the new reform bill will make Medicare's problems bigger--and
even harder to fix, by Jacob
S. Hacker and Theodore R. Marmor, The Boston Globe, Dec. 7,
Tomorrow, President Bush is set to sign Medicare's
biggest overhaul in 38 years into law. But after watching the
shrill yet perfunctory debate that culminated last week in the
passage of the bill, even close observers of Washington politics
can be forgiven for wondering just what exactly it was all about.
On one side, congressional Republicans and President Bush described
the $400-billion legislation as a moderate, sensible means of
providing long-overdue drug coverage to seniors.
On the other, Democratic opponents-including most House Democrats,
Senate minority leader Tom Daschle, and Senator Ted Kennedy, who
led an unsuccessful filibuster-decried it as a monstrous giveaway
to insurers and drug companies. They also charged that it was
a "Trojan horse" aimed at crippling Medicare's universal
benefits in order to foster go-it-alone competition.
All this becomes more understandable when one recognizes that
the bill is really two bills. The first provides a much-needed,
if modest and excessively complex, drug benefit. But while this
new benefit is generous for some low-income seniors, it will end
up raising out-of-pocket drug costs for other poor beneficiaries.
And because it is poorly designed and does not include effective
ways of controlling drug costs, the plan will ultimately leave
most seniors little better off than they are today, and some worse
The second, darker side of the new Medicare bill is a slew of
changes that have little or nothing to do with drug coverage and
everything to do with special-interest demands and ideological
animus toward Medicare. These include huge new subsidies for private
insurers, and provisions that ensure that drug companies will
be spared from their greatest fear: that Medicare will use its
massive buying power to demand reductions in drug prices. Perhaps
most ominous, the bill also contains elements that favor private
plans and risk further degeneration of Medicare's all-in-the-same-boat
structure. Six sizable "demonstration projects" are
intended to introduce greater competition into Medicare; they
will also likely raise costs for seniors who remain in the traditional
What is most striking about the bill is not the consistency of
its vision, but its deep incoherence. In the name of greater free-market
competition, the legislation offers massive new subsidies to the
pharmaceutical and insurance industries. In the name of providing
greater protection, it threatens Medicare's guarantee of universal
benefits. (Indeed, it even provides more than $6 billion to support
Health Savings Accounts outside of Medicare, risking the fragmentation
of the broader insurance risk pool.) And in the name of greater
cost containment, it encourages the expansion of private plans
that have, to date, not saved Medicare money, while creating new
budgetary rules that could very well make Medicare less equitable
and affordable down the road.
Behind these glaring inconsistencies lies the one great fact
of contemporary American politics: partisan and ideological polarization.
But if the bill were the product of political conflict alone,
we would expect not a massive new entitlement with so many contradictions
and problems but a more modest, lowest-common-denominator agreement-for
example, a bill covering catastrophic drugs costs only. Instead,
what we have is a bill driven principally by a mix of high Republican
ideals and low political calculations that was crafted almost
entirely in isolation from Democratic input and then tweaked just
enough to win moderate votes and sidestep potentially hostile
This brings us to the most overlooked reason for the unnecessary
and self-defeating complexity: the conservative reform agenda
itself, which is simultaneously driven by ideological principles
that celebrate free competition and the interests of powerful
industries that hope to avoid it at all costs. Private insurers
and drug companies don't want true competition: They want a playing
field tilted in their favor. And they're willing to do whatever
it takes to seize the advantage, including, according to recent
news reports, bidding exorbitant sums for the future lobbying
services of the current Medicare administrator, Thomas Scully.
Republicans, eager to win campaign funds and hostile to the very
idea of Medicare, essentially gave the medical industry what it
wanted. But what they produced has about the same intellectual
purity as an ad jingle.
To be sure, politics usually requires compromises. But what's
shameful about the present bill is just how deeply the compromises-or,
more accurately, the concessions to knee-jerk beliefs and private
interests-undercut the stated goal of the bill: drug coverage
for seniors. By our back-of-the envelope calculations, the roughly
$400 billion in new spending over the next 10 years (not to mention
the $140 billion in new premiums paid by Medicare beneficiaries
themselves) will buy only about half as much coverage as a sensibly
designed bill could. This is not only because of the subsidies
for private health plans and for Health Savings Accounts, but
also because of the higher overhead costs of private plans (about
five to six times higher than for traditional Medicare) and the
20-to-30-percent higher prices for drugs that seniors will have
to pay because Medicare is forbidden from using its bargaining
power to negotiate better deals.
All this helps explain why the drug benefit itself is so convoluted
and ultimately so meager-covering, for example, only a small share
of seniors' expected drug expenses overall, and reimbursing the
300th dollar of drug spending but not the 3,000th. It also helps
explain why, according to polls, seniors already don't like the
benefit very much. A recent University of Pennsylvania survey,
for example, shows opposition to the bill outweighing support
by two percentage points among the general public, but by some
16 points among Americans over 65.
Indeed, a significant proportion of Medicare beneficiaries will
almost certainly be worse, not better, off under the bill. This
includes several million low-income seniors who will lose the
generous coverage they now enjoy under state Medicaid programs.
It also includes millions who already have pretty good drug coverage
through their former employers-coverage which will likely be dropped,
despite the bill's subsidies for employers that retain coverage.
Even if these clear losses are ignored, all credible estimates
suggests that, except for the very poor and very sick, drug spending
will consume a larger share of seniors' incomes in the coming
years than it does now, despite the new legislation. This is not
just because the benefit is so meager, but also because the bill
fails to authorize the negotiation strategies that large corporations
and public programs like the veterans' health plan use to rein
in skyrocketing drug prices. Fortunately for Republicans, none
of this will become crystal clear until after the 2004 election,
because-not coincidentally-the new drug benefit does not kick
in until 2006.
Nonetheless, some hopeful Democrats argue the bill is worth supporting
because it will, in the long term, be a stepping stone to a good
drug benefit and sensible Medicare reforms. Might they have a
point? Making the benefit more rational and generous, especially
for low-income seniors and those with high but not catastrophic
drug costs, is essential. But for three important reasons, the
new bill is unlikely to be refined and improved down the line.
The first is the dismal historical record of Medicare's attempts
to encourage private plans within the program. If the past is
any guide, the next debate will not concern the expansion of benefits
but figuring out how to make the amazingly complex legislation
actually work. And there will be considerable pressure from conservatives
to delay any major changes until after the demonstration projects
designed to showcase the alleged benefits of market competition
Furthermore, efforts to upgrade the benefit will run headlong
into the massive budget deficit, and into the fact that the profligate
legislation has no effective cost-control mechanisms.
Finally, the legislation's one bow to cost control is guaranteed
to create conflict on terrain highly unfavorable to those seeking
to expand and rationalize benefits. In a relatively unnoticed
provision that wasn't in either the original House or Senate legislation,
the bill creates a new standard for Medicare "insolvency."
It would define the program as insolvent whenever, in two consecutive
years, more than 45 percent of its spending comes from general
income tax revenues (not incidentally, the most progressive source
of Medicare financing) rather than payroll taxes and premiums.
When this ceiling is hit, which is likely to happen sometime in
the next decade, the law will require the president to propose
spending cuts and tax increases within the program. That's likely
to cause benefit cuts and premium hikes, not benefit expansions.
It's also certain to cause political conflict-which may be the
bill's ultimate contradiction. Republicans hope to take off the
table an issue with which they have been battered for years, and
they may well do so through 2006. But by pushing through such
an unwieldy bill, they are virtually ensuring that Medicare will
be the biggest issue in American politics in the coming decades.
Sadly, at the present juncture, that seems to promise more acrimony,
confusion, and disappointment, rather than the constructive steps
forward that Medicare so desperately needs.
Jacob S. Hacker, assistant professor of political
science at Yale and a fellow at the New America Foundation, is
author most recently of "The Divided Welfare State."
Theodore R. Marmor, professor at Yale School of Management, is
author most recently of "The Politics of Medicare" (2d