Commentary

The Medigap Gap

This article originally appeared on Creators.com on March 6, 2003.

Medicare taxes young workers on the first and last dollar they earn, regardless how poor they are, in order to subsidize medical bills for those over age 65, regardless how rich they are. There is no conceivable justification for such a scheme. Yet both Republicans and Democrats are now threatening to “reform” Medicare by greatly increasing future subsidies, and thus increasing future Medicare taxes.

The problem with the plan offered by House Democrats is that its 10-year cost is about $1 trillion, which is $1 trillion too much. The problem with the Bush administration’s plan is that its 10-year cost is $400 billion, which is $400 billion too much. Taxpayers are already burdened with more than 45 percent of all medical bills. That is not because 45 percent of all Americans are poor. On the contrary, those being subsidized are often more affluent than the taxpayers who subsidize them.

Additional subsidies for prescription drugs would boost demand for such drugs and drive up their prices, thus pushing actual spending much higher. Even without these drug subsidies, the annual cost of Medicare is projected to soar from $224 billion in 2000 to $425 billion by 2011. Costs will rise even faster after 2011, as the percentage of the population over 65 really begins to soar. Medicare is insolvent, and extra subsidies could make its coming collapse really ugly.

As expensive as Medicare is, it covers only half of all medical expenses of the elderly. No sensible person would participate in Medicare if it were not both heavily subsidized and mandatory. Medicare not only fails to cover prescription drugs, it also fails to cover even routine physical exams, eye tests, hearings aids and, most importantly, catastrophic expenses. Seniors are compelled to buy private medigap insurance to fill some of these gaps, but medigap options for drug insurance are severely limited by law.

Although there is much more to the president’s plan than prescription drug insurance, that is the key issue on which political battles are being fought. Better access to drug insurance is one thing; fat subsidies are quite another. Sen. Olympia Snow, R-Maine, has been widely quoted saying, “Every senior should have access to comprehensive drug coverage, regardless of which Medicare option they choose.” Better access is indeed unobjectionable. The administration’s fact sheet, by contrast, asserts that “all seniors should have the option of a subsidized prescription drug benefit.” Why should all seniors be subsidized? Why should turning 65 entitle anyone to subsidies?

The main reason seniors have limited access to prescription drug insurance is that in 1992 Congress made it a crime for any insurance company to offer such insurance.

More precisely, Congress required that Medigap policies be offered as only 10 package deals, with prescription drug insurance available only within the three most expensive packages. Although a Congressional Budget Office study says “medigap policies … charge high premiums for drug coverage,” that is not really true. Medigap policies appear to charge high premiums only because drug coverage is wrapped up in a big bundle with various other benefits, including coverage for foreign travel and for the entire cost of Medicare deductibles. You have to pay for costly insurance you don’t want in order to get the drug benefit. The obvious solution is to unbundle the prescription drug plans, allowing drug policies to be sold separately and allowing insurance companies to offer more or less generous drug benefits for higher and lower prices.

Drug insurance within the top three medigap plans is far more costly than a separate catastrophic policy with a large deductible, but Congress made it illegal to offer such an inexpensive policy. The standard plans, by contrast, leave seniors dangerously exposed to unusually high drug costs. The annual deductible in the standardized plans is too low ($250), co-payments are high (50 percent), and drug expenses that exceed $6,250 are not covered by even the most expensive plan. “Only 17 percent of Medicare beneficiaries will spend more than $5,000 on prescription drugs in 2005,” CBO estimates, “but their combines spending will make up nearly 54 percent of total drug expenditures by Medicare beneficiaries that year.”

People are generally quite satisfied with the quality, choices and prices of goods and services they buy in the competitive marketplace. If you don’t like one supermarket or restaurant, you try another. Once the government gets involved in either providing services directly (schools and postal service) or mandating how private services must be provided (the standardized medigap policies), the resulting loss of choice and competition invariably leaves many people unsatisfied.

The appropriate solution would be to minimize government involvement in such matters, such as leaving medical insurance questions to the insurance companies and their customers. But the idea of solving government blunders by undoing them rarely gets much political attention. Instead, politicians invariably offer to fix problems caused by one overpriced, overbearing government program by adding yet another overpriced, overbearing government program. So it is today with these competing plans to fix the simple problem of federally limited access to drug insurance by granting huge subsidies to old folks, regardless of their income or wealth. Fixing the access problem would be extremely easy, and the cost to taxpayers would be just what it should be — zero.

Alan Reynolds is a senior fellow with the Cato Institute.