June 14, 2006

June 14, 2006 | Commentary on Health Care

Price rises every day without entitlement reform

Last month, seniors and the disabled passed the point at which they can enroll in the new Medicare drug program without penalty. And official Washington congratulated itself on another successful entitlement expansion - the largest single entitlement expansion since the Great Society.

Sadly, the news reports obsessed on various government foul-ups during the sign-up process. The real problem is that this program eventually will replace existing public and private spending for drugs with new taxpayer financing - at a time when entitlement costs already are growing much more rapidly than the tax receipts that are supposed pay for them.

Roughly three out of every four seniors already had some form of prescription-drug coverage even before the hugely expensive Medicare drug bill was passed in 2003.

The real problem was much simpler and much easier to solve: target assistance to low-income seniors who needed the most help. But Democrats and Republicans joined to reject that option - and the Bush administration, which originally focused on helping the needy, acquiesced.

Most of the Medicare beneficiaries enrolled in the drug program were enrolled automatically, whether by employers (getting generous taxpayer subsidies) or through the new Medicare Advantage plans.

The 6.4 million Medicare beneficiaries also eligible for Medicaid had no choice in the matter: They were simply transferred, en masse, into the new Medicare drug program. That's where the predictable and well-publicized glitches, such as computer-matching foul-ups, were greatest.

In a huge drug entitlement governed by more than 1,100 pages of mind-numbing regulation, it's difficult to get all the details right.

But the enrollment numbers that were finally reached are irrelevant over the long run. Congress created a universal entitlement - and a universal entitlement eventually will crowd out most alternative coverage, including employer-based coverage.

The dynamics are in motion. When the costs increase, as they surely will, so will the congressional pressure to impose some form of price-control regime on prescription drugs. (That will be the ultimate prescription for lower-quality medical care for American seniors: You can't get more of anything by paying less for it.)

Meanwhile, the Medicare trustees are reporting that the long-term (75-year) unfunded liabilities of the Medicare program - the benefits promised but not paid for - have reached $32.4 trillion, $8 trillion from the drug entitlement alone.

The bigger costs are going to hit heavily when the first of the 77 million baby boomers start to retire in 2011. No one in Congress has unveiled a plan to pay for it. The tacit consensus seems to be: Stick the 20-somethings with the big bills.

Those 20-somethings may not realize it now, but they have a lot of taxpaying to do - Medicare, plus larger Medicaid and Social Security bills. What will it cost to fully fund the Big Three? My colleague, Heritage federal budget expert Brian Riedl, points to cautious, mainline predictions of the federal budget picture that show that, absent serious entitlement reform, the cost will boost federal spending from 20 percent of gross domestic product to almost 38 percent of GDP by 2050.

Riedl says the real figures may be much worse - leaving Congress the choice of hiking taxes until they are $11,000 higher per household than they are now, or eliminating virtually all other federal programs, including defense and veterans benefits, by 2045.

Congress must grapple with entitlement spending. One option is means-testing the benefits. Starting next year, wealthy seniors (singles making more than $80,000, couples more than $160,000) will be asked to pay a little more of their Medicare Part B premium costs - 28 percent, rather than the 25 percent that all now pay.

That small increase for a few marks a significant change in the Medicare program. The next step should be to start transforming Medicare from a defined-benefit program into a defined-contribution one.

Baby boomers should be able to carry private health insurance coverage into retirement and get a government contribution to offset its cost. The government contribution itself should reflect market conditions, but it should be capped at an annual dollar amount. And any retiree should be able to buy more expensive coverage, above the amount of the government contribution, if he or she wishes to do so.

Congress can delay taking action, but every delay raises the tab for taxpayers.

Robert Moffit is director of the director of the Center for Health Policy Studies at the Heritage Foundation.

About the Author

Robert E. Moffit, Ph.D. Senior Fellow
Center for Health Policy Studies

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