April 15, 2005

April 15, 2005 | Commentary on Health Care

Bitter Medicine

Imagine you're running a company.

You've been providing prescription-drug coverage to your retired employees for years. But now the government is willing to do so. Do you continue providing benefits, or save yourself money and responsibility by letting Uncle Sam provide those benefits?

This question won't be merely hypothetical for long. Starting next January, the federal government will add a prescription-drug benefit to Medicare. All seniors, regardless of income or need, will be eligible. And with the government willing to pick up the tab, many companies currently offering retiree drug benefits will drop them or scale them back.

Back when Congress was debating the law in the summer of 2003, it added a provision that would pay companies up to $1,330 per retiree, tax-free, as long as the company maintains a drug benefit at least as good as the new Medicare benefit.

This could be an extremely sweet deal for companies, but not for retirees who need the drugs. As The Wall Street Journal put it on Jan. 28, "employers can receive substantial government subsidies for their retiree health plans even if they raise the out-of-pocket costs to those retirees." So retirees could be spending more for their drug coverage, while taxpayers would have to pick up the bill for these expensive subsidies. That's a lose-lose situation, one that's expected to cost taxpayers $71 billion over the next 10 years.

This unfortunate change will happen quickly. The Congressional Budget Office estimates that in 2006, 2.7 million retirees will lose their existing employer-based drug coverage. The New York Times reports that number could go as high as 3.8 million.

The incentives in the Medicare law will accelerate the loss of private coverage. A company will have to choose between maintaining its current coverage and saving itself 28 percent, or dropping coverage entirely and saving itself 100 percent. Companies may delay for a year or two, but eventually the economic imperative will force them to drop their retiree drug coverage and save themselves far more.

In fact, several have already announced plans to drop their drug coverage: Delphi Corp. and ArvinMeritor, to name two. It's no surprise that both these companies are in the automotive industry. Because of generous contracts drawn up when profits were high, that industry has some of the highest health-care costs in the country.

It already costs General Motors, for example, some $1,400 per vehicle sold to provide health-care coverage to all its employees and retirees. Over time, if the taxpayer is willing to pick up a chunk of that spending, it makes sense for GM to let it. After all, doing so will increase the company's profit, even if it saddles taxpayers with the drug bills of tens of thousands of additional retirees.

It doesn't need to be this way.

There's still time -- although not much -- for lawmakers to fix these problems. Congress should suspend the coming entitlement program, and instead target assistance to seniors without drug coverage, especially poor seniors.

Remember, about three quarters of seniors already have some form of prescription-drug coverage. We don't need a universal entitlement program that's simply unaffordable and will take current coverage away from retirees when we could fashion a program directing help to those who really need it.

The first deadlines imposed by the new Medicare program start hitting this fall. Once they arrive, it will be difficult to prevent a financial disaster that ultimately will harm all taxpayers. Let's take action, before it's too late.

Ed Feulner is president of the Heritage Foundation.

About the Author

Edwin J. Feulner, Ph.D. Founder, Chairman of the Asian Studies Center, and Chung Ju-yung Fellow
Founder's Office