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.
COMMENTARY Health Care Reform
Bitter Medicine
Apr 15, 2005 2 min read
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