The Heritage Foundation

Executive Memorandum #203 on Social Security

June 2, 1988

June 2, 1988 | Executive Memorandum on Social Security

Why Reagan Should Veto the Flawed Medicare Bill


(Archived document, may contain errors)

6/2/88 203

WHY REAGAN SHOULD VETO THE FLAWED. MEDICARE BILL

Congress is expected soon to complete action on the Medicare Catastrophic Protection Act of 1988 (H.R. 2470), reported out of conference committee on May 25: The legislation, which would provide unlimited hospital care for the elderly and adds a reimbursement for prescrip- tion drugs, is the biggest expansion of Medicare since the program was launched in 1 965. Health and Human Services Secretary Otis Bowen has said he will recommend that the Presi- dent sign the bill when it reaches the White House. Bowen is giving the President bad advice. The President should veto the bill on the grounds that the legisla tion does little to address the real concerns of the elderly and yet will lead either to a catastrophic expansion of the deficit or to steadily rising taxes on senior citizens.

Failing to Meet the Catastrophic Costs. The legislation is projected by the House-Senate conferees to cost $31 billion over just the first five years. Yet only 5 percent of this money would help low-income elderly Americans. Another 30 percent would help p ay for prescrip- tion drugs. But survey data show this provision to have the least support among retirees. Nevertheless, the drug benefit was the item most aggressively demanded by lobbyists for the American Association of Retired Persons (AARP), which wo u ld benefit directly from the provision because the group happens to be the nation's second biggest mail-order pharmacy. The remaining 65 percent of the new spending would do nothing more than replace benefits now offered in the private "Medigap" insurance policies purchased as supplements to Medicare by about 75 percent of the elderly. At the same time this bill does nothing to meet the real catastrophic costs of the elderly - long-term nursing care.

In exchange for these expensive but marginal benefits, a ll Medicate enrollees would face stiff in"treases in their Part B premiums and millions of retirees would be forced to pay hundreds of dollar's in additional income taxes. The current $24.80 monthly Part B premium would be raised by $4 in 1989, and by 199 3, this additional premium4s projected at $10.20 a month. -

Yet this premium hike covers only part of the new program's anticipated cost. About 13 mil- lion elderly Americans also would be forced to pay a new Medicare income surtax. In 1989, this surtax wo uld mean an extra $22 in tax added to every $150 of income tax they already owed the IRS, up to a maximum of $800 in additional taxes. Worse still, while other Americans would find their total tax bill reduced for the bracket creep effects of inflation,

senior citizens would face an increasing surtax to keep pace with the rising cost of medical treatment. Thus the elderly would face much higher marginal tax rates than those paid by non- elderly individuals with the same income. In 1989, for example, elde rly who otherwise would be in the 15 percent bracket would be taxed at 17.2 percent; in 1993; the rate would be 19.2 -1989 percent. Similarly, elderly in the 28 percent bracket would be taxed: at 32.1 percent in and 35.8 percent in 1993. Moreover, these t ax rates would continue; escalating indefinitely into the future as Medicare expenditures increase.

Heavy Taxes, Few Benefits. Supporters of the bill claim that this legislation is self-financing, and congratulate themselves on their fiscal restraint. Yet this demonstrates a very naive under- standing of the political process. The fact is that the legislation will cease to be self-financing as soon as the irate seniors realize that they will have to pay heavy new taxes for few benefits and begin to lobby C o ngress for relief. The history of Medicare shows that, faced with raising costs to the elderly in line with program costs, Congress has turned more and more to raids on the general revenues. This is likely to hap- pen with the new legislation because Proj e cted versus Actual Costs of even the staggering official cost projec- Medicare Hospital Insurance (Part A) tions underestimate the likely real ex- 12 . ..................................................................................................... p e nse of these new benefits. Past es- 11 . ................................................................................................. timates of Medicare costs have been . ........... 1 W5 Pwjaclions .................................. ...... IN111111 1 1 Actual Ccwt notoriously off the mark (See Graph) and a. .............. ....................... ................ the same is likely to be true of the 7. ...................................................................... ..................... catastro p hic legislation. rne future cost 6. .................................................... ..................................... 0 5. ............................. ..................................................... of the drug benefit is especially diffi c ult n 4. .............. ....................................... to calculate and even the experts admit 31@@ .... ..................... . ................................ 2- the only available data on which projec- . ...................................... . ................................................ tions are based are extremely unreliable. ................................................................................................... Moreover, demand for new entitlements 19M 1067 1089 1&9 19`70 19 '71 19'72 19'73 19'74 1d75 is always difficult to predict. Heritage InfoChart Year

Should Ronald Reagan sign this bill, the irony is that the same man who campaigned against Medicare in 1965 will go down in history as having initiated and approved its grea test expan- sion. Reagan began the discussion of catastrophic care legislation last year out of a personal, compassionate desire to help the few, needy retirees with very high medical bills. But, by al- lowing Secretary Bowen to reject numerous sensible p r oposals in favor of an expansion of Medicare, the President set in motion the congressional bidding process, leading to the fiasco of a massive spending bill, with an unlimited financial commitment. What is much worse, the bill does not even address the r oot of the problem. Only Ronald Reagan now can get the wor- thy goal of catastrophic health care back on track. And only a presidential veto can begin that process. Edmund F. Haislmaier Policy Analyst

F or further information: Edmund F. Haishnaier, "Catastrophic Health Legislation: Congress's Case of Medicare Malpractice," Heritage Foundation Issue Bulletin No. 139, April 18, 1988.

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