People on Medicare are the only group in our society that needs to purchase a second insurance policy to fill the gaps in their primary health plan. Even after doing that, many seniors do not have coverage for the prescription drugs that non-seniors take for granted.
To "solve" this problem, both Republicans and Democrats are engaged in a shameless bidding war to court elderly voters in this election year. Let us hope that none of the proposals are actually adopted. Any legislation passed at this point will mortgage the future of our children and grandchildren – pledging an enormous amount of the income of taxpayers not yet born just to meet the needs of elderly retirees.
The problem. The reason why seniors have a problem with prescription drugs is well known. Despite its political popularity, Medicare violates almost all principles of sound insurance. It pays too many small bills the elderly could easily afford themselves, while leaving them exposed to thousands of dollars of potential out-of-pocket expenses, including their drug costs. For instance, each year about 750,000 Medicare beneficiaries spend more than $5,000 out-of-pocket.
To prevent financial devastation from medical expenses, about two-thirds of Medicare beneficiaries acquire supplemental insurance, either through a former employer or by direct purchase. Most of these Medigap policies do not cover prescriptions, and coverage is often incomplete among those that do. Ironically, the poorest seniors often have the best drug coverage because they qualify for Medicaid, the federal-state health program for the poor.
What is generally not understood is how very wasteful it is to have seniors paying two premiums to two plans (one for Medicare and one for Medigap insurance). For example, seniors with both types of coverage spend about 30 percent more on health care, on the average, than seniors covered by Medicare alone. Indeed, the only thing more wasteful than paying two premiums to two plans is to pay three premiums to three plans – the idea that appears to garner the most support from members of Congress, although they pay only one premium to one plan to get their own health insurance.
The Future Cost of the Current Program. Even without a prescription drug benefit, the future of Medicare looks bleak. President Bush, and President Clinton before him, called attention to the urgent need to reform Social Security. Yet the bigger problem is Medicare.
In general, anyone who has worked at least 10 years has already earned the right to receive future Medicare benefits, even though no funds have been set aside to pay those benefits. In a study for the National Center for Policy Analysis (NCPA), Professor Thomas Saving, a Medicare Trustee and director of the Private Enterprise Research Center (PERC) at Texas A&M University, estimated that the current accrued liability under Medicare is almost $17 trillion. This is more than five times the level of the official national debt.
Of course, there will be future payroll tax revenues, but they will be nowhere near what is needed at current tax rates. By the time today's taxpayers retire, the federal government will likely spend more on their health care than on their Social Security checks. Yet the Medicare payroll tax rate is only about a third of the tax rate that funds retirement income. By 2030, about the mid-point of baby boomer retirement years, one of every five dollars of income tax revenues will be required just to make up the annual deficit in Medicare. By 2050, when today's teenagers reach retirement age, Medicare's annual deficit will require one of every three income tax dollars collected.
Adding a drug benefit to Medicare would be like throwing gasoline on a fire as far as fiscal responsibility is concerned. Although coverage for drugs may not sound like a big deal, the fact is drug costs are growing faster than other health care costs and they will continue to do so for the foreseeable future.
Medicare currently pays only five percent of the cost of prescription drugs used by Medicare beneficiaries. Proposals to add a comprehensive prescription drug benefit to the program could shift as much as two-thirds of senior drug costs to Medicare. The impact on the future of Medicare will be devastating.
The House Republican Proposal. Republicans in the House have already passed their prescription drug benefit proposal. Assuming all seniors participate, the likely result of this proposal is that Medicare would pay for a little more than one-fourth of their drug costs. Another PERC economist, Andrew Rettenmaier, estimates that the GOP drug benefit will raise Medicare's claim on other revenue to more than one-fourth of income taxes by 2030 and 40 percent by 2050. When the Social Security deficit is included, more than half of all income tax revenues will be needed just to pay seniors' benefits by mid-century!
The House Democratic Proposal. Naturally, Congressional Democrats regard this proposal as much too stingy. Assuming all seniors participate, the likely result of the House Democrats' proposal is that Medicare would pay for about two-thirds of elderly drug costs. Under this plan, Rettenmaier estimates that Medicare's deficit will rise to more than one-third of income taxes by 2030, and by 2050 Medicare will require more than one tax dollar for every two collected. When the deficit in Social Security is included, more than two-thirds of income tax revenues will be needed just to pay seniors' benefits by mid-century!
A Better Way. In a study for the NCPA, Milliman & Robertson estimated that if the average Medicare expenditure were combined with the average Medigap premium and paid to a single plan, there is enough money to enroll seniors in the same type of health plans other Americans have. In other words, we do not need more money in the system. We need structural change. We have all the money we need for prescription drug coverage – at least for now. We just need to spend it more wisely.