The Heritage Foundation

Executive Memorandum #140 on Social Security

November 25, 1986

November 25, 1986 | Executive Memorandum on Social Security

On Catastrophic Health Care, Otis Bowen Undermines Reagan Policy

(Archived document, may contain errors)

11/25/86 140

ON CATASTROPHIC HEALTH CA REY OTIS BOWEN UNDERMINES REAGAN POLICY

The Department of Health and Human Services la st week released, for discussion, its recommendations for dealing with "catastrophic" health care financing. The study was ordered by President Reagan in February and undertaken by Health and Human Services Secretary Otis Bowen. While some of the recommen d ations make sense, the most important proposal--expanding the Medicare program to pay for virtually all the acute care hospital costs of the elderly--would reverse dramatically Ronald Reagan's domestic policy agenda. Specifically, the plan 1) would trigge r a significant growth in the federal government's involvement in health care and 2) would increase medical costs for all Americans. By even considering such a proposal, the White House has given a considerable and unexpected boost to liberal efforts to cr e ate a taxpayer-financed national health service. Little wonder that Senator Edward Kennedy (D-MA) has welcomed Bowen's Medicare recommendation as "a new direction for the Administration on this issue." Indeed it is. It contradicts much of what Ronald Reag an long has advocated. If the Administration embraces Bowen's badly flawed plan for Medicare, it may prove to be the Administration's most 'serious domestic policy blunder.

Bowen claims that unveiling his proposals for discussion is no different from the T reasury's release of its tax proposals for general debate prior to the tax reform legislation. But in the tax reform case, the shape of the Administration's tax strategy was already well defined by the President and his cabinet. By contrast, Bowen's radic al and controversial Medicare proposal precedes any formal decision by the White House as to its overall approach.

Action is certainly needed to help those Americans who, usually because of inadequate insurance, cannot finance very heavy--or "catastrophic" --hospital costs and long-term retirement care. But a federal program which pays for near-unlimited medical care would invite an explosion in health costs. Needed instead are incentives to encourage Americans to furnish themselves with insurance to cover

catastrophic health costs. The Bowen plan does include some useful proposals to provide such incentives. It suggests, for instance, a new tax-free "Individual Medical Account," modeled after the Individual Retirement Account, to encourage younger America ns to save for later nursing home costs. The plan also wisely would grant full tax-deductibility for the health plans of self-employed Americans, and require all deductible plans to include catastrophic protection. This would stimulate private solutions t o the problem.

But these useful proposals are overshadowed by Bowen's desire to have Medicare pay for all of a retiree's acute health care costs above a $2,000 a year deductible, regardless of the retiree's assets or income. The new plan would allow retire es the option of increasing their Part B premiums by $4.92 per month to obtain the federal catastrophic coverage. Part B is the optional, premium-based element of Medicare which pays for physician and outpatient services.

This proposal has serious shortco mings. First, it is using a sledge hammer to crack a walnut. Of 28 million Americans enrolled in Medicare, only about 12,000 each year qxceed Medicare's hospital coverage--and most of those are protected by private "Medigap" coverage or savings. Second, i t would fuel price rises in the health care industry. The reason: if Uncle Sam picks up an unlimited tab, neither the patient nor the hospital has the incentive to question optional or costly procedures. Thus Bowen's assumption that utilization patterns wo u ld not change is wildly optimistic. And third, Bowen's contention that coverage could be financed completely by a modest premium is naive in the extreme. The gap between premium revenue and expenditures would widen rapidly as lawmakers found it politicall y attractive to hold down premiums while bending to pressure to expand the definition of reimbursable medical expenses. This already has happened with Part B, to which the new premium would be added--those premiums now cover only 25 percent of outlays.

Bow en and his chief of staff, Thomas Burke, have made no secret of their desire to expand the role of the federal government via Medicare and to squeeze out private retirement health insurance. They will no doubt.be strong advocates of their Medicare proposa l in Congress, where they will receive enthusiastic support from liberals. By permitting Bowen to release his recommendations before deciding on its strategy, the White House may have permanently lost the initiative on an issue that could prove to be one o f the most important of Ronald Reagan's presidency. For 20 years liberal efforts to turn Medicare into a tax-supported national health system have wisely been blocked in Congress, for fear that it could lead to a hemorrhaging of federal outlays. It is iron ic that Ronald Reagan's Health Secretary may make the liberals' dream come true.

Stuart M. Butler, Ph.D. Director of Domestic Policy Studies

For further information:

Peter J. Ferrara, "Controlling Catastrophic Health Costs: Otis Bowen's Grand Opportunity," Heritage Foundation Backgroundcr No. 499, April 3. 1986.

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