The Sky's the Limit: Medicare's Upwardly Mobile Drug Cost Projections
by Derek Hunter
WebMemo #326
August 12, 2003 | |
Whatever the outcome of the current House-Senate conference on Medicare legislation, taxpayers can depend on one thing: The cost projections of the Medicare drug entitlement keep rising.
In less than one month, the Congressional Budget Office (CBO) significantly increased its estimates of the mammoth House and Senate bills. Initial estimates put the cost of the program at $400 billion over 10 years. CBO now estimates that the drug benefit will cost:
$432 billion from 2004-2013, in the Senate bill, and
$425 billion from 2004-2013, in the House bill.[1]
Universal Benefit Drives Cost
House and Senate leaders refuse to target limited taxpayer funds to low-income seniors who do not have, or cannot afford, prescription drug coverage. Instead, they insist on creating a universal Medicare drug entitlement.
House and Senate leaders also ignore the fact that most seniors already have prescription drug coverage from a variety of sources, including private, employer-based retiree coverage. Instead, they insist on displacing existing private coverage in favor of a government entitlement.
This means, of course, not only that many seniors will lose their perfectly good existing private coverage, but also that America's current and future taxpayers are going to pay--big-time.
Higher Costs A "Down Payment"
The recently passed House and the Senate versions of the proposed Medicare prescription drug entitlement are expensive. Sponsors claimed the provisions would cost about $400 billion over 10 years. Both bills passed on June 27, 2003.
Then, on July 22, 2003, the Congressional Budget Office (CBO) issued another report on the bills. The result: The drug benefit in the Senate version of the Medicare drug provisions (S.1) is now estimated to cost $432 billion over the period 2004-2013. The House version (H.R.1) is now estimated to cost $425 billion over the same period.[2]
Thus, in less than one month, CBO significantly increased its estimates of the mammoth House and Senate bills. But today's CBO estimates do not, and cannot, take into account what can happen when and if a bill becomes law and is routinely subjected to the legislative changes that Congress, under pressure from liberal seniors' lobbies, can and will make at any time.
Senator Edward Kennedy (D-MA), indicating that $400 billion is just a start, made it very clear in an interview with US News & World Report that the current Medicare legislation is a "down payment" on the Medicare drug benefit.[3] With the congressional leadership building the foundation of the Medicare drug entitlement, it is only a matter of time before Members of Congress erect a massive entitlement structure.
Ignoring Real Market Competition
The current debate over a Medicare prescription drug entitlement is hardly new. For many years, Members of Congress have pointed to the absence of drug coverage in Medicare as prima facie evidence that the program was both slow to change and too hindered by legislative and bureaucratic inflexibility.
Instead of trying to reform the program and attacking the bureaucratic inflexibility at its roots by injecting real market competition into program, however, many Members of Congress have insisted on simply adding a Medicare drug benefit as an entitlement just like other Medicare benefits, to be administered under the same type of structure that governs other Medicare benefits. Likewise, the price tags for these various Medicare drug proposals have risen significantly from year to year.
In 1988, Congress passed the Medicare Catastrophic Coverage Act, which included a self-financing prescription drug entitlement. Original CBO estimates put the five-year cost of prescription drugs at $5.7 billion. But less than 12 months later, CBO estimates put the price at $11.8 billion, nearly doubling the earlier projections. These Medicare Catastrophic drug projections, interestingly enough, were positively puny by today's standards. Nonetheless, seniors did not want to pay for the rapidly rising cost of the new benefits, including the new drug benefits. Following protests by angry seniors over how much the law was going to cost them, the law was repealed in 1989.[4]
For the Record: Recent Medicare Prescription Drug Proposals
Given past history on Medicare drug cost projections, no one can say with any certainty how much any Medicare prescription drug entitlement will cost. One thing is clear, however: Over time, the costs of Administration and congressional proposals to add a Medicare prescription entitlement have all gone in one direction: up.
1999
The Breaux-Thomas Proposal. The Bipartisan Commission on the Future of Medicare announced the results of their study on how best to improve Medicare. Along with an overhaul of the Medicare system to include competition between private plans for Medicare recipients' business, the majority of the members of the Commission, led by Senator John Breaux (D-LA) and Representative Bill Thomas (R-CA), called for $60 billion to cover prescription drugs for low-income seniors. The Breaux-Thomas proposal included a targeted drug benefit for low-income seniors within the broader context of an overall reform of the Medicare program, based on the best features of the successful Federal Employees Health Benefits Program (FEHBP). The Clinton Administration strongly opposed the Breaux-Thomas proposal, calling it "inadequate and inefficient."[5]
The First Clinton Medicare Proposal. President Bill Clinton proposed a prescription drug benefit as part of a broader package of changes in the Medicare program. The overall Medicare proposal was estimated to cost $374 billion over 10 years and $794 billion over 15 years. For the drug benefit provisions, the Clinton proposal was to cost $118 billion over 10 years.[6]
2000
The Gore Proposal. Vice President Al Gore, as a presidential candidate, called for adding a prescription drug benefit to Medicare that would cost $253 billion over 10 years.[7]
The First Bush Proposal. Governor George W. Bush, as a presidential candidate, proposed an overall reform of Medicare at a cost of $198 billion over 10 years, $158 billion of which was to be used to cover prescription drugs.[8]
The Second Clinton Proposal. President Clinton proposed another Medicare prescription drug benefit, this time at a price tag of $160 billion over 10 years.[9]
The House Republican Proposal. House Republicans passed a Medicare prescription drug benefit that was estimated to cost $157 billion over 10 years.[10]
2001
The Graham Proposal. Senator Bob Graham (D-FL) introduced a Medicare prescription drug bill that was estimated to cost $318 billion over 10 years.[11]
The Breaux-Frist Proposal. Senators John Breaux (D-LA) and Bill Frist (R-TN) introduced legislation to reform Medicare. The proposal also included provisions to cover prescription drugs in Medicare at a cost of $176 billion over 10 years.[12]
2002
The Graham-Miller-Kennedy Proposal. Senators Bob Graham (D-FL), Zell Miller (D-GA), and Edward Kennedy (D-MA) proposed an amendment to the Greater Access to Affordable Pharmaceuticals Act of 2001 (S. 812) that was to spend $594 billion over seven years.[13]
The Tripartisan Proposal. A proposal sponsored by Senators James Jeffords (I-VT), Olympia Snowe (R-ME), Charles Grassley (R-IA), Orrin Hatch (R-UT), and John Breaux (D-LA) to add a prescription drug benefit to Medicare was defeated in the Senate. It was estimated that the proposal would have cost $340 billion over 10 years.[14]
The House Medicare Reform Proposal. The House or Representatives passed a Medicare reform bill that provided $320 billion over 10 years for prescription drugs in Medicare.[15]
2003
The Second Bush Proposal. President Bush proposed $400 billion over 10 years for a Medicare prescription drug benefit.[16]
Senate Medicare Bill (S. 1). On June 27, 2003, the Senate passed a Medicare prescription drug benefit that the CBO estimates would cost $432 billion over 10 years.[17]
House Medicare Bill (H.R. 1). On June 27, 2003, the House of Representatives passed a Medicare prescription drug benefit that the CBO estimates would cost $425 billion over 10 years.[18]
House Democratic Proposal. House Democrats called for a prescription drug benefit ranging from $800 billion to $1 trillion over 10 years.[19]
Explosive Entitlement Growth
Over the past few years, the cost of proposed Medicare drug provisions has steadily increased. Yet the latest 10-year CBO estimates barely begin to take into account the first wave of 77 million baby-boomers that will begin to retire in 2011. When they do, and their enrollment nearly doubles the size of the Medicare population, Medicare drug costs will soar.
Members of Congress should be honest with taxpayers. What members of the House and Senate, as well as the current and the previous Administration, have determined to be necessary to help senior citizens to pay for prescription drugs has increased significantly over the past five years. There is no way to know how much this new entitlement will end up costing taxpayers.
Remarkably, the latest $400 billion 10-year cost estimate is already outdated. The CBO projection, in any case, has turned out to be a floor, not a ceiling, for the next explosive growth in federal entitlement spending.
[1]Congressional Budget Office, "H.R. 1: Medicare Prescription Drug and Modernization Act of 2003 and S. 1: Prescription Drug and Medicare Improvement Act of 2003, Congressional Budget Office Cost Estimate, July 22, 2003, p. 3, at http://www.cbo.gov/showdoc.cfm?index=4438&sequence=0.
[2]Congressional Budget Office, "H.R. 1: Medicare Prescription Drug and Modernization Act of 2003 and S. 1: Prescription Drug and Medicare Improvement Act of 2003, Congressional Budget Office Cost Estimate, July 22, 2003, p. 3, at http://www.cbo.gov/showdoc.cfm?index=4438&sequence=0.
[3]Gloria Borger, "Rx Drugs: Whose Issue is it?" US News & World Report, June 30, 2003.
[4]For more information on this, see Robert E. Moffit, "The Last Time Congress Reformed Health Care: A Lawmakers Guide to the Medicare Catastrophic Debacle," Heritage Foundation Backgrounder No. 996, August 4, 1994.
[5]Robert Pear, "Clinton Planning to Cut Long-Term Cost of Medicare," The New York Times, June 27, 1999.
[6]Robert Pear, "Clinton Lays Out Plan to Overhaul Medicare System," The New York Times, June 30, 1999.
[7]Mike Allen, "Bush Details Medicare Plan; Proposal Includes Drug Benefit," The Washington Post, September 6, 2000.
[8]Ibid.
[9]Joseph P. Shapiro, "Medicare's Drug Woes: A Costly but Crucial Plan," US News & World Report, February 21, 2000.
[10]Press release, "Graham Prescription Drug Plan Officially Dubbed Affordable," June 8, 2001, at http://graham.senate.gov/pr060801.html.
[11]Ibid.
[12]"Politics & Policy RX Drug Benefit: CBO Says `Rival' Plans Are Affordable," American Political Network, American Health Line, Vol. 6, No. 9 (June 11, 2001).
[13]Press release, "Graham-Miller-Kennedy Prescription Drug Benefit Receives CBO Score," July 19, 2002, at http://graham.senate.gov/pr071902.html.
[14]Amy Goldstein and Helen Dewar, "Senate Defeats 2 Drug Proposals; Prescription Cost Accord Is Elusive," The Washington Post, July 24, 2002.
[15]Ibid.
[16]Sarah Lueck, "Federal Worker Health Plan Offers Choices, but at What Cost?" The Wall Street Journal, February 20, 2003.
[17]Congressional Budget Office, at http://www.cbo.gov/showdoc.cfm?index=4438&sequence=0.
[18]Ibid.
[19]Editorial, "Into the Medicare Maw," The Wall Street Journal, March 5, 2003.
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? 2003 The Heritage Foundation
All Rights Reserved.
Time to Rethink the Disastrous Medicare Legislation
by Stuart M. Butler, Ph.D., Robert E. Moffit, Ph.D.
WebMemo #370
November 17, 2003 | printer-friendly format |
The Medicare conference agreement fails the two critical requirements of a responsible drug benefit program for the nation's seniors. The original idea underlying this legislation was never just about adding drug coverage to Medicare. It was about doing so in a way that would not lead to huge additional liabilities to future generations, and in a way that would reform the program so that it could respond to the changing needs of the elderly and disabled.[1] But the agreement will not lead to that. Instead it guts critical reforms, relegating them to a "demonstration project" that is doomed to failure. And it opens the floodgates to new entitlement spending that will mean huge taxes on future workers.
It is time for Congress and the President to go back to the drawing board and do two things:
Congress should enact a limited measure, based on the discount card agreed to by the conference that will actually help most seniors who now lack affordable drug coverage.
The President and Members of Congress committed to reform must do what they failed to do effectively over the last two years - methodically build the case with the American people for critical reforms in the program. Changes in sensitive programs like Medicare can only be achieved through a public campaign, not through back-door deals.
What's Wrong With the Conference Agreement
Early text from Medicare conferees indicate critical decisions have been made that should cause great concern to reformers and to taxpayers. Among them:
The agreement means explosive new costs and huge unfunded liabilities that will burden future generations. In less than a month after the House and Senate passage of the Medicare drug provisions, the Congressional Budget Office revised the projected ten-year costs upwards from $400 billion to $425 billion and $432 billion, respectively.[2]
But this is just the tip of the iceberg. Of far greater concern is the staggering increase in the unfunded liabilities of an already insolvent Medicare program. The projected unfunded liability of the Medicare drug proposal, for current Medicare beneficiaries alone, is estimated at $2.6 trillion.[3] The projected drug costs will build pressure to repeal the Bush tax cuts[4] and significantly increase the tax burdens on working families and future generations.[5] Instead of adopting a financing mechanism similar to the FEHBP, which would impose a cap on the dollar amount of the government contribution to health plans, the conferees have instead proposed a process for the President and the House and Senate to address formally the future demands on the general revenues required to finance the Medicare program.[6].
The unintended consequence of patient dumping discussed below will incur even higher federal costs with tens of billions of dollars in federal subsidies to profitable corporations in an attempt to discourage them from dumping millions of retirees out of their private coverage. Thus, taxpayers will be forced to bear the high price to prevent a massive disruption of the private coverage aggravated by the incentives in the Medicare bill. It makes no difference whether this disruption is intentional, carefully engineered or merely the product of a major congressional miscalculation.
The agreement guts the House bill's "premium support" provision in favor of a limited and doomed demonstration program. The heart of real Medicare reform is premium support financing structure and a competitive system modeled after Congress' own health system, the Federal Employees Health Benefits Program (FEHBP). This was the key component of the majority (Breaux-Thomas) recommendations of the National Bipartisan Commission on The Future of Medicare in 1999, and an original model of reform for the Bush Administration. The House bill had provided that Medicare would move toward such a system beginning in 2010. Senator Edward Kennedy (D-MA), among others, has been adamantly opposed to the creation of a consumer- based system, even for the next generation of seniors.
The agreement ends the prospect of real reform in favor of a "demonstration project" for Medicare reform in six metropolitan areas - and even that is not scheduled to begin for seven years. But the demonstration proposal is a retreat from the structural changes that are necessary for the future of the Medicare program. Like its predecessors, such a "demonstration" is almost bound to fail; various providers who wanted to be insulated from both price competition and congressional micro-management or obstruction have deliberately undermined previous Medicare demonstration projects.[7]
The agreement contains an unworkable and potentially unpopular drug benefit, with millions of Americans losing part of their existing coverage. Instead of targeting benefits to seniors who need them, the Medicare conferees are insisting on creating a universal drug entitlement to be delivered through the vehicle of stand-alone insurance. Indeed, media is reporting that conferees are going to make the government drug benefit less onerous to Medicare beneficiaries, by increasing taxpayer obligations even more.[8] In the process, according to both Congressional Budget Office and recent independent economic analysis,[9] more than 4 million seniors with existing private coverage are bound to lose it or have it scaled back.[10] Meanwhile, the politically engineered premiums and deductibles, coupled with their odd combination of "doughnut holes" or gaps in drug coverage, are likely to be unpopular with seniors. The proposed government drug benefits are clearly inferior to existing employer-based coverage. Not surprisingly, surveys show that most seniors, when the drug provisions are explained to them, don't like them.[11]
The conferees have agreed to a "fallback position" on the provision of prescription drugs that will further undermine private plans. It is questionable whether the insurance options would even materialize in sufficient numbers under the agreement, leaving the drug benefit itself to be delivered under some version of a "fall-back" provision run by the government.[12] The fallback means that the federal government would assume responsibility for the provision of prescription drugs in any region of the country where there is an insufficient number of private plans.[13] Under the conference agreement, a government fallback program would be operational if beneficiaries do not have access to at least one stand alone prescription drug plan and one integrated health plan in each region; two drug only plans must be available if no integrated plan is available in any given region.
It is worth noting that the Bush Administration initially denounced the Senate fallback provision because it would discourage private plans from entering the market in the first place, and would lead to government control of the delivery and pricing of prescription drugs.[14] White House officials correctly argued that the fall back provision would discourage private entities from bearing the insurance risk for prescription coverage. This could lead to direct government control over the financing and delivery of most prescription drugs in the United States.
The conferees commit Congress to spending tens of billions in federal subsidies and create special tax breaks for corporations to make the universal drug entitlement politically palatable, and thus expand direct federal control over corporate health benefit practices. The creation of a universal government entitlement for drug coverage would create a powerful incentive for companies to dump retirees out of their existing coverage into the government drug program, or at least to scale back their existing coverage. The Congressional Budget Office (CBO), as well as independent health policy analysts, has indicated that roughly one out of every three retirees with employer- based coverage would lose it. To offset these incentives, the House and Senate conferees have agreed to special federal subsidies to corporations to discourage them from dumping retiree drug coverage, estimated at more than $70 billion over ten years.[15] Moreover, the provision of such taxpayer funding as a condition for the continuation of employer- based drug coverage will open up a new avenue of federal control over private sector benefit setting.[16]
Cramping private health plan competition. Both the House and Senate bills attempt to create new competitive options for private health insurance, but these are marred by regulatory excesses that will surely limit personal choice and free market competition. Particularly onerous are the comprehensive standardization of health benefits for private health plans and the imposition of a straight-jacketed system of geographical service areas. [17]
An Interim Proposal
It is time for Washington to recognize that the current process of developing a drug benefit with Medicare reform was ill-fated from the start. Once it was clear to Capitol Hill that the President was not going to build on his initial set of principles by taking the high-profile lead to build public and congressional support in addressing the tough issues, it became increasingly difficult for serious reformers in Congress to achieve a responsible outcome. Those fundamental issues, such as how to deal with the staggering liabilities of Medicare that threaten the program's ability to deliver existing benefits, remain unresolved as Congress seems poised to add to the burden on future generations.
Faced with the prospect of political and policy failure, Congress and the President should change course and focus on two objectives in the remaining weeks of this session. First, Congress should put off creating a major new drug benefit and instead enact a modest program focused on those genuinely in need. Second, the President should reassemble a "coalition of the willing" of those members of congress from both parties who are prepared to change the Medicare program for the next generation of retirees, the baby boom generation. [18]. Working closely with this coalition - consisting of congressional leaders who are committed to responsible reform-, the President should embark on a national campaign to discuss the key reform issues in Medicare and to build public support for major reform legislation.
Specifically, with the active support of the President, Congress should:
Enact the drug discount card already agreed to by the House-Senate conference.
The conferees have already adopted a prescription drug card, and they are in agreement on the need to subsidize the coverage of low-income seniors. The provision would enable all seniors to have a choice between at least two different drug cards that would secure drug discounts between 15 percent and 25 percent. Low-income seniors would also be able to get a $600 annual subsidy to cover the cost of their prescriptions.[19]
Congress also may wish to add a provision for government-subsidized private catastrophic coverage to protect poor seniors against high drug costs. This could be done immediately, and the access problem facing poor seniors without prescription drug coverage could be resolved quickly and efficiently.
The President should embark upon a major public information campaign to explain to Americans why the Medicare program should be changed for the Baby Boomers who start in retiring in huge numbers, beginning in 2010. He should work directly with willing members of Congress, in either party, who are committed to real reform of the program. Together, they should develop and enact a coherent and responsible Medicare reform plan.
In 1997, with the strong support of President Bill Clinton, Congress created the National Bipartisan Commission on the Future of Medicare. This, among other major Medicare provisions, was a significant advance in public policy under the Balanced Budget Act of 1997. Chaired by Senator John Breaux (D-LA) and Representative Bill Thomas (R-CA), the commission completed 18 months of hearings, briefings, studies, and analyses on the Medicare program and its future. A majority of the commission reached a consensus and voted in 1999 to recommend changes in the program that would transform it into a superior system like the popular and successful Federal Employees Health Benefits Program. President Clinton failed to build upon the work of the Commission, and an historic opportunity to make change was lost.
President Bush does not have to repeat this disastrous mistake. But to avoid it, he must be directly engaged. To fashion a coherent policy and build strong public support to advance the reform agenda on Capitol Hill, the President must work closely with congressional reformers who are sincerely committed to the necessary structural reform. Together, they could develop and present a detailed, market-based reform program to Congress for enactment as soon as possible. With congressional and executive branch cooperation on a shared goal of real Medicare reform, lawmakers should be able to move very quickly, building upon the solid policy work and first-rate analyses produced in 1999 by the Bipartisan Commission and its staff. Meanwhile, President Bush should commit to building public support for the reform measure.
A critical element to achieve success is that the President must commit himself to building public support for real Medicare reform , so that his recommendations will command wide support when presented to Congress.
Consequences of Failure
The President must make a strong and sustained case for change. The Congress has an historic opportunity to prepare the Medicare program for the baby boomers--the next generation of senior citizens. They will be retiring in just eight years. The consequences of failure are unacceptable, both for future retirees and for the future generations of taxpayers who will be supporting them. It is wrong for Congress to deny an entire generation the right to choose their own health care plans, especially when medical and information technology are rapidly evolving and opening up unprecedented opportunities to serve the personal needs of millions of Americans.
The broader structural reform of Medicare should continue. It should not be reduced to another failed demonstration program, or otherwise watered down and rendered ineffectual. But it should be done carefully and with the full support of the President in his capacity as the nation's leader. It is unlikely that solid Medicare reform will be accomplished without a clean and coherent set of reform proposals forged by a willing coalition of Members committed to real reform, a reliance on the solid work done by the previous Bipartisan Commission, or the President making a strong public case for change and weighing in on the specifics of Medicare reform policy.
Meanwhile, Congress can and should, quickly and efficiently, resolve the problem for seniors without drug coverage. They can do that immediately, and they should.
[1] On this point, see Robert E. Moffit, " Courting Disaster: Adding A Prescription Drug Benefit Without Serious Medicare Reform," Heritage Foundation Executive Memorandum, No. 816, May 17, 2002.
[2]Congressional Budget Office, "H.R. 1: Medicare Prescription Drug Modernization Act of 2003 and S. 1: Prescription Drug and Medicare Improvement Act of 2003," Congressional Budget Office Cost Estimate, July 22, 2003.
[3]See remarks of Thomas R. Saving, Medicare Trustee, in Robert E. Moffit et al., "What Will Medicare's Future Hold for Seniors and Taxpayers?" Heritage Foundation Lecture No. 797, September 23, 2003, p. 4.
[4]Daniel J. Mitchell, "Why Medicare Expansion Threatens the Bush Tax Cuts and Undermines Fundamental Tax Reform," Heritage Foundation Backgrounder No. 1672, July 28, 2003.
[5]William Beach and Brian Riedl, "The New Medicare Drug Entitlement's Huge New Tax on Working Americans," Heritage Foundation Backgrounder No. 1673, July 30, 2003.
[6] For a discussion of this cost containment issue, see Stuart M. Butler, et al., " Cost Control in the medicare Drug Bill Needs Premium Support, Not a `Trigger'", Heritage Foundation Backgrounder, No. 1704, November 10, 2003.
[7] For a brief account of similar health care and Medicare demonstration efforts, see Robert E. Moffit, " A Demonstration Project= No Medicare Reform," Heritage Foundation WebMemo No. 366, November 13, 2003.
[8] Joanne Kenen, " Medicare Outline May be In Reach by Friday," Reuters, October 23,2003, 7:35 PM.
[9]See Kenneth Thorpe, "Potential Implications of the Medicare Prescription Drug Benefit on Retiree Health Care Benefits," Emory University, September 13, 2003; see also Derek Hunter, "Recent Research Confirms That Seniors Will Lose Coverage Under New Medicare Legislation," Heritage Foundation Web Memo No. 345, at http://www.heritage.org/Research/HealthCare/wm345.cfm.
[10]On the dynamics of retiree coverage loss, see Edmund F. Haislmaier, "How Congress's Medicare Drug Provisions Would reduce Seniors' Existing Coverage," Heritage Foundation Backgrounder No. 1668, July 17, 2003; see also Lanhee J. Chen, "What Seniors Will Lose With a Universal Medicare Drug Entitlement," Heritage Foundation Backgrounder No. 1680, August 26, 2003, and Derek Hunter, "The Medicare Drug Entitlement's High Cost to Seniors With Employer-Based Coverage," Heritage Foundation Web Memo No. 344, at http://www.heritage.org/Research/HealthCare/wm344.cfm.
[11]According to a recent Kaiser Family Foundation survey, only 34 percent of seniors have a "favorable impression" of the congressional Medicare proposals. See Derek Hunter, "What New Research Reveals About the Medicare Drug Debate," Heritage Foundation Web Memo No. 342, September 25, 2003, at http://www.heritage.org/Research/HealthCare/wm342.cfm.
[12]On this point, see Robert Laszewski, "Will the Conferees' Medicare Insurance Provisions Really Work?" Heritage Foundation Lecture No. 801, October 15, 2003.
[13] Mary Agnes Carey, "Medicare Conferees Agree on Fallback Drug Plan," CQ Today, October 21, 2003. p. 1.
[14]Robert Pear, "Compromise Calls for U.S. to Guarantee Medicare Drug benefit," The New York Times, October 21, 2003. Under the proposed compromise, according to Senator Charles Grassley (R-IA), the taxpayers would assume the financial risk of providing drug benefits in any geographically defined market with fewer than two private drug plans.
[15] Robert Pear, `Deal `In Principle' for Medicare Plan to Cover Drug Costs,", The New York Times, November 16, 2003.
[16]On this point, see Derek Hunter, "More Taxpayer Subsidies Will Not Correct Congress's Medicare Drug Miscalculation," Heritage Foundation WebMemo No. 357, October 27, 2003.
[17]As health insurance expert Robert Laszewski notes, "Most health plans operate in only one state, or two or three states, and rarely in every town and village in those areas." Laszewski, "Will the Conferees' Medicare Insurance Provisions Really Work?" p. 2.
[18] Pointing to the difficulty of getting cooperation on Medicare legislation, Rep. Bill Thomas (R-CA) used the phrase in his October 19, 2003 appearance on ABC.
[19]Sarah Leuck, "Drug Cards Could Be Fallback If Prescription Bill Bogs Down," The Wall Street Journal, September 18, 2003.
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? 2004 The Heritage Foundation
All Rights Reserved.
New Medicare Drug Entitlement's Huge New Tax on Working Americans
by Brian M. Riedl and William W. Beach
Backgrounder #1673
July 30, 2003
The Medicare debate has focused almost exclusively on what form of drug benefit to provide to senior citizens. Lost in the debate is what the huge new unfunded liability implicit in the drug legislation would mean to American taxpayers. There are no free lunches, and future taxpayers will have to pick up the commitment to senior citizens.
To appreciate what this means, Americans should consider the fact that the unfunded portions of the Medicare drug bills currently being considered by Congress would:
Cost taxpayers a total of $2 trillion through 2030 alone, with escalating costs thereafter. (All dollar amounts are adjusted for inflation and expressed in 2003 dollars.)
Mean that a 40-year-old head of household in 2003 could expect his or her family to pay $16,127 in extra taxes until retirement to pay for other people's drug benefit before paying for his or her own drug coverage. This is on top of taxes already needed to pay for existing unfunded Medicare obligations, as well as taxes for the Social Security shortfall.
Mean that a baby born today would inherit at age 27 an extra tax burden averaging $1,125 per household in 2030. That annual cost would increase every year, and it would be in addition to Medicare payroll taxes and any taxes needed to cover the projected shortfalls in Social Security and the current Medicare program.
By 2030, cost the average household $3,980 per year in higher taxes when combined with Medicare's current $5 trillion projected shortfall through 2030. (The Medicare shortfall is defined as the portion of Medicare spending not covered by payroll taxes and premiums, which must eventually be covered by raising taxes and/or premiums.)
The budgets of mandatory programs, such as Medicare, are classified as "uncontrollable" because the government cannot directly control how much is spent. Lawmakers merely set eligibility requirements and benefit levels, and the program's cost is determined by how many eligible individuals enroll in the program. Reducing program spending requires that Congress rewrite the eligibility and benefit levels.
Popular mandatory programs typically experience increased enrollment. This in turn creates pressure for Congress to expand eligibility to a wider constituency and increase benefit levels. With no brakes, costs soar, forcing Congress either to raise taxes or to reduce benefits.
The uncontrollable, unknowable costs of mandatory programs explain how Medicare could be created in 1965 based on a projected annual cost of $10 billion and end up costing $244 billion by 2003. Medicare spending is on pace to double in the next decade, and that growth rate will accelerate when the baby boomers begin retiring. With the payroll tax insufficient to fund Medicare's costs, the program will run a $5 trillion deficit through 2030.
Adding an expensive new drug benefit will substantially worsen Medicare's already shaky finances. Estimating the long-term cost of a drug benefit is difficult, but it would be irresponsible for Congress to create this benefit without attempting to calculate its long-term costs and producing a credible plan to pay for it.
The 10-year cost estimates performed by the Congressional Budget Office (CBO) do not capture the substantial cost that will likely be felt by taxpayers in 15, 20, and 30 years. This paper estimates those costs.
The Total Shortfall
Like the CBO, the authors estimate that the current Medicare drug bills would cost approximately $328 billion over the next 10 years ($400 billion without adjusting for inflation). Yet costs accelerate substantially beyond the 10-year budgeting window. In the following 10 years, from 2014 through 2023, the drug benefit is projected to cost $772 billion. That rapid growth rate continues through 2030.1
Chart 1 shows that the Medicare drug benefit is projected to face a shortfall of:
$42 billion in 2010,
$83 billion in 2020
$148 billion in 2030.
Adding in the projected shortfall of the current Medicare program, the combined shortfall is:
$132 billion in 2010,
$276 billion in 2020, and
$525 billion in 2030.
For 2003 through 2030, the current Medicare program faces a total shortfall of $5 trillion. The drug benefit would add approximately $2 trillion to this amount.
What the Shortfall Means for Taxpayers
When the baby-boom generation enters Medicare and causes it to plunge deeper into the red, Congress will likely use deficit spending to fund the shortfall. Deficits, however, must eventually be repaid through either taxes or fees. Lawmakers will likely resist massive increases in Medicare premiums, leaving the taxpayers to cover the $5 trillion Medicare shortfall as well as the $2 trillion shortfall created by a drug benefit. The effects of the combined shortfall on two typical households are detailed below.
Example 1: A married couple, both 40 years old
This couple already pays the 15.3 percent payroll tax to fund current Medicare (and Social Security) beneficiaries. Because the payroll tax will not provide enough revenue to fund Medicare for all retirees, this couple also faces $39,894 in additional taxes between now and their own retirement in 2030.
The proposed Medicare drug benefit will add $16,127 to that tax burden, but none of these taxes--neither the payroll tax, the tax need to fund the current Medicare shortfall, nor the tax needed to fund a drug benefit shortfall--will be set aside for their own retirement. Every dollar will fund spending for current Medicare recipients.
Example 2: A couple with a baby born in 2003
By age 27, the child has likely married, begun a career, and started a family--and inherited an overwhelming tax burden.
In 2030, when the child is 27, the person's household would pay $1,125 in taxes just to cover the unfunded drug benefits of seniors. This is in addition to the 15.3 percent payroll tax, plus the $2,855 in additional taxes needed to cover the shortfall in the current Medicare program. These taxes will increase rapidly over the next 40 years before this person's own retirement.
Chart 2 shows the annual cost on a per-household basis. To cover Medicare's prescription drug shortfall, taxes must be raised by:
$371 per household in 2010,
$680 per household in 2020, and
$1,125 per household in 2030.
Adding this into Medicare's current projected shortfall, the total becomes:
$1,168 per household in 2010,
$2,262 per household in 2020, and
$3,980 per household in 2030.
How Such New Taxes Could Be Levied
Taxpayer funding of the Medicare drug benefit shortfall would require raising individual income taxes by approximately 5 percent through 2030. Raising that amount of income tax could be done in one of the following ways or some combination of them:
Raising the current 25, 28, 33, and 35 percent income tax brackets by 2 to 3 percentage points each;
Eliminating most of the home mortgage interest tax deduction;
Repealing the earned income tax credit; or
Repealing the child tax credit.
When combined with the shortfall in the current Medicare program, the necessary income tax increase is 18 percent through 2030. Examples of such tax increases include:
Repealing every tax cut enacted since 2001--including marriage penalty relief, the expanded child tax credit, the expanded adoption tax credit, and the reduced 10 percent tax bracket for lower-income families--and imposing additional taxes elsewhere;
Raising the current 25, 28, 33, and 35 percent income tax brackets by 7 to 9 percentage points each; or
Repealing the tax exclusion that exempts employees from paying taxes on the value of their health insurance.
Two-thirds of these tax increases would fund the current Medicare shortfall, and one-third would fund the new drug benefit.
What Congress Should Do To Avoid This New Tax
Most seniors already have private drug coverage. Thus, targeted help to those who need it would make much more sense than a large new unfunded drug benefit for all seniors. Moreover, the absence of drug coverage in today's Medicare program is the result of deficiencies in the way Medicare benefits are modernized over time.
Currently, revising key benefits takes an act of Congress. It would be much more sensible to enact reforms that allow revised benefits, such as drug coverage, to be introduced into Medicare gradually over time, paid for with changes in other less valuable benefits, and done so in a way that reflects the preferences of seniors. The best model for this is Congress's own health plan, the Federal Employees Health Benefits Program (FEHBP). In the FEHBP, market competition and consumer choice leads to plans that reflect enrollee needs.2
Congress should address the needs of some seniors for drug coverage in a way that preserves two critical principles:3
A Medicare drug bill should impose no new unfunded liabilities on future generations.
Medicare should be revamped to resemble the FEHBP so that drug benefits and other features can become common and cost-effective features of plans driven by consumer choice and competition.
Conclusion
President George W. Bush and many in Congress cite tax relief as the centerpiece of their economic agenda. Lawmakers who vote for the Medicare drug benefit are voting for a $2 trillion tax increase. Responsible lawmakers who oppose such substantial tax increases should look beyond the 2004 election and examine the burden that a Medicare drug burden will impose on future generations.
Brian M. Riedl is Grover M. Hermann Fellow in Federal Budgetary Affairs in the Thomas A. Roe Institute for Economic Policy Studies, and William W. Beach is Director of the Center for Data Analysis, at The Heritage Foundation.
Appendix
Methodology
The 2003-2030 annual cost estimates for the current Medicare program and for the Senate's proposed drug benefit come from data produced by Dr. Andrew Rettenmaier and Dr. Thomas Saving, respectively Executive Associate Director and Director of the Private Enterprise Research Center at Texas A&M University. Dr. Saving also is one of two public trustees of the Social Security and Medicare trust funds. Dr. Saving's projections of Medicare costs as a percentage of taxable payroll were converted into nominal and then real dollars using the economic projections of the 2003 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds.4
The tax cost was converted into percentage income tax increases based on projections of future baseline tax revenues from the Global Insight U.S. Macroeconomic Model and supporting Global Insight databases.
The methodologies, assumptions, conclusions and opinions in this report are entirely the work of Heritage Foundation analysts. They have not been endorsed by, and do not necessarily reflect the views of, Dr. Saving or the owners of the Global Insight U.S. Macroeconomic Model.
Data used in this Backgrounder are available upon request from the authors.
1. Although the cost estimates apply to the Senate-passed bill, the cost of the House version should not differ substantially.
2. See Robert E. Moffit, Ph.D., "A Road Map to Medicare Reform: Building on the Experience of the FEHBP," Testimony before the Special Committee on Aging, U.S. Senate, May 6, 2003, at www.heritage.org/Research/HealthCare/test050603.cfm.
3. See Stuart M. Butler, Ph.D, "The Crucial Elements of an Acceptable Medicare Bill," Heritage Foundation Backgrounder No. 1667, July 16, 2003.
4. Located at www.ssa.gov/OACT/TR/TR03/index.html.
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? 2003 The Heritage Foundation
All Rights Reserved.
Why Medicare Expansion Threatens the Bush Tax Cuts and Undermines Fundamental Tax Reform
by Daniel J. Mitchell, Ph.D.
Backgrounder #1672
July 25, 2003
The House and Senate have approved legislation adding a prescription drug benefit to Medicare, and a conference committee is now attempting to reconcile these two bills. If the two chambers do manage to iron out their differences, the resulting bill will represent the biggest unfunded entitlement expansion in nearly 40 years.
Unfortunately for taxpaying Americans, however, the projected 10-year $400 billion cost is just a down payment that will not produce the necessary Medicare improvements and needed reforms. Instead, Congress will have passed a bill that in future years will require huge new taxes--new taxes that will threaten the recently enacted tax plan.
Moreover, this massive new entitlement significantly endangers future tax reductions and undermines the campaign for a fair and simple system such as the flat tax.
The Medicare prescription drug proposal is bad health policy, exacerbating the flaws in a system that has almost no market-based incentives to improve service and control costs. But the House and Senate bills also will undermine sound tax and economic policy in several ways. Specifically:
The size of government will expand
A new entitlement will take America even faster down the road that has caused so much economic damage in Europe's welfare states. Indeed, the unfunded Medicare expansion is essentially a huge future tax increase since the population of Medicare recipients will nearly double once the baby-boom generation retires. Ironically, just when some European countries are waking up to the problem and restraining unfunded entitlements, America will be creating an enormous new entitlement.
President Bush's recently enacted tax cut and tax reform package will likely be the first casualty
Because of arcane budget rules, the bulk of the 2001 and 2003 tax cuts expire at the end of 2008 and the end of 2010. Extending these tax cuts or making them permanent will be enormously difficult in an environment of skyrocketing spending for government-provided health care. Indeed, the creation of a prescription drug entitlement may be akin to repealing the Bush tax cuts.
By adding to the deficit, the huge new unfunded liability will likely be the death knell of further tax relief and fundamental tax reform
A prescription drug benefit means bigger deficits--a problem that will intensify as the baby boomers start to retire in the next decade. Once these demographic and fiscal variables become part of the budget forecast, lawmakers seeking to cut taxes and create a simple and fair tax code, such as the flat tax, in all probability will face insurmountable political obstacles.
A new entitlement means bigger government, and bigger government means higher taxes, especially when politicians are expanding the welfare state and neglecting much-needed Medicare reform. Simply stated, the prescription drug benefit will make America more like stagnant European nations such as France.
The Problem
Entitlement spending is the fastest growing part of the federal budget, and this pattern will continue even if there is no expansion of so-called mandatory programs In just the past 40 years, entitlements have nearly doubled as a share of federal outlays, climbing from 32 percent of total outlays in 1962 to 60 percent of the federal budget in 2002.1
The elderly will be a much bigger share of the population once the baby-boom generation retires. And since the elderly consume most entitlement spending, the fiscal outlook will worsen--even if there are no changes to the underlying programs. According to the Congressional Budget Office, mandatory spending for Social Security and Medicare will nearly double as a share of the gross domestic product (GDP) over the next 40 years.2
Although Social Security and Medicare spending are projected to explode, payroll tax revenues to finance these programs will remain relatively constant as a share of GDP. The net result will be huge long-term deficits, and Medicare is the main problem. According to the trustees' reports on Social Security and Medicare,3 the combined deficit of the two programs will swell to more than 8 percent of national economic output in 2075, with Medicare accounting for about three-fourths of the red ink. According to government data, the Social Security cash-flow deficit through 2075 is $25.3 trillion in today's dollars. But this is spare change compared to the Medicare cash-flow deficit, which is a staggering $66.8 trillion over the same period.4
While the long-term outlook is grim, even the short-term prognosis is sobering. The baby-boom generation will begin to retire in about 10 years, and the fiscal consequences will be profound. The combined deficit will rapidly expand, climbing to 1 percent of GDP in 2015, 2 percent of GDP in 2020, and 3 percent of GDP in 2025. To put that figure in perspective, 3 percent of GDP today would be more than $325 billion, or $3,072 per household.
The tax implications of these big deficits should concern all responsible lawmakers as well as taxpayers. Raising revenue by just 1 percent of GDP next year would require an annual tax increase of more than $100 billion.5 Over the next 10 years, the tax increase needed to finance such a deficit would be more than $1.5 trillion.6 Such a tax increase would be a body blow to the economy, threatening European-style stagnation and higher unemployment.
The Enormous Cost of a New Prescription Drug Entitlement
In the absence of program reform, creating a new entitlement for prescription drugs is akin to pouring gasoline on a fire. And it will be very expensive gasoline. The 10-year cost of the new benefit is projected at $400 billion, but it is quite likely that the real cost will be much larger since public and private-sector estimates of drug costs in recent years have been well below actual spending levels. But the $400 billion is trivial compared with the situation when the baby boomers start to retire--just after the 10-year estimating window used by Congress.7
There are several reasons to expect that any prescription drug benefit will cost far more than official estimates indicate. Three are particularly important.
Behavioral changes will drive up costs
Government budget estimators have been notoriously inaccurate in predicting how individuals will respond to changes in fiscal policy. This is why tax cut estimates frequently overstate the revenue loss associated with lower tax rates.8 But it also explains why government prognosticators understate the cost of new entitlement programs.
When government begins to offer a benefit, individuals have an incentive to alter their behavior to maximize the amount that they will receive
Moreover, it is impossible to predict the development of breakthrough drugs that will enhance the quality of life, but it is safe to assume that seniors will want such drugs if they become available, particularly if Medicare subsidizes them. This explains, at least in part, why both Medicare and Medicaid have cost taxpayers several times as much as first predicted.9
Politicians will come under increasing pressure to expand the program
The House and Senate prescription drug bills offer haphazard coverage to seniors. Both have deductibles and then offer partial reimbursement up to a specified level. Once seniors reach that level of drug expenditure, they then are responsible for all costs up to another specified level, at which point the government picks up almost all of the costs. As a result of this spotty coverage, the $400 billion in the two bills will cover less than one-fourth of the total prescription drug cost for the elderly over the next 10 years.10
This patchwork system will generate enormous pressure on politicians to make coverage more uniform, and special-interest groups most likely will demand that three-fourths of the program be financed by general tax revenue, which could triple projected expenditures. It is worth noting Senator Ted Kennedy's view: "This is only a down payment. Hopefully, we can use this down payment in an effort to fulfill our responsibility to seniors over the years."11
Demographic trends mean higher spending. The baby-boom generation begins to retire in about 10 years. Today, there are over 40 million people on Medicare; by 2030, that number will jump to almost 80 million, nearly doubling in less than 30 years.12 Yet, because Congress is using 10-year budget estimates, this ticking fiscal time bomb is not part of the prescription drug debate.
Making long-run projections is, by necessity, somewhat speculative. The final legislation--if any--is still unknown, as is exactly how behavioral changes and future program expansions will affect costs.
Nonetheless, estimating the probable range of fiscal effects is quite possible: It has been done by Thomas Saving, one of the trustees of the Social Security and Medicare Trust Funds. Based on data from the Medicare Trustees' Report and the Congressional Budget Office and estimates from Texas A&M University, he estimates that the Medicare deficit will consume 20 percent of federal income taxes in 2026 and 33 percent of income taxes in 2042.13
If a prescription drug entitlement is created, those numbers will become even more startling. Under a best-case scenario, with government paying only 25 percent of drug costs, the Medicare deficit will climb to 24 percent of income tax revenues in 2026 and 39 percent in 2042. Using more realistic assumptions, however, the fiscal burden will become much more ominous. If Medicare pays 75 percent of prescription drugs, the program's overall deficit will consume 35 percent of income tax receipts in 2026 and 54 percent of those revenues in 2042.14
Medicare expenditures already are projected to climb dramatically, and creating a new entitlement will boost spending even faster. If lawmakers enact this legislation without considering the consequences, they will put their successors in an extremely difficult position, leaving them with three politically unpopular options. Future lawmakers could:
Raise taxes to make up the shortfall
Payroll taxes would have to be increased by more than 100 percent to make up the overall financing shortfall in Medicare. Lawmakers could choose higher income tax rates, of course, but the net result will still be more money in Washington and less money for the productive sector of the economy. The additional per household tax burden would be $1,168 in 2010, climbing quickly to nearly $4,000 in 2030.15
Accept enormous additional deficits
If politicians do not want to raise taxes or premiums, they can borrow money from the private sector to pay benefits. This will mean deficits approaching 8 percent of national economic output on a permanent basis. Deficits are not necessarily a bad thing, particularly if they are incurred to facilitate a policy with long-term benefits to the nation (such as winning World War II, lowering tax rates, or creating personal Social Security accounts). A new prescription drug entitlement, however, does not fall in this category.
Scale back benefits and/or ration care
The last choice is to reduce or renege on promised benefits--the least likely choice by future politicians. The creation of an entitlement today makes it very difficult for future lawmakers to cut it.
Creating Obstacles to Permanent Tax Reduction
In a political environment of rising costs and demands for more benefits, the most likely scenario is action by Congress to repeal existing legislation that would reduce tax revenue while concomitantly dampening enthusiasm for future tax reduction and reform. The remaining Bush tax cuts would likely be the first target.
The bulk of the 2001 tax cuts expire at the end of 2010, and most of the 2003 tax cuts expire at the end of 2008. Good economic policy suggests that these provisions should be made permanent to maximize the economic benefit of lower tax rates. At the very least, however, they should be extended to protect the economy from a significant tax increase in either 2009 or 2011.
If the temporary tax cuts are allowed to expire, the economy will be hit with a $775 billion tax increase between today and 2013.16 This tax increase would have serious economic consequences, particularly since much of it would be in the form of higher penalties on work, saving, and investment.
Yet, is it reasonable to assume that lawmakers will make the Bush tax cuts permanent when future budget projections will be adversely affected by the upcoming retirement of the baby boomers? Even extending the tax cuts will be much more difficult in that environment, and making the Bush tax cuts permanent might be impossible. For example:
The 15 percent tax rate on dividends and capital gains will expire at the end of 2008, and static revenue estimates will show an annual "cost" of nearly $25 billion to continue these rate reductions.17
Extending the 2001 tax cuts would be even more problematical. According to the Treasury Department, extending those tax cuts for just three years would "cost" nearly $500 billion. Making just the income tax rate reductions permanent would "cost" more than $270 billion.18
Permanent repeal of the death tax would be particularly vulnerable. This unfair levy finally ends in 2010, but will reappear in 2011 under current law. Since permanent repeal would "cost" about $40 billion per year, that goal will be extremely difficult to achieve.
Equally important, the baby-boom generation will be closer to retirement when the 2001 tax cuts expire; therefore, the future cost of providing benefits for these soon-to-be seniors will have a bigger effect on 10-year budget projections.
One need only imagine the demagogic political environment that might develop. Advocates of class warfare will argue that the death tax should be brought back to life to help pay for "life-saving drugs." Supporters of such politics also will argue that personal income tax rates on the "rich" should be raised to avoid "deficits as far as the eye can see."
Goodbye to Future Tax Reform
The tax cuts enacted in 2001 and 2003 are already at risk, and adding a prescription drug entitlement would magnify that risk. Further tax relief and fundamental tax reform would also be jeopardized if entitlements continue to consume an ever-larger share of national economic output.
All of the following tax cuts are necessary steps on the road to fundamental tax reform--and all will be much harder to achieve if prescription drugs become an entitlement:
Corporate tax rate reduction
The United States has the highest corporate tax rate of any developed nation. This punitive levy undermines the competitiveness of U.S.-based companies. Based on static scoring, reducing the tax rate by just 1 percentage point will "cost" more than $50 billion over 10 years, but can lawmakers "afford" to drop the rate when budget choices are dominated by rising entitlement expenditures?
Alternative minimum tax (AMT) repeal
The alternative minimum tax is a "Catch-22" system that forces an ever-larger number of taxpayers to calculate their tax burden a second time using the AMT.19 If this results in a higher tax liability, the taxpayer must pay more tax. Is it reasonable to think that this unfair tax--with its $600 billion price tag--will be repealed when prescription drug spending is consuming a huge share of income tax revenue?20
Universal IRAs
People should not be taxed twice on income that is saved and invested, which is why individual retirement accounts should be universal. Back-ended IRAs (Roth IRAs) are particularly attractive to politicians since they increase tax revenue in the short run, but will lawmakers be willing to adopt a system eliminating the second layer of tax on saving and investment when it might mean lower revenues in the long run?
Expensing of business investment
Companies should be allowed to fully deduct investment expenses when calculating taxable income (expensing), but the current system only allows them to deduct a portion of expenses in the year they are incurred (depreciation). This depreciation system creates a bias against capital formation and reduces worker productivity. Extending expensing for small businesses through 2013 will "cost" $23.7 billion.21 Providing this neutral treatment for all businesses would require an even bigger tax cut, but will Congress do anything when Medicare expenses are climbing much faster than inflation?
Territorial taxation
The United States has the world's worst treatment of foreign-source income. The greedy hand of the Internal Revenue Service reaches out to tax labor income, capital income, and corporate income earned in other nations--even though this income already is subject to foreign tax. This "worldwide" tax reach hinders U.S. competitiveness and is largely responsible for many companies' deciding to re-charter in jurisdictions with better tax law, such as Bermuda and the Cayman Islands. Territorial taxation--the common-sense notion of taxing only income earned inside national borders--would solve this problem, but is this solution feasible when prescription drug costs take an ever-larger share of national income?
In an environment of entitlements crowding out good tax policy, none of these reforms would be possible.
What Congress Should Do
Rather than enacting a huge new drug entitlement that will undermine sensible tax policies, lawmakers should pause to consider how best to address the shortcomings of Medicare in a responsible manner. A lack of drug insurance is not a widespread problem. Most seniors already have private coverage. Thus, a sweeping new government program covering every senior is not needed to address the genuine problems of a minority of generally lower-income seniors. Moreover, the lack of drug coverage in the existing Medicare program actually indicates deficiencies in the program's process of overhauling and modernizing benefits, and that problem requires structural reforms of Medicare, not an expensive add-on.
The best model to use to address these problems is Congress's own health plan, the Federal Employees Health Benefits Program (FEHBP), in which market competition and consumer choice leads to cost-effective plans with benefits that reflect enrollee needs--quite unlike Medicare.22
Specifically, Members of Congress should address these shortcomings in ways that preserve two critical principles:23
A Medicare drug bill should impose no net new unfunded liabilities on future generations.
The program should be revamped to resemble the FEHBP so that drug benefits and other features can become common and cost-effective features of plans through consumer choice and competition.
Conclusion
The House and Senate prescription drug bills will hurt America by making the health care system less responsive to market forces, but the damage will extend far beyond the health care system. The fiscal policy consequences of entitlement expansion are staggering.
Almost surely, a new drug entitlement will endanger the 2001 and 2003 Bush tax cuts. In the future, as lawmakers examine the need to extend those tax cuts and make them permanent, they will be haunted by budget projections showing an enormous expansion in Medicare spending. This will create a political environment that hinders the enactment of supply-side tax policy.
In the long run, entitlement expansion also threatens fundamental tax reform. Many of the reforms needed to bring the tax code closer to a simple and fair flat tax involve a reduction in tax revenue. This will be a daunting challenge. A bigger Medicare system--particularly one insulated from market-based reforms--will make it more difficult to replace the Internal Revenue Code with a pro-growth flat tax.
Daniel J. Mitchell, Ph.D., is McKenna Senior Research Fellow in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.
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1. Congressional Budget Office, "Historical Budget Data," January 29, 2003, at www.cbo.gov/showdoc.cfm?index=1821&sequence=0.
2. Congressional Budget Office, "A 125-Year Picture of the Federal Government's Share of the Economy, 1950-2075," revised July 3, 2002, at www.cbo.gov/showdoc.cfm?index=3521&sequence=0.
3. For more information, see Centers for Medicare and Medicaid Services, Table II.A5--Medicare Sources of Income and Expenditures as a Percentage of the Gross Domestic Product, at www.cms.hhs.gov/publications/trusteesreport/2003/tabiia5.asp, and "Appendix F: Estimates for Oasdi and HI, Separate and Combined," in OASDI Board of Trustees, 2003 OASDI Trustees Report, Table VI.F5, at www.ssa.gov/OACT/TR/TR03/VI_OASDHI_GDP.html#wp108957.
4. Calculations based on 2003 Social Security Trustees' Report and 2003 Medicare Trustees' Report. See Social Security Administration, "Single-Year Tables Consistent with 2003 OASDI Trustees Report," Tables VI.F7, at www.ssa.gov/OACT/TR/TR03/lr6F7-2.html and Table VI.F10, at www.ssa.gov/OACT/TR/TR03/lr6F10-2.html.
5. Congressional Budget Office, "CBO's Current Economic Projections," at www.cbo.gov/showdoc.cfm?index=1824&sequence=0.
6. Ibid.
7. For an overview of this problem, see Robert E. Moffit, "What's Wrong with the Senate Medicare Drug Bill," Heritage Foundation Web Memo No. 297, June 18, 2003, at www.heritage.org/Research/HealthCare/wm297.cfm, and Nina Owcharenko, "Time to Draw the Line on Medicare 'Reform,'" Heritage Foundation Web Memo No. 300, June 23, 2003, at www.heritage.org/Research/HealthCare/wm304.cfm.
8. Daniel J. Mitchell, "The Correct Way to Measure the Revenue Impact of Changes in Tax Rates," Heritage Foundation Backgrounder No. 1544, May 3, 2002, at www.heritage.org/Research/Taxes/BG1544.cfm.
9. Daniel J. Mitchell and Stuart M. Butler, "Health Care Debate Talking Points #2: Why the Numbers Will Be Wrong," Heritage Foundation F.Y.I. No. 22, August 9, 1994.
10. Congressional Budget Office, letter to interested parties, February 3, 2003, at www.cbo.gov/showdoc.cfm?index=4056&sequence=0.
11. Wayne Washington, "Medicare Drug Aid Plan Passes Senate, House Approval Overhaul," The Boston Globe, June 27, 2003, p. A2.
12. 2003 Annual Report of the Board of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Fund, March 17, 2003, p. 24, at cms.hhs.gov/publications/trusteesreport/2003/tr.pdf.
13. Tom Saving, "Perspectives on the 2003 Social Security and Medicare Trustees Reports," presentation at program on
"The 2003 Medicare Trustees' Report: One Year Closer to Crisis?" American Enterprise Institute, March 24, 2003, at
www.aei.org/docLib/200303241_saving.pdf.
14. Ibid.
15. Brian M. Riedl and William W. Beach, "The New Medicare Drug Entitlement's Huge New Tax on Working Americans," Heritage Foundation Backgrounder, forthcoming July 2003.
16. Office of Management and Budget, Mid-Session Review of the Budget, July 2003, at www.whitehouse.gov/omb/budget/fy2004/pdf/04MSR.pdf.
17. Ibid.
18. Ibid.
19. The alternative minimum tax was originally designed for 155 taxpayers but is projected to affect 36 million taxpayers by 2010. See Chris Edwards, "10 Outrageous Facts About the Income Tax," Cato Institute, April 15, 2003, at www.cato.org/dailys/04-15-03-3.html.
20. Congressional Budget Office, "Budget Options," March 2003, at www.cbo.gov/showdoc.cfm?index=4066&sequence=17.
21. Office of Management and Budget, Mid-Session Review of the Budget.
22. Robert E. Moffit, "Road Map to Medicare Reform: Building on the Experience of the FEHBP," testimony before the Special Committee on Aging, U.S. Senate, May 6, 2003, at www.heritage.org/Research/HealthCare/test050603.cfm.
23. See Stuart M. Butler, Ph.D, "The Crucial Elements of an Acceptable Medicare Bill," Heritage Foundation Backgrounder No. 1667, July 16, 2003.
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? 2003 The Heritage Foundation
All Rights Reserved.
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