The Medicare Monster

A Cautionary Tale

Steven Hayward & Erik Peterson from the January 1993 issue

(Page 5 of 5)

Under a universal "all payer" health-insurance policy, the Medicare price-fixing policy would be applied to the entire health-care system. The fears the AMA expressed at the time of Medicare’s enactment 25 years ago that it would lead to socialized medicine seem fated to be realized.

As the nation barrels toward some kind of universal healthcare policy, there is an ominous political parallel shaping up between 1965 and 1993. What finally tipped the balance in favor of Medicare in 1965 was the huge turnover in Congress. The next Congress will have more than 100 new House members. Despite some losses, the Democrats will have a solid majority, and even some Republican congressional candidates adopted as boilerplate the slogan that the federal government must take a role in providing some kind of universal health coverage. Bill Clinton has vowed to make health care a top priority, and Congress isn’t likely to hesitate much over the legacy of Medicare.

In light of the alarming actuarial projections for Medicare’s hospital-insurance program, it is no wonder that politicians are loathe to propose a national health plan that explicitly includes a new payroll tax. But the halfway house of "play or pay" that Democrats are advocating will quickly fall into the same trap as Medicare.

First, Medicare is simply one example of the fact that, as an HCFA official put it, the federal government "continually underestimates the cost of social insurance programs." This problem would be compounded under a "play or pay" scheme because the alternative payroll tax would initially be set low to entice participation.

As a consequence, the government would end up with a disproportionate share of high-cost enrollees (similar to what has happened with the state-run "assigned risk" pools for auto insurance) because companies with high health-insurance costs would find it to their cost advantage to dump the burden onto the government program. Thus, the "pay" portion of the government program would certainly be underfunded. ‘It is guaranteed to increase the federal deficit," says a source at the HCFA. "It is impossible to set a payroll tax that will cover the cost."

A recent study by the Urban Institute found that if the payroll-tax rate of a "play or pay" policy were set at 7 percent, 112 million nonelderly people, or 52 percent of the insured population, would be covered through the "pay" option. This number includes 59 percent of all private-sector workers. If the rate is 9 percent, an estimated 84.8 million would still be enrolled in the public plan, or 39 percent of the nonelderly insured population. These numbers suggest it will be a massive, and massively underfunded, program.

Providing significant funding through cost containment is equally chimerical, unless the government is prepared to administer an onerous "all-payer" regime of price controls on the entire health-care system, and then employ a rigorous scheme of rationing on top of that. Although a few liberals speak openly of price controls and ‘all-payer" regulations, they are loathe to entertain the necessity of rationing because of the inequities it would generate.

There is one decided difference between the politics of Medicare in 1965 and today. In 1965, all the opponents of Medicare had to offer was a watered down version of that program, Medicare on the cheap. Today, opponents of increased federal involvement in health care have a true market-based alternative to offer. The combination of "Medi-save accounts," in which people would be encouraged to save their own money for health insurance and direct payment of medical expenses, and tax credits to enable low-income families to purchase health insurance, offer a viable alternative to centralized big-government health insurance portion of Medicare

Although this isn’t the magic answer to soaring health-care costs, it is a policy that rests on the one proven strategy for holding costs down: making the individual responsible for first-dollar costs of health care. If the critics can portray the issue as big government versus individual empowerment, there just might be a chance for positive reform of the health-care mess.

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Pingback| 11.18.09 @ 4:58PM

Would You Buy Insurance From This Man? « Left Coast Ledger links to this page. Here’s an excerpt:

…saying will be $1 trillion on the initial bill. Let me make this clear: the CBO nor any other government agency has ever even come close to correctly estimating the cost of any major government program. Medicare was supposed to cost $10 billion in 1964. The estimate was projected well into the 1990s. Wilbur Mills was the miscreant who ramrodded the bill through the House for LBJ. You’ll remember Wilbur as the…