Many Americans who have private health insurance will lose
their coverage if major health care policy proposals advanced
by President Barack Obama and congressional leaders, including
Senator Max Baucus (D-MT), chairman of the Senate Finance
Committee, become law.
These proposals have common themes. President Obama, in
particular, has repeatedly made assurances that those enrolled
in private insurance will be able to keep it and has touted the
benefits of marketplace competition, but he, along with
Senator Baucus and others, has coupled these assurances with a
counterproductive proposal for a new public health plan to compete
directly with private-sector plans in a national health insurance
exchange. Based on independent analysis, such a provision
would displace the private health coverage of millions of
Americans.[1]
Beyond the proposed public health care plan, however, the
President and Senator Baucus would also undertake a major expansion
of existing government health care programs and entitlements,
including Medicare, Medicaid, and the State Children's Health
Insurance Program (SCHIP). Given the inevitable dynamics of
such program expansions, assurances to Americans that they
would be able to keep their private health coverage are
meaningless. Their employers would have powerful incentives to dump
them into public coverage.
The insurance system would, in fact, become even more fragmented
than it is today. President Obama's promise of access to the "same
kind" of private health insurance that is available to Members of
Congress would not apply, for example, to an adult or a child
living below the poverty level. That option would be very
different. President Obama and Senator Baucus both propose
expansions of Medicaid, a fundamentally flawed welfare program in
which a disproportionate number of enrollees end up in hospital
emergency rooms for routine care, and SCHIP, which in many states
is simply Medicaid.
Fresh from his election as chairman of the House Committee on
Energy and Commerce, which has jurisdiction over Medicaid, SCHIP,
and part of Medicare, Representative Henry Waxman (D-CA) has also
been a champion of Medicaid expansion. At the very least, expansion
of Medicaid, SCHIP, and Medicare will be the "default" plan for
Congress and the Obama Administration.
Expansion of Medicaid under H.R. 1, the American Recovery
and Reinvestment Act of 2009 (the "economic stimulus" legislation)
and expansion of SCHIP under H.R. 2, the Children's Health
Insurance Program Reauthorization Act of 2009, may well become
an excuse not to pursue genuine health care reform. True reform
would entail structural changes not only in health insurance
markets, but also in existing public programs, as well as expanded
personal choice and genuine market competition. Using the
tremendous leverage of Medicare and Medicaid and new authorities
under H.R. 1 and H.R. 2, the federal bureaucracy will be able to do
much of the handiwork without subjecting Members of Congress
to controversial votes, leaving ordinary Americans unaware of the
dangers to their private health insurance coverage that lurk
beneath the surface.
Health reformshould revitalize, not undermine, private health
insurance. Policymakers should expand personal choice and get as
many healthy people into private insurance pools as possible.
Taking healthy children out of the private pools and putting
them into government programs like Medicaid and SCHIP is
exactly the opposite of what should be done. SCHIP expansion splits
up health insurance coverage for families. Children go into SCHIP
(many states run at least part of their SCHIP programs as Medicaid)
while their parents remain in private coverage.
Medicare expansion also incurs its own costs. Those who are ages
55 to 64 would be better off in a pool with a younger population in
a newly reformed health insurance market, with a robust set of
affordable options, than in traditional Medicare, which
routinely covers only part of retirees' health care costs, requires
enrollees to buy supplemental private coverage to cover needed
benefits and catastrophic care, and is routinely subject to
confusing and often inconsistent rules and reimbursement cuts.
The Deepening Entitlement Crisis
Expanding Medicaid and Medicare and incurring new liabilities
is, to put it mildly, fiscally unwise. After all, Congress, in
launching a recent series of massive bailouts, an unprecedented
splurge in federal spending, has just created a record deficit
of $1.6 trillion.[2] At the same time, Congress has avoided the
tough but vital decisions about how to pay for the massive
entitlement obligations that have already been incurred in Medicare
and Social Security, let alone how to finance new ones.
Independent analysts, as well as the Government Accountability
Office (GAO), the watchdog of Congress, have repeatedly warned
Congress and state officials that their budgets and taxpayers are
already on a collision course with the rapidly rising costs of
entitlement programs. Medicare and Medicaid, cheap at the point of
service, are in fact not cheap at all--nor do they provide the
affordable coverage politicians have promised and Americans seek.
Medicare alone has long-term obligations that amount to $36
trillion, and rising long-term care costs in Medicaid, particularly
costs incurred by the massive baby-boom generation, will add to the
enormous pressure on state and federal taxpayers to meet the needs
of retirees.
The Office of the Actuary (OACT) at the Centers for Medicare and
Medicaid Services (CMS) has estimated that Medicaid will grow
about 7.9 percent annually between 2008 and 2017, reaching $673.7
billion in 2017.[3] Cumulative spending over the next 10 years
will amount to about $5 trillion.
As Medicaid is close to Medicare in size and grows at
approximately the same rate, the long-term cost of Medicaid is
roughly equal to that of Medicare. Medicaid's long-term
unfunded liability will be even greater than Medicare's because
Medicaid is funded entirely through general funds on a pay-as-you
go basis, with no trust funds or dedicated payroll tax
available for its use. Given the unsustainable cost of the current
programs and the utter failure of Congress to address these issues,
it is hard to imagine how Congress would plan to finance
additional entitlement costs. The current approach on Capitol Hill
is to avoid such accountability.
Medicaid: Limited Access and
Choices
Expanding Medicaid is an old idea. There is nothing innovative
about it. Medicaid has been expanded incrementally over the past 40
years, both through federal mandates and through state initiatives,
and enrollment in the program has climbed to more than 60 million
people.
Medicaid is a convenient method for hiding the true cost of
ever-expanding government programs because the federal government
pays only 57 percent of the cost, with state and local
governments responsible for the balance. Proponents of new
federal expansion ignore the reality that states already have
the authority to expand Medicaid to more individuals below the
federal poverty level ($20,200 for a family of four in 2008) who
are parents or caretaker relatives of children eligible for
Medicaid. But the states have chosen not to do so.
Under the Obama and Baucus proposals, Congress would
undertake such an expansion. While the Obama proposal is silent on
the extent of expansion, the Baucus proposal would expand the
existing Medicaid population and include childless adults as well.
While a few wealthier states might benefit from expansion as new
federal dollars replaced state and local dollars that currently
fund health care for indigent populations, most states would
experience new, unbudgeted costs. The consequence of Medicaid
expansion for states is that they would be forced to accept this
expansion as a higher priority than education, transportation, or
other important issues for which they are responsible.
Under the Baucus plan, more than 7 million Americans would head
into Medicaid.[4] Medicaid recipients would not have the
choices and benefits that are available to federal employees. While
the Baucus plan promises "access to recommended preventive
care, including services like a health risk assessment, physical
exam, immunizations, and age and gender-appropriate cancer
screenings,"[5] millions consigned to Medicaid would
not have access to such benefits.
With limited access to providers, too many Medicaid
patients do not get the care they need. Once enrolled in Medicaid,
many find that their access to doctors, particularly specialists,
is limited, so they have to get care in the most expensive place on
the planet: the hospital emergency room. In 2006, more than
one-third of all ambulatory visits for people on Medicaid were to a
hospital emergency room or outpatient department, compared to
just 14 percent of visits by people with private insurance.[6] Nearly
36 percent of ambulatory care visits by privately insured people
were to medical or surgical specialty offices.[7] For Americans on
Medicaid, the percentage of visits to specialists was just 16
percent.[8]
Medicaid directors themselves acknowledge the access difficulty,
which is due in part to low rates of provider reimbursement through
Medicaid. In a survey of the 51 Medicaid directors conducted
for the Kaiser Commission on Medicaid and the Uninsured, 17
reported some or significant problems with access to primary care,
and 36 reported some or significant problems with access to
specialty care.[9]
Expansion of public programs will only make the access problem
worse. According to the Lewin Group, hospitals and physicians could
lose from $2.8 billion to $36.4 billion annually through
different public payment scenarios created with the enactment
of a new public health plan.[10] This would be even worse
under a Medicaid expansion:
Medicaid typically pays less than Medicare or commercial
insurance and providers often cite low reimbursement rates as their
primary reason for not participating in the program. These issues
were exacerbated during the last economic downturn when all states
reduced or froze provider rates to help curb Medicaid growth,
sometimes for multiple years.[11]
President Obama and Senator Baucus, as well as liberals in
Congress and the state legislatures, routinely press for an
expansion of Medicaid, despite the fact that such expansion
contradicts other key health care reform goals that they claim they
want to achieve. In the description of his plan, Senator
Baucus notes that:
[T]he costs of care for the uninsured are largely borne by those
with insurance; providers charge higher prices to patients
with private coverage to make up for uncompensated care, and
these costs are passed on to consumers in the form of increased
premiums. Requiring all Americans to have health insurance
will help end the shifting of costs from the uninsured to the
insured.[12]
But Medicaid is also a major cause of cost-shifting. It
pays lower reimbursement rates to doctors and hospitals and other
medical professionals than are paid by Medicare and the private
sector. Medicaid pays doctors only 56 percent of private coverage;
hospitals, 67 percent.[13] Medicare pays hospitals 71 percent of
private payments and pays doctors 81 percent of private payments.[14]
Faced with lower reimbursement levels from public plans,
providers pass their losses on to those who are covered by private
plans--which show up in higher private-sector premiums. "According
to a recent report by Milliman, Inc., a prominent actuarial
consulting firm," writes Robert E. Moffit, "this 'hidden tax' of
lower reimbursement levels of Medicare and Medicaid amounts to
$88.8 billion a year, or an additional annual cost of $1,788
in insurance for a family of four."[15] Thus, expanding Medicaid
would not "help end the shifting of costs" as promised. Instead, it
would probably make cost-shifting even worse.
Expansion of Medicare and Medicaid ranks last in Americans'
preferences for insurance coverage. The Commonwealth Fund 2002
Workplace Health Insurance Survey found that 43 percent of adults
favored employer-based coverage, 22 percent favored individually
purchased insurance, 15 percent favored a new government
program for the uninsured, and only 10 percent favored Medicare or
Medicaid. Even among low-income adults, Medicare and Medicaid
finished last: 27 percent preferred employer-based coverage,
21 percent favored a new government program, and 19 percent favored
Medicare or Medicaid.[16]
Denying Lower-Income Families a
Choice
Under the health insurance program available to President Obama
and Members of Congress, a federal employee typically has the
choice of a number of plans. Under the Obama and Baucus proposals,
which claim to provide that same choice to Americans, such a
choice would be denied to millions on the basis of their income.
They would instead be required to accept whatever is offered by
their state through Medicaid.
Under a reformed health care system, the option of choosing
one's health insurance should not be based on one's income. If a
person has an annual income of $10,829 or lower, which makes him
eligible for Medicaid, it does not logically follow that he is
therefore less capable of making decisions about his health care
than someone with a higher income. It would be more equitable for
people to have access, through a system of income-based premium
support, to the kind of coverage they want rather than what
government officials pick for them.
Instead of putting more people into Medicaid, authentic reform
should reverse course and aim to expand private health insurance
pools, including the healthy current Medicaid recipients, thereby
freeing the public dollars that support them.
Medicare Expansion
Just as Medicaid expansion up the income scale has been routine
health policy ever since the Clinton Administration proposed
the idea in the late 1990s, Medicare expansion down the age scale
has also been fashionable. As part of his health care
initiative, Senator Baucus has proposed making coverage
"immediately available" to Americans ages 55 to 64 through a
"Medicare buy-in."[17] In the Baucus proposal, "[t]he premium
amount would be calculated so that the total costs for the
buy-in population would be budget neutral. Thus, this option
would not create new costs for the Medicare program or for
taxpayers."[18]
But singling out this age group in terms of the number of people
who are uninsured misses the mark. According to the latest data
from the U.S. Census Bureau, 4 million Americans between ages 55
and 64--12 percent of the 33.3 million individuals in this age
range--are uninsured.[19] By comparison, 10.3 million people
(25.7 percent) of the 40 million ages 24 to 34 are uninsured;[20]
7.7 million people (18.3 percent) of the 42 million ages 35 to 44
are uninsured;[21] and 6.8 million people (15.4 percent) of
44 million ages 45 to 54 years are uninsured.[22] In terms of
making the greatest impact on increasing the sheer number of
Americans with health insurance, starting with this age group makes
little sense unless the real intent is to expand government,
not insurance coverage.
The Baucus argument for the Medicare "buy-in" is that the
individual insurance market for people in the target age group is
not affordable. Senator Baucus points out that from 2006 to
2007, the "average annual premium" in the individual market for
those ages 60 to 64 was more than $5,000 for single coverage
and $9,200 for family coverage.[23]
It cannot be overlooked, however, that a person who buys
individual insurance, as opposed to group health insurance through
an employer, is deprived of the enormously generous tax subsidy for
the purchase of health insurance. This is a crucial point that
Senator Baucus himself has acknowledged as a major inequity in
the insurance system.
The question of whether a health insurance premium is or is
not "affordable" depends, of course, on what is meant by
"affordability." It is a slippery concept in much of the
conventional health policy discussion. "Affordability" is a result
of a number of variables, such as the income of the person, the
competitiveness of the health insurance market in his state or
locality, the prevailing patterns of medical practice and cost
of hospital care in his area, and the level of underwriting for
coverage, among other things.
This also means that access for this group or any other group
can be resolved by such measures as equally generous individual tax
or premium subsidies for health insurance; reform of the
health insurance market (including the combination of individual
and small-group insurance markets in a single, statewide health
insurance market exchange); risk-transfer pools for higher-risk
individuals; regulatory reform of the state health
insurance market and reduction of benefit mandates to allow
people to buy cheaper coverage; or a restriction on health
insurance underwriting.
The fact is that there is a wide variety of available remedies
for high-cost individuals (senior citizens or those with chronic
illnesses, for instance) that can make health insurance affordable
through the private markets without expanding entitlements.
In Medicare, of course, no beneficiaries are excluded from
coverage, and premiums are "community rated," lowering costs
for high-risk individuals while driving up the cost for everyone
else. But on the narrow issue of cost, the situation is more
complex. It is simply not true that Medicare coverage is, on
average, cheaper than private coverage. Medicare beneficiaries are
heavily subsidized by virtue of their entitlement, but Medicare
coverage is not usually affordable for an individual to purchase
without such subsidies. If the real issue is ultimately a matter of
government subsidies for the purchase of health insurance, those
subsidies could be applied to private health insurance as
easily as they are to Medicare.
Leaving aside the program's real and growing cost to taxpayers,
the notion that Medicare is "cheaper" deserves closer examination.
If private coverage on the individual market costs $5,000 a year
and is not affordable without tax breaks or premium support,
then the same applies to the cost of buying into Medicare without
public subsidies.
In 2007, the standard monthly premium for Medicare Part A was
$410. The standard monthly premium for Part B, which covers
physician services, was $93.50. However, the Part B premium is
mostly subsidized, and the ordinary Medicare beneficiary, at least
age 65 or disabled, pays only 25 percent of the Part B cost. If an
individual were charged just 80 percent of the true Part B
premium, the cost would have been $161.40 per month. In 2009, the
Part B premium jumps dramatically, and to pay 80 percent of
the premium would cost $308.30 per month.
Beyond that, the cost of the prescription-drug benefit under
Part D should be added, based on the reasonable assumption that a
person in the 55-64 age group would need prescription drug
coverage. In 2007, the base beneficiary premium was $27.35 per
month. The total annual cost of these premiums would be $7,185 in
2007, as shown in Table 1, which is substantially higher than the
individual coverage that Senator Baucus cited in his report for the
same period.
But that is not all. Beyond the Medicare Parts A, B, and D
premiums, the vast majority of Medicare beneficiaries find it
necessary to secure catastrophic coverage or other private
supplemental coverage to cover gaps in Medicare. In addition to the
$7,185 in Medicare premiums in 2007, an individual under the Baucus
plan would also have faced $992 for the inpatient hospital
deductible in 2007 and even more costs for deductibles and
coinsurance for Part B services, typically 20 percent of the cost
of the service. Part D also carries another set of deductibles
and coinsurance.
It would not be unreasonable for persons in the 55-64 age group
also to secure such private supplemental coverage, knowing
that Medicare does not cover some necessary and desirable benefits
and, used alone, would incur high routine out-of-pocket costs for
the average Medicare beneficiary. Most Medicare beneficiaries
receive additional assistance with the cost of their care through
their employers, through Medicaid, or, as noted, through
supplemental "Medigap" coverage that the government requires
them to purchase. Because of its high costs and gaps in coverage,
only 17 percent of Medicare beneficiaries depend solely on Medicare
coverage.[24]
Today, Medicare beneficiaries can choose from among 12 different
Medigap policies with wide variation in cost based on age,
geography, and out-of-pocket costs. In 2007 and 2008, a Medicare
beneficiary with a Medigap policy in Northern Virginia
typically paid an annual cost ranging from $3,800 to $4,450
(including the Medigap premium plus residual out-of-pocket
costs).[25] Allowing a person to "buy into Medicare"
and be faced with the typical additional costs associated with
the gaps in Medicare coverage and cost-sharing is not likely
to be a bargain.
The Fiscal Nightmare
The official projections for current entitlements show that the
American people will be confronted with a series of unpleasant
options: savage benefit cuts, massive tax increases, or a
combination of both. Heritage Foundation analysts, among many
others, have amply documented the long-term economic
catastrophe that lies ahead without comprehensive entitlement
reform.[26]
By 2052, thecombined cost of Social Security, Medicare, and
Medicaid will leap from 8.4 percent to 18.4 percent of gross
domestic product. Unless these programs are reformed, they will
crowd out all other federal spending by 2052.
In buttressing the findings of independent analysts, the GAO
recently released two reports, The Nation's Long-Term Fiscal
Outlook: September 2008 Update,and State and Local Fiscal
Challenges: Rising Health Care Costs Drive Long-Term and
Immediate Pressures. These reports are must reading for Members
of the 111th Congress.[27] Any notion that Medicaid and Medicare can
be expanded without aggravating the current fiscal crisis is
quickly dispelled by the work of these highly respected GAO
analysts.
The GAO candidly tells Congress:
Just ten years from now in this simulation that is based on
historical trends and recent policy preferences, 76 percent of
every dollar of federal revenue will be spent on retirees and their
health care providers, health care providers for the poor, and our
bond holders. This leaves little room for other
priorities, such as national defense and investment in
infrastructure and alternative energy sources, and threatens the
government's fiscal ability to respond to emergencies, both
natural and manmade.[28]
The GAO estimates that it would take a 39 percent increase
in revenue, or a 37 percent decrease in non-interest spending, to
close the federal fiscal gap.[29] Further, the GAO points
directly to health care spending as the major cause of the fiscal
gap: "Rapidly rising health care costs are not simply a federal
budget problem; they are our nation's number-one long-term
fiscal challenge."[30]
Health care costs, principally Medicaid costs, even at current
levels will force states to raise revenue or reduce spending
by 7.6 percent every year in order to close the fiscal gap faced by
state and local governments.[31] It is ironic that just as
Senator Baucus and others propose to add millions of additional
beneficiaries to the fiscally troubled Medicaid program, Congress
is on the threshold of passing a temporary increase in the Medicaid
Federal Medical Assistance Percentage (FMAP), the federal Medicaid
match, in order to provide urgent economic relief to states.
Adding more people to Medicaid when states cannot even afford
their current programs makes no sense--unless the real object is to
crash the program in order to force the states to support a
single-payer system, under which the federal government
would take over the entire health care system. Congress's own
analysts have demonstrated that the current path for Medicare and
Medicaid is "unsustainable."
Conclusion
Based on the promises and proposals advanced by President Obama
and Senator Baucus, the individual pieces of the dominant
congressional agenda for health care reform do not fit neatly
together. Expansion of government programs undermines existing
private health insurance coverage for millions of Americans--a
development directly contrary to President Obama's campaign
promises-- and aborts any salutary effort to mainstream
millions of Americans who are trapped in poorly
performing public plans into the private health insurance
system in which most of their fellow citizens participate.
The Obama and Baucus proposals also directly undermine the
historic accomplishments of the 1990s welfare reform, which was
designed to get Americans off of dependence on government
programs. Indeed, expanding the private health insurance
pool and spreading risk over a larger population would help to
stabilize health insurance premiums and slow the growth in health
care costs.
Expansion of government programs will divert more resources into
federal and state bureaucracies and force states to divert more
funds away from other public priorities into Medicaid and SCHIP.
Likewise, the Medicare "buy-in" as a "cheaper" alternative is
an illusion. Totaling up the real costs of Medicare Parts A, B, and
D, as well as supplemental coverage, it would be even more
expensive than current private insurance.
Entitlement reform, lowering the cost of both public and private
health insurance, and expanding private insurance coverage should
be accomplished simultaneously, allowing for a smooth interaction
among the various parts. Expanding government entitlement programs
will thwart the ability to harness market forces to control
costs--while depriving more and more Americans of the
opportunity to secure the private coverage of their choice.
Dennis G. Smith is Senior
Fellow in the Center for Health Policy Studies at The Heritage
Foundation.
[3]U.S.
Department of Health and Human Services, Centers for Medicare and
Medicaid Services, Office of the Actuary, 2008 Actuarial Report
on the Financial Outlook for Medicaid, October 17, 2008, p.
25.
[6]Susan Schappert and Elizabeth Rechtsteiner,
U.S. Department of Health and Human Services, Centers for Disease
Control and Prevention, National Center for Health Statistics,
"National Health Statistics Reports: Ambulatory Medical Care
Utilization Estimates for 2006," No. 8, August 6, 2008, p. 11,
Table 1.
[9]Kaiser Commission on Medicaid and the
Uninsured, Headed for a Crunch: An Update on Medicaid Spending,
Coverage and Policy Heading into an Economic Downturn--Results from
a 50-State Medicaid Budget Survey for State Fiscal Years 2008 and
2009, Henry J. Kaiser Family Foundation, September 2008, p. 55,
Figure 29, at /static/reportimages/93D4AE3A7EE7654CA6EC7CFEB20E7A91.pdf (February
6, 2009).
[10]Moffit, "How a Public Health Plan Will Erode
Private Care," p. 3.
[11]Kaiser Commission on Medicaid and the
Uninsured, Headed for a Crunch, p. 30.
[12]Baucus, "Call to Action," p. iii.
[13]Moffit, "How a Public Health Plan Will Erode
Private Care," p. 8.
[16]Jennifer N. Edwards, Michelle M. Doty, and
Cathy Schoen, "The Erosion of Employer-Based Health Coverage and
the Threat to Workers' Health Care," Commonwealth Fund, August
2002, p. 5.
[17]Baucus, "Call to Action," p. 21.
[19]U.S. Census Bureau, "Income, Poverty,
and Health Insurance Coverage in the United States: 2007," August
2008, p. 69, Table C-3.
[23]Baucus, "Call to Action," p. 21.
[24]America's Health Insurance Plans, "Low-Income
and Rural Beneficiaries with MediGap Coverage: 2004," February
2007, p. 2.
[26]See, for example, Heritage entitlement
spending charts, "Entitlement Spending Will More than Double by
2050," "Entitlements Alone Will Eclipse Historical Tax Levels by
2052," and "Mandatory Spending Consumes Growing Share of Total
Spending," at http://www.heritage.org.
[27]U.S. Government Accountability Office, The
Nation's Long-Term Fiscal Outlook: September 2008 Update,
GAO-09-94R, at /static/reportimages/F80E8E0A87FE334350888390641B7AE2.pdf (February
6, 2009), and State and Local Fiscal Challenges: Rising Health
Care Costs Drive Long-Term and Immediate Pressures,
GAO-09-21-OT, November 19, 2008, at /static/reportimages/F06761F611DE0EF74C7F24C67B1C6173.pdf (February
9, 2008).
[28]U.S. Government Accountability Office, The
Nation's Long-Term Fiscal Outlook: September 2008 Update, p.
2.