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Wall Street Journal


Health of the Union

January 26, 2006

By David Gratzer

During next week's State of the Union address, President Bush will cite rising health costs as a major problem for Americans and their businesses, and he will outline steps to strengthen health savings accounts as a remedy. But he is unlikely to mention Medicare reform -- and that would be a mistake. Indeed, if the president is serious about health reform, he will have to tackle Medicare. And he can start by re-engaging a debate from 1999.

Seven years ago, Sen. John Breaux and Rep. Bill Thomas completed the final report of the National Bipartisan Commission on the Future of Medicare. Considering various reforms, they eventually settled on a proposal modeled after the popular Federal Employees Health Benefits Plan (FEHBP), which covers nine million federal employees and their families. Instead of today's one-size-fits-all Medicare structure, they envisioned a program where seniors choose among competing private plans.

Since then, Washington has debated the size and scope of Medicare expansion -- such as the prescription benefit -- but the program itself has yet to be fundamentally rethought. It needs to be, because faced with Medicare's rising costs over the past four decades, the only real response has been a bipartisan exercise in wage and price controls. The results have been dismal:

  • Poor physician participation. In cities such as Denver, it is hard for the elderly to find a doctor. According to a new study by the Center for Studying Health System Change, nearly 30% of American physicians will not accept new Medicare patients.

  • Regulatory excess. Medicare requires hospitals and other providers to comply with over 130,000 pages of regulations, according to a Mayo Clinic estimate. A study for the American Hospital Association found that for every hour of care delivered to a Medicare patient, hospital officials spend roughly a half-hour completing the paperwork.

  • Uneven service. "One unintended consequence of [Medicare's] administered pricing systems," notes a recent Federal Trade Commission report, "has been to make some hospital services extraordinarily lucrative and others unprofitable. As a result, some services are more available (and others less available) than they would be in a competitive market."

Herein lies the core problem with attempting to separate health reform from Medicare reform: The pricing and regulations of this massively large federal program have a profound impact on the rest of health care. With its controls, Medicare bureaucrats simply shift costs over to insured Americans. And if we really fret over rising health care costs, Medicare gives us plenty of reason for angst: It will consume 25% of federal income-tax revenues by 2030.

What then to do about Medicare? Breaux-Thomas proposed various worthwhile ideas, like collapsing the archaic structure of Medicare (Parts A and B) into a single plan. But the most far-reaching ideas focused on replacing the present program with competing private plans. The federal government would then offer premium support to individuals, providing more subsidies for lower-income seniors than those with higher-incomes.

Premium support is mentioned in the Medicare Modernization Act of 2003, but the idea is confined to a handful of demonstration projects starting in 2010. Writing on this page, former House Majority Leader Dick Armey observed: "I was in Congress long enough to know how demonstration projects really work. . . . On meaningful needed reforms, demonstration projects mean a quiet, obscure death."

There are, of course, other steps that must be taken to reform Medicare. The age of eligibility remains 65 -- just as it was 40 years ago when House Ways and Means Chairman Wilbur Mills helped ink the original legislation. Even social security changes its age of eligibility, albeit over the next two decades. We live longer and work longer than ever before -- shouldn't Medicare reflect that?

Medicare works on a pay-as-you-go basis, meaning that today's retirees depend on the financial support of today's taxpayers. With an aging population, the foundations are sinking. Some type of prefunding would be critically important. Indeed, the arguments made in favor of private accounts for social security are even stronger for Medicare reform, given that the unfunded liability is so much larger.

The White House is unlikely to touch prefunding again. Still, it would make sense is to finish the job started by Sen. Breaux and Rep. Thomas. Let's not forget that premium support won approval from a majority on a commission appointed by President Clinton.

In his State of the Union address three years ago, President Bush outlined sweeping changes to Medicare, suggesting that the program needed choice. He even alluded to the FEHBP when he suggested that seniors should have coverage "just like you -- the members of Congress, and your staff, and other federal employees." If the president is serious about taming rising health costs, he will use his second term to act on these words. In fact, the cool reception to his new prescription drug benefit may present an opportunity, since many seniors want the coverage but are hesitant on Plan D. Certainly a bold proposal will give Congress more to discuss than earmarks.

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