Simple Solutions for Elderly Prescription DrugsCommentary by Pete du Pont
July 22, 1999
Let me start out by saying that Congress has predicted nine of the last three national crises. Many of you will remember the Swine Flu scare back in the 1970s. Congress got it in its head that this Swine Flu was going to be a huge health problem and so it pulled out all stops, spent millions of dollars and had everyone vaccinated.
Fortunately, the dreaded flu crisis never arose. Nor did we learn the lesson that Congress is easily excitable and willing to throw money and a new program at almost anything if it sees a political advantage.
And that's precisely what it sees when looking at a proposal to provide seniors with a new prescription drug benefit. But surely there is a better way to address the problems than the president's plan which would expand Medicare at a time when Medicare's unfunded liability ($8.9 trillion over the next 75 years) is twice the size of Social Security's.
If Congress has to pass legislation, here are four suggestions that would make things better without making Medicare worse.
Free Medigap. In order to limit their financial exposure, most seniors acquire, either through a former employer or private purchase, supplemental (medigap) insurance, which pays many or all of the expenses Medicare does not. Like Medicare, the federal government tightly controls the medigap policies.
Were insurers given more freedom, they could create plans that responded to the needs of the market. Specifically, if insurers were free to forego coverage of many routine expenses, they could offer more generous drug coverage -- with no increase in premiums.
Free Medicare. Some 16 percent of seniors have shifted out of traditional Medicare and into a private-sector HMO, and 95 percent of them provide their enrollees with a prescription drug benefit.
However, the Clinton administration and a Medicare bureaucracy hostile to any challenge to its power and authority have combined to halt and even reverse the trend. After the administration cut reimbursement rates to Medicare HMOs this year, many HMOs dropped out of the program, leaving some 450,000 seniors, many who had drug coverage, scrambling to find another HMO or return to Medicare. Another 99 HMOs intend to leave next year, affecting 325,000 more seniors.
What could the private sector do for the elderly if they were free of Medicare restraints? A Milliman & Robertson analysis concludes that with the average amount Medicare currently spends on each senior, a private plan could in principle establish a $1,585 across-the-board deductible and cover hospital, physician and drug costs above that deductible. Although a deductible of that size seems like a lot of money, many seniors are already spending $1,500 to $2,000 a year for medigap coverage. What if they took that money they currently spend on medigap premiums and put it in the bank?
Free Roth IRAs. Many workers already set aside $2,000 a year after-tax in Roth IRA retirement accounts that grow tax-free. After age 59 1/2, the funds can be withdrawn without penalty for any purpose, including medical expenses. Since the elderly by definition satisfy the age test, Roth IRAs could potentially serve as "back-ended" Medical Savings Accounts for the elderly.
However, there are two small problems. First, the law prohibits taxpayers from depositing more in a Roth IRA than they receive in earned income in each year. Since only about 18 percent of those age 65 and over work (and therefore have earned income), this restriction excludes the vast majority of seniors.
Second, unless deposits are held for at least five years, the interest earned is not tax-free. Clearly this restriction discourages the type of annual deposits and withdrawals that are needed for health care.
The solution is to allow seniors to deposit the maximum in their accounts (regardless of the amount of earned income) and let them use the funds at any time without tax consequences -- provided that the Roth IRA backs up a Medicare or (even better) a Medicare+Choice private health plan.
Free the States. Finally, Congress should free up the states by letting them use these funds for the purpose of providing prescription drug coverage for the elderly poor, perhaps by using a risk pool. More than half the states have high risk pools that permit uninsured people who have been denied health insurance to obtain coverage for a reasonable premium. They could do the same for those who have been denied prescription drug coverage.
These proposals would create no new taxes (even if they were called premiums) and would cost the government nothing. At a time when Medicare is in financial trouble, it makes much more sense to look at smaller, less-expensive and targeted solutions for those seniors who need help.
The National Center for Policy Analysis is a public policy research institute founded in 1983 and internationally known for its studies on public policy issues. The NCPA is headquartered in Dallas, Texas, with an office in Washington, D.C.