Day fast approaching, Congress will not be able to actually enact any of their proposals. While the problems with the program are bad, most of the proposed solutions are worse.

This is not to say that action is not needed eventually. When a new Congress ascends on Washington, they should start over, and begin a process of thoughtfully reforming the entire Medicare system.

Why should Congress take a comprehensive approach, rather than just adding a prescription drug benefit onto the current program? Because despite its popularity, Medicare violates almost all principles of sound insurance. It pays too many small bills the elderly could easily afford on their own while exposing them to thousands of dollars of potential out-of-pocket expenses. In fact, seniors are the only people in our society who have to buy a second health plan just to fill the gaps in the first. Yet even with medigap insurance, most seniors still don't have adequate drug coverage.

Dollar for dollar, drugs offer a better return on health care spending than other major therapies. But, Medicare's practice of covering few prescription drugs encourages doctors and their patients to choose more costly physician and hospital services.

Just adding a drug plan on top of Medicare will not solve this problem, however. In order to recoup the savings, it is important that the plan that administers the drug benefit be the same plan that administers the rest of the health benefits. When two health plans administer two different sets of benefits, the decision makers can avoid the full costs of their bad decisions and cannot reap the full benefits of their good decisions. Suppose one plan controls hospital benefits and another controls drug benefits. Given a fixed premium for each, the incentive of the first plan is to reduce hospital costs, while the incentive of the second is to reduce drug costs. Neither plan has an incentive to consider the overall picture.

Additionally, paying one premium to one plan is much more efficient than paying several premiums to several plans. For example, when seniors purchase medigap insurance to reduce their exposure under Medicare, the federal government requires that insurance to cover the Part A and Part B deductibles and co-payments. Thus seniors with medigap insurance have first dollar coverage for many medical services, even though they may lack drug coverage. The result is a great deal of waste. Health economists estimate that seniors with both Medicare and medigap insurance spend about 30 percent more on health care than those with Medicare alone. Adding a third plan with a separate premium to cover drugs, would just compound the problem.

That wasteful spending will only put more pressure on an already overburdened taxpayer. Even without reform, 48 percent of federal income tax revenues will be needed to meet the annual deficits in Social Security and Medicare by the year 2050 – in addition to the 15.3 percent payroll tax. Under the House Republican proposal, that burden increases to 55 percent of income tax revenues, and up to more than two-thirds under the House Democrats' proposal. Once again, that's in addition to the 15.3 percent payroll tax.

According to an NCPA study by Milliman & Robertson, Inc., the nation's leading actuarial firm on health benefits, seniors could have access to the same kinds of health insurance the non-elderly have if we were only to spend our resources more wisely. The study found that if the amount Medicare spends on the average beneficiary each year were combined with the amount seniors are already paying for the most popular medigap policy, it would be sufficient to buy private insurance that includes prescription drug coverage.

Virtually all of Medicare's shortcomings stem from the fact that Medicare's features have been determined by politicians and not by firms that have to compete for business. Yet like for-profit firms, politicians must compete to survive. Unfortunately, the nature of that competition forces them to weigh political costs against political benefits – where "costs" and "benefits" are measured in terms of impact on the next election and not what's best for the patient. Maybe after the election, Congress could put together a single plan that gives seniors the same health benefits that non-seniors have.