The Real Medicare Crisis

UNCOMMON SENSE 27 © February 2003 For recent work on Medicare for All, see Economic Analysis of Medicare for All, Pollin et al, PERI 11/18

By Bruce C. Vladeck, Professor of Health Policy and Geriatrics; Senior Vice President for Policy, Mount Sinai Medical Center, New York; Administrator [1993 to 1997], Health Care Financing Administration*

The drumbeat about Medicare “reform” continues. Typically, Congressional leaders refuse to consider legislation to provide Medicare beneficiaries with insurance coverage for prescription drugs unless accompanied by “reforms” in the broader Medicare program. Much-needed payment increases for physicians and other health care providers are to be held hostage to various “reform” agendas — most of which involve assorted privatization schemes, despite the long track record of abject failures by private insurers seeking to supplant Medicare.

Such “reform” is needed, it is argued (or assumed) based on one or both of the two pillars of Washington conventional wisdom: first, that the aging of the baby-boom generation, which will double the number of Americans 65 and over in the next thirty years, will make Medicare (and Social Security) unaffordable; second, that even before then, Medicare is so inefficient and so poorly designed that almost any change would be an improvement.

None of this conventional wisdom is true. Even if the excessively pessimistic assumptions used in the official Washington projections of Medicare’s future financial status turn out to be accurate (and they haven’t been for at least a decade), the net real, after-tax, disposable income of non-elderly households in the US will be significantly greater in 2030 than it is now, even if those households absorb all the increases in Medicare costs. And if long-term productivity and income growth in the American economy even approaches historical norms (let alone the performance of the 1990s), the increased costs of Medicare (and Social Security) will be simply drowned out by increased incomes and wealth. Because both programs are supported by taxes on wages, the economic health of both Medicare and Social Security would be enhanced by decent-paying jobs for all who want them.

Nor is Medicare as it is now constituted so severely broken. Its administrative costs are a small fraction of those of any private insurer in this country; its beneficiaries are much more satisfied with their health insurance than are privately-insured Americans; and the rate of cost increase per beneficiary in Medicare (making fair comparisons by holding benefits constant) has lagged well behind most private insurers for the last decade.

Bad ideas rarely flourish on their own. Perpetuation of the demonstrably false tenets of the conventional wisdom about Medicare is the result, instead, of concerted efforts, including the expenditures of hundreds of millions of dollars, by those who would benefit financially or ideologically from Medicare privatization, or by those who recognize that Medicare’s continuing popularity with the general public is the single issue on which Democrats have the greatest advantage over Republicans in public opinion polls. An enormous enterprise is devoted to maintaining false perceptions about Medicare.

The real Medicare crisis. All of this would be just part of the broader political sideshow were it not for the fact that continued harping on the problems defined by the conventional wisdom deflect attention from the very real crisis affecting Medicare and generating a need for real Medicare reform. That crisis is the extent to which needed health services are becoming increasingly unaffordable for millions of Medicare beneficiaries.

Today, Medicare covers barely half of the total health expenses of its beneficiaries – and even if one removes long-term nursing home expenditures, which constitute a health financing crisis all of their own, from the calculation, Medicare’s share of all other health expenses still does not reach two-thirds. That almost belies conventional understanding of what health “insurance” is supposed to mean. As is by now widely understood, Medicare does not cover most outpatient prescription drugs, but it also doesn’t cover annual physicals, dental care, eyeglasses, hearing aids, or long-term care. Coverage for mental health services is extremely limited. Moreover, Medicare maintains a structure of deductibles and copayments that mirrored the private industry norm when the program was enacted in 1965. But that structure is now woefully obsolete. Most notably, unlike almost any other health insurance plan now available in the United States, Medicare has no ceiling or “catastrophic cap” on beneficiaries’ out-of-pocket liabilities.

Thus, essentially every Medicare beneficiary who can afford to obtain supplemental insurance does so. But the availability of such coverage is rapidly eroding: retirement health benefits for former employees are being abandoned as fast as employers can get out from under their obligations; managed care plans that used to offer supplemental benefits as inducements to enroll are no longer doing so; and the price of private Medicare supplemental coverage — “Medigap” — is skyrocketing in many states. Including the premiums for supplemental insurance, the average Medicare beneficiary now pays roughly 20% of her household income for medical expenses over and above those borne by Medicare. It is thus no surprise that evidence is beginning to accumulate that a growing number of Medicare beneficiaries are going without the health services they need, because they can’t afford them.

Needed: Real Medicare Reform. Real Medicare reform is thus urgently needed. It must include affordable coverage of prescription drugs, but it also needs to include restructured deductibles and copayments, caps on out-of-pocket costs, easier access to affordable supplemental policies, and better coverage of mental health, dental, vision, and hearing care. Conventional Washington wisdom will undoubtedly object that such program expansions will cost a lot of money which, in a time of budget deficits we can’t afford, and that the only benefit expansions that should be permitted are those financed by savings elsewhere in the program — although the benefits are already inadequate, administrative costs are approaching the vanishing point, and payment to most providers is more likely to be too little than too much. Of course real Medicare reform will be expensive, but the problem is not one of economics: whether or not we choose to reform Medicare in this way is a matter of political decision-making. Undoing just a fraction of the 2001 tax cuts would, for example, provide ample financing for years to come. Pursuing full employment at decent wages would also help the Medicare budget.

The real fact is that, although we are far and away the wealthiest nation in human history, we are much less generous in the provision of health services to retirees and the disabled than is almost every other industrialized nation. We can do much better, if we want to. We should be embarrassed to do anything less.

Editors: Helen Lachs Ginsburg, Economics (Emer.), Brooklyn College, CUNY and June Zaccone, Economics (Emer.), Hofstra University