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| Issue #3, October 31, 2005 |
Growing Support for Delaying Medicare Rx Program
The House and Senate are working toward reconciliation packages that mostly amount to rearranging the deck chairs on a sinking ship. That lack of leadership is causing more legislators to look seriously at delaying implementation of the Medicare drug program slated to take effect in January.
The federal government faces a five-year deficit of $1.6 trillion, yet the Republican Congress cannot bring itself to trim more than $50 billion over that period. With regard to health care and overall fiscal responsibility, both reconciliation packages are inadequate.
- Senate Finance Committee. This reconciliation package would reduce Medicaid payments for prescription drugs but increase federal spending in the Katrina states. The CBO estimates a net reduction in federal Medicaid spending of $4.3 billion over five years. The package also would increase payments to Medicare providers but reduce payments to private plans. Net effect: reduce Medicare spending by $5.7 billion over five years.
- House Energy & Commerce Committee. This committee's package would reduce five-year spending by just $9.5 billion. It would do so in part through meritorious proposals such as allowing higher Medicaid co-payments and making it slightly harder for middle-class seniors to abuse the program.
Congress should be reducing spending dramatically, by (1) repealing the Medicare drug program; (2) enacting comprehensive Medicare reforms; and (3) reforming Medicaid the way Congress reformed welfare in 1996.
A group of Republican senators offers what would be a good first step: a proposal to cut $125 billion from the federal budget over two years. Among other spending cuts, the package would delay implementation of the Medicare drug program for nonpoor seniors for two years and require wealthy seniors to pay more of the cost of their Medicare coverage. One of that group, Sen. John McCain (R-AZ), said of the Republican Congress's spending habits, "I am totally confident that the Republican base is upset and angry about the fiscal indiscipline that we practiced here in the Congress and the mortgaging of our children and our grandchildren's futures." On The Chris Matthews Show last weekend, Howard Fineman noted that McCain might have enough votes in the Senate to delay implementation of the Medicare drug program.
Cato scholars and others have argued that the Medicare drug program should be repealed:
- Offset Opportunities, Michael F. Cannon, American Spectator, October 18, 2005.
- Shared Sacrifice: Delaying the Medicare Drug Benefit, video feed of Capitol Hill briefing featuring Sen. John McCain (R-AZ), Rep. Jim Cooper (D-TN), Rep. Jeff Flake (R-AZ), and Michael F. Cannon, October 7, 2005.
- An Evaluation of Medicare's Prescription Drug Policy, Jagadeesh Gokhale, congressional testimony, September 22, 2005.
- Repeal Medicare Drug Entitlement, Michael F. Cannon, commentary, May 23, 2004.
- An Unhealthy Tradition, Michael F. Cannon, NationalReview.com, March 26, 2004.
- Medicare Shortfall Needs President's Attention, Michael F. Cannon, Monterey County Herald, March 6, 2005.
- New Medicare Benefit Will Outspend Projections, Michael F. Cannon, FOXNews.com, February 27, 2005
Study: Rx Coverage Doesn't Reduce Medicare Spending on Other Services
A key argument for the upcoming Medicare prescription drug program is that subsidizing drugs would reduce spending on costlier treatment options such as surgery. A recent study in Health Services Research suggests that claim may not be true. Researchers found no difference in spending on physician or hospital services between Medicare beneficiaries with drug coverage and those without it.
Medicare Rx Program = Corporate Welfare
The most ardent defenders of the upcoming Medicare prescription drug benefit tend to be corporate lobbyists. One reason might be that the program includes massive doses of corporate welfare to firms that provide retiree drug coverage.
CBO estimates suggest that direct subsidies to corporations will reach $150 billion in the first ten years of the program. For example, General Motors's take will come to about $4 billion. But that $150 billion does not include the indirect subsidy that comes from encouraging firms to drop their retiree drug coverage. The CBO has estimated that the program will induce firms to drop drug coverage for close to three million retirees. That process has already begun. J.C. Penney Co. and Jostens Inc. have announced that they will drop drug coverage for retirees next year. According to a J.C Penney spokesman, "The fact that Medicare was implementing prescription-drug coverage in 2006 was the impetus for the change."
In an October 18 editorial, Michael Cannon predicted not only that "taxpayers will be forced to pay drug bills that seniors and employers were already paying themselves" as a result of the Medicare drug boondoggle, but that "more employers and unions will make promises that they can't keep because they will reasonably expect the federal government to bail them out, as it did with this program."
Would the President's Tax Reform Commission Wipe Out HSAs?
The picture emerging from the president's tax reform commission suggests that its leading tax reform proposal would eliminate health savings accounts. The commission will soon unveil a number of proposals for reforming the federal tax code. The details that have been reported (subscription required), though, suggest the leading proposal would eliminate the tax parity that HSAs create between (1) employer-sponsored health benefits and (2) health savings and out-of-pocket expenditures.
According to reports, the leading proposal (the "simplified income tax") would:
- Cap the currently unlimited tax exclusion for employer-sponsored insurance at $5,000 for single taxpayers and $11,500 for families (indexed for inflation).
- Create what Tax Notes describes as "an equivalent tax break for individual policies" for those without employer-sponsored insurance.
- Roll health savings accounts (HSAs) and other tax-preferred savings vehicles into a "save for family account" (let's call them SFFAs). Unlike HSA contributions, SFFA contributions would be taxed.
(The commission refers to a second proposal, about which even less detail has been reported, as Plan B. That proposal would cap the exclusion at $4,000 for singles and $8,400 for families.)
Capping the exclusion is attractive for reasons of equity and efficiency. However, setting caps below the amount of health benefits that a given worker currently exempts is essentially a tax increase. Therefore, caps must be accompanied by some offsetting measure (such as a reduction in tax rates) to prevent a net tax increase. Just as important, HSAs are designed to reduce reliance on third-party payment by granting the same tax-free status to health savings and out-of-pocket expenditures as is currently granted to employer-purchased health insurance.
In the new Cato Institute book Healthy Competition, Michael Cannon and Michael Tanner forward a proposal that addresses both these issues. Large HSAs would provide complete tax parity for all uses of one's health care dollars. Further, they would cap the exclusion without increasing taxes by:
- Setting caps high enough that few would initially be affected (e.g., $8,000 for individuals, $16,000 for families),
- Giving workers ownership over every dollar below that cap (rather than splitting ownership with employers), and
- Making the new caps voluntary.
At press time, it seems the commission's Plan A would cap the exclusion without any offsetting measures to prevent a tax increase. Moreover, the proposal seems to completely eliminate tax-free HSA contributions. The end result would be two health-related tax increases.
- Projections by the Lewin Group suggest Plan A would tax the health premiums of 29 percent of workers with self-only coverage (11.2 million individuals) and 18.5 percent of workers with family coverage (7.7 million families). Plan B would tax the premiums of 56 percent of workers with self-only coverage (21.7 million) and 61 percent of workers with family coverage (25.3 million).
- Unlike HSAs, contributions to SFFAs would be taxed. Thus it seems that tax-free health savings would be eliminated, but below-the-cap premiums for third-party insurance would remain untaxed.
- Since the caps would be well above the average premium for HSA-compatible high-deductible health plans ($2,700/individual, $7,909/family), and since only insurance premiums would be untaxed, employers would have every incentive to stick with comprehensive third-party coverage (average premiums: $4,024/individual, $10,088/family).
One impetus behind the commission's efforts is the need to head off growth of the alternative minimum tax (AMT). Under current law, the AMT will automatically increase taxes for millions of middle-class Americans. The commission wants to repeal the AMT while preserving the revenue that it would generate. But maintaining those revenue levels requires a tax increase, and it looks as though the commission has set its sights on health insurance and HSAs.
The commission's proposals contain many dimensions that go well beyond health care, and all should withhold judgment until all the details are available. But what has been reported so far looks like a giant leap backward for health care reform.
Illinois Expands Welfare State to Include Middle-Class Children
With little consideration, the Illinois legislature approved a plan (proposed by Gov. Rod Blagojevich less than a month ago) to have taxpayers provide health coverage to middle-class children. Some 75 percent of children targeted by the program come from families earning between $40,000 and $80,000 a year. Blagojevich plans to fund the program by moving Medicaid recipients into HMOs, despite evidence that doing so can increase expenditures by 12 percent. In an editorial in the Chicago Sun-Times, Michael Cannon outlined the dangers of this proposal for all involved. Look for higher taxes and further erosion of private health insurance in the Prairie State.
Markets Respond to HSAs and Other CDHC
HSAs and other forms of consumer-directed health coverage are growing in popularity and turning patients into more discerning consumers. With every passing week, we see more evidence that health care providers and other entrepreneurs are stepping up to meet the demands of those patients.
- Entrepreneurs such as Take Care Health Systems and MinuteClinic are making basic care more convenient and affordable. Those and other firms are opening walk-in clinics in retail chains such as CVS, Wal-Mart, and Target. The clinics offer basic medical services such as flu and tetanus shots, strep-throat tests, and sports physicals. The waits are shorter and a visit can cost just $60, compared to $110 for a doctor's visit (or much more for a trip to the ER).
- Insurers such as Aetna and PPO administrators such as HealthCare Direct have begun have begun to furnish consumers with price information (i.e., the rates they negotiate with providers). Firms such as Subimo and WebMD are providing web-based tools that compare prices and the quality of care at different hospitals.
- The availability of quality information just took a great leap forward. Forrester Research released a report that rates the quality six web-based hospital quality-comparison tools. The verdict? "Subimo and WebMD lead the pack, offering superior usability as well as greater depth and breadth of data." The federal government’s web site "leaves consumers fumbling with insufficient help."
Market competition will provide affordable health care and usable price and quality information—if the demand exists, and regulation does not get in the way. With big employers such as GM and Wal-Mart ready to offer HSAs to their workers, the market will soon be doing even more to satisfy these tough customers.
Attention for Healthy Competition
Healthy Competition: What's Holding Back Health Care and How to Free It, by Michael F. Cannon and Michael D. Tanner, was released last month by the Cato Institute. The book has received significant attention since its release:
- National Journal senior writer Clive Cook cited Healthy Competition in his October 21 Wealth of Nations column (subscription required). Cook writes: "Cannon and Tanner rightly emphasize that if greater [health care] outlays were buying [Americans] correspondingly better results, the country would have no reason to complain. The results in this country are indeed better—but the price is higher than necessary. As they argue, and document, in a system substantially without pressure from users to curb costs, a great deal of spending is wasted."
- Healthy Competition has risen to be the #2 best-selling book on health insurance at Amazon.com.
- On Tuesday, November 29, the Cato Institute will host a Book Forum on Healthy Competition featuring coauthor Michael F. Cannon, with comments by Sen. Jim DeMint (R-SC), immediate past president of the American Medical Association Dr. John Nelson, and New Republic senior editor Jonathan Cohn.
Upcoming Cato Institute Events
Michael Cannon to speak at WHCC Summit on Consumer-Centric Health Care Strategies
Topic: The Impact Consumer-Directed Health Care will have on Health Care Quality, Delivery and Outcomes
November 3, 2005, 3:15–4:15 PM
Marriott Fisherman's Wharf Hotel, San Francisco, CA
For more information, click here.
Michael Cannon to speak at World Health Care Innovation and Technology Congress
Topic: Healthy Competition: How to Bring Innovation to Health Care (Breakthrough Innovation Seminar)
November 9, 2005, 3:00–5:45 PM
Marriot Wardman Park Hotel, Washington, D.C.
For more information, click here.
Healthy Competition Book Forum
Tuesday, November 29, 2005, 4:00 PM (Reception to Follow)
Cato Institute, Washington, D.C.
Featuring: coauthor Michael F. Cannon, Director, Health Policy Studies, Cato Institute; with comments by Jonathan Cohn, Senior Editor, New Republic; Dr. John Nelson, Immediate Past President American Medical Association; Sen. Jim DeMint, (R-SC).
For more information and to register, click here.
Recent Cato Institute Events and Publications
Katrina's Medicaid Boondoggle, Michael F. Cannon and Michael D. Tanner, October 21, 2005.
Offset Opportunities, Michael F. Cannon, American Spectator, October 18, 2005.
Kids Just Pawns in Governor's Big Government Scheme, Michael F. Cannon, Chicago Sun-Times, October 13, 2005.
Choice & Security, Michael F. Cannon, NationalReview.com, October 14, 2005.
Shared Sacrifice: Delaying the Medicare Drug Benefit, Capitol Hill Briefing, October 7, 2005.
Healthy Competition is a periodic newsletter produced by the Cato Institute. It features news and commentary on current health policy issues from a free-market perspective. If you wish to subscribe to this free weekly newsletter, update your address, or be removed from our list, please click here and follow the instructions.