Tricked By Clinton

The Washington Post, Tuesday, January 26, 1999; Page A19

President Clinton has thrown a monkey wrench into a sensible proposal to reform Medicare that had been gaining momentum among both Democrats and Republicans on a bipartisan commission.

The proposal, by Sen. John Breaux (D-La.), the panel's co-chairman, will be presented at a meeting this morning. According to a draft that I obtained, it would "model Medicare on a system patterned after the Federal Employee Health Benefits Program (FEHBP)," which currently allows government workers to pick from a menu of health plans, ranging in coverage from bare-bones to luxurious, with the feds paying most of the premium and employees and retirees picking up the balance.

Right now, Medicare is essentially a fee-for-service system, with the government reimbursing seniors for their expenses and private plans filling in the gaps. But costs have escalated rapidly, and Medicare's trust fund will run out of money in 2008. That is why the president and Congress appointed the bipartisan commission, which issues its final report March 1.

The Breaux plan, which has the support of Rep. Bill Thomas (R-Calif.), the other co-chairman—would allow competitive market forces to hold down costs and drastically reduce the role of the price-fixing Health Care Financing Administration.

But, Thomas told me, Clinton's State of the Union address last week "pulled the rug out from under the commission." The president proposed to use 15 percent of the budget surpluses over the next 15 years to shore up Medicare as it is. Presto, the Medicare problem is solved! No reform needed. Breaux seems peeved as well. "It's like putting more gas in an old car," he said of Clinton's idea for pumping more dollars into the old system.

In fact, the president's proposals amount to a rear-guard action against the future. The effect—even if the plan is never approved—is to prevent any significant changes in both Medicare and Social Security and perhaps a tax cut as well.

Let's look at the numbers: The White House is assuming that the federal budget surpluses for the next 15 years will total $4.4 trillion. In other words, on average, Americans will pay an extra $300 billion a year in taxes beyond what is needed to run the government at its currently budgeted level.

Now, $300 billion is a lot of money—about $2,500 for every household in America. The question is what to do with this surplus: spend it, use it to reduce the government's debt or never collect it at all by enacting tax relief.

Meanwhile, both the Social Security and Medicare programs are heading for trouble. Social Security is financed strictly with the proceeds of the payroll tax, while Medicare gets funding from that tax, from private payments and from what are called general revenues (individual income taxes, corporate taxes, etc.).

What Clinton proposed on Jan. 19 was to use 62 percent of the budget surplus for Social Security, 15 percent for Medicare and 11 percent for something called Universal Savings Accounts (USAs), private savings accounts funded by the government.

"This is the right way to use the surplus," said the president. It is also a strikingly radical idea. Forget Medicare for a second. Clinton wants to raid general revenues—to the tune of $2.7 trillion—and turn that money over to a rickety Social Security system.

Imagine if that same $2.7 trillion were returned to taxpayers—$20,000 per family!—who would use it to set up mandatory private personal retirement accounts. In 30 years, at a rate of 7 percent annually, those accounts—with no other contributions—would grow to $160,000.

Similarly with USAs: Why not cut taxes by $500 billion and let Americans put the money into IRAs? And with Medicare: The $700 billion could be part of a tax cut that we could all use to improve our own health coverage under a system like the one Breaux proposes.

Breaux calls the system "premium support." Private insurance companies would offer "a standardized core benefit package, . . . at least equivalent to the package offered in the government-run fee-for-service plan"—which would be retained for those who wanted it.

Beyond the core package, insurance companies could offer more benefits, each with its own configuration of co-payments and deductibles. And "premium support" would offer extra help for low-income Americans, says Thomas.

But the main point, Breaux told me, is that "questions of price would be decided not by micro-managing out of Washington, but by the marketplace." He added, "The concept of premium support is gaining momentum." But that was before Clinton decided, in Thomas's words to "throw a $700 billion party for Medicare."

When politicians began, with admirable seriousness, to confront the crisis facing the nation's two major entitlements, it was clear there were only three solutions: cut benefits, raise taxes or move toward market reforms.

To stave off those reforms and to avoid the political fallout from cutting benefits, Clinton has, in effect, decided to raise taxes. But the trick is that he's not touching payroll taxes. Instead, he's using income taxes, which should, by right, be returned to the people who are being overcharged.

But preventing a tax cut is one thing. Preventing reform of Social Security and Medicare is worse. It's a shame, but this genius at sleight of hand may have pulled off yet another trick.