Commentary

A Benefit That Is Bad for America’s Health

This article originally appeared in the Financial Times on June 20, 2003.
President George W. Bush has made it clear that he expects new prescription drug coverage to be added to Medicare, the federal health care program for the elderly. In previous years, Democrats and Republicans supported opposing plans and were unable to work out their differences. But the Charles Grassley-Max Baucus plan offering a universal subsidy on prescription drugs now enjoys bipartisan support in the Senate. .

What has changed? Unfortunately, Republicans have abandoned the market-based reforms they tied to prescription drug coverage in the past. These reforms were intended to introduce competition and choice into Medicare to reverse the spiral of heavy-handed regulation, ineffective price controls, and runaway spending that have made Medicare a monument of cumbersome, bureaucratic healthcare—and a fiscal time-bomb. .

These reforms are essential to make the current program sustainable, even without adding a costly new benefit. With their abandonment, the prescription drug benefit that is about to be signed into law will be the most fiscally irresponsible legislation in U.S. history. .

An Unfunded Benefit.

The new prescription drug subsidy is an unfunded benefit. There has been no mention on either side of the Senate as to how and when this additional federal expenditure will be financed. The politicians are keeping quiet about this detail for a good reason. The cost of the long-term plan is astronomical. .

The political debate focuses on the $400 billion cost to taxpayers. But that is only for the next ten years. This is particularly misleading because it does not account for the increased cost associated with the baby-boomers retiring. Using the same long-term spending assumptions applied to Social Security, the present value of all future Medicare expenditures associated with the administrationÕs original proposal for extending prescription drug coverage could generate an unfunded federal obligation of $6 trillion. .

That sounds pretty bleak. And it gets worse. The original White House proposal included strong incentives for competition that would have yielded future cost savings. The proposal making its way through the Senate has dropped those incentives. Take the lack of competition into account and the result is striking. Depending on the future growth of demand for prescription drugs under Medicare, the Senate plan would increase the government’s unfunded obligation of between $6 trillion and $7 trillion to $12 trillion. Yet Medicare is already in deep trouble. Under conservative assumptions of future healthcare spending growth, its long-term shortfall amounts to more than $30 trillion. And this is without a new prescription drug benefit. .

Limited Policy Options.

What are the options? Congress will no doubt try to reduce Medicare spending in future budget deals, once it sees the size of its liabilities. It may force wider-ranging cuts, putting housing, transportation, education, and other services at risk. The alternative is to raise taxes to prevent deficits from soaring and damaging economic growth. Unfortunately, tax hikes appear to be the most probable outcome. .

Those favoring the status quo in the structure of important entitlement programs view such long-term fiscal estimates as speculative and undeserving of much attention now. After all, much of the shortfall accrues well after the next few decades. Consider, however, that with an aging population and longer lifespans, the budget noose will start to tighten within a decade. Faced with an escalation of health spending, the government will have little flexibility for dealing with other long-term financial shortfalls. .

Furthermore, if adopted, a new prescription drug benefit would become increasingly difficult to pare back as the elderly increase in number over the coming decades and as they organize politically to protect their “entitlement.” .

According to Alan Greenspan, chairman of the U.S. Federal Reserve: “Rapidly advancing medical technologies, essentially inelastic demand for medical services for the elderly, and [a] subsidized third-party payment system, have created virtually unconstrained demand.”

The proposed drug benefit should be recognized for what it is: a hand-out to today’s elderly that, with near certainty, piles new tax burdens on the shoulders of America’s young and future generations.