WASHINGTON — Pension programs in the United States as well as many other countries are heading over the fiscal cliff. Even President Bill Clinton has noticed the problems with Social Security.
Unfortunately, Medicare, which provides health care to the elderly, is in similar straits. In less than a decade the program will run out of money: The annual deficit will eventually hit a trillion dollars as the huge baby boom generation retires.
But Americans shouldn’t worry. The president has a plan. He would increase program liabilities, allowing those between the ages of 55 and 64 to buy into Medicare and creating a new drug benefit.
How would Clinton pay for this? He would tighten price controls by freezing hospital reimbursements next year. He would also throw money at Medicare, $660 billion over the next 15 years. This is, of course, part of the same vast U.S. budget surplus that is supposed to save Social Security and fund a host of new pork barrel programs.
Unfortunately, irresponsible handling of Medicare is a hallmark of this administration.
Clinton first proposed arbitrary cuts in Medicare outlays. His 1993 budget reduced Medicare spending by $56 billion over five years. The ill-fated Clinton health care reform package envisioned an additional $152 billion in cuts over six years. First lady Hillary Clinton told Congress that “we are thinking zero growth in costs” in a program whose budget had been rising 10 percent a year.
But costs of Medicare — and of universal health care systems around the globe that cover retirees — increase for a reason. The elderly consume far more medical services.
Glaucoma, hip replacement and heart bypass operations, as well as a myriad of other procedures, are usually performed on the old, not the young. In fact, those over 75 generate 10 times as much in health care costs as those between the ages of 20 and 50. New technological advances and an aging population guarantee that Medicare spending will continue to rise.
Unfortunately, then, attempts to arbitrarily cut expenses would inevitably cut care. The U.S. Congress began attempting to limit Medicare costs a quarter-century ago. The Reagan administration came up with its own complex set of price controls, called the Prospective Payment System.
These restrictions did little for taxpayers — between 1980 and 1995 federal outlays for Medicare still jumped from $35 billion to $157 billion. However, the controls did reduce services for Medicare recipients.
By 1994, estimated the Physician Payment Review Commission, a government advisory board, Medicare was paying only 59 percent of what private insurers paid for comparable services. Many doctors and hospitals adjusted their treatments accordingly.
The U.S. Department of Health and Human Services concluded that 540,000 Medicare patients were receiving poorer care and increasing numbers were being discharged before their conditions stabilized. The House Government Operations Committee estimated that controls caused 3,269 avoidable deaths.
Given the difficulty in controlling Medicare costs, the president’s proposal to expand the program risks financial disaster. Spending will rise — current beneficiaries receive more than five times as much in benefits as they contributed to the system, and there’s no reason to believe that new beneficiaries would cover the cost of their care.
As analyst Merrill Matthews points out, creating a health care program for those nearing retirement would encourage both workers to retire earlier and companies to drop health care benefits for those who do so. This would increase costs even further.
Since demand rises when costs fall, creating a drug benefit, too, would end up costing far more than the president predicts. Japan, in particular, has struggled with exploding pharmaceutical outlays. But if Washington responded by imposing price controls it would discourage drug companies from developing the sort of new medicines that have done so much to improve the elderly’s quality of life.
Alas, there are no easy solutions for Medicare. Indeed, countries throughout Europe, as well as Japan, are struggling with similar problems of rising costs and restricted care in their medical systems.
But that doesn’t mean there are no answers. Congress should offer vouchers to Medicare beneficiaries, allowing them to choose among a wide variety of private plans, including catastrophic insurance supplemented by a Medical Savings Account to cover out-of-pocket expenses. This would reward recipients who were more careful medical consumers.
Second, Congress should raise the eligibility age, since seniors live an average of three years longer today than in 1965, when the program was created. Lawmakers should also steadily lower the federal contribution, since participants currently collect so much more than they contribute.
Ultimately, Congress should phase out benefits to wealthy seniors. Why should poor workers subsidize rich retirees?
Of course, the president would undoubtedly resist such proposals. But like a hanging, the threat of impending fiscal collapse will help concentrate the public’s mind. Just like for Social Security, real reform is necessary to protect taxpayers and retirees alike.
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