The Wrong Medicine at the Wrong Time

Commentary by John C Goodman

With Medicare teetering on the edge of bankruptcy, President Clinton is proposing to add more beneficiaries and more costs. Under the president's new proposal, all Americans ages 62 to 64 (the Medicare eligibility age is 65) would be able to join Medicare in exchange for a monthly premium of $300. Those ages 55 to 61 who have involuntarily lost their jobs would have the same option for $400 a month. And employers would face a new mandate: retirees over age 55 who were promised and then denied postretirement health insurance would have the right to buy into their previous employer's health plan.

Is the proposal a good idea? No, it's a solution in search of a problem.

Of the 22 million Americans between 55 and 64, only about three million have no health insurance. That's an uninsured rate of only 13.9 percent, well below the 17.7 percent rate for the nonelderly population as a whole. Moreover, among those who don't have employer-provided coverage about 2.2 million have purchased their own insurance - in many cases at about half of the premium cost of the president's plan.

Of course, some of the uninsured have medical problems, but the 1996 Kassebaum-Kennedy health insurance reform bill created "portability." Employees who have health insurance and leave their job cannot be denied an insurance policy because of a preexisting medical condition. A provision that went into effect this month also requires the states to adopt a risk pool or some other mechanism to provide health insurance for those who are uninsurable, whether or not they've been previously insured.

The White House estimates that only about 300,000 near elderly will take up its offer. So why bother? Commentators have been unanimous in their answers. This proposal makes sense only when viewed as part of a piecemeal attempt to enact the infamous health plan, soundly defeated in Clinton's first term. Last year it was children. This year the near elderly. Next year will it be working single moms?

The president maintains that his program will pay for itself and cause no net increase in the deficit. But that promise doesn't pass the laugh test. No one's going to pay $300 or $400 a month for health insurance unless there's no better option around. The White House admits that the offer will attract the sickest and most costly retirees (adverse selection). To counteract those costs enrollees will be charged a slightly higher premium for Medicare Part B (which pays for doctors' care) upon becoming eligible for regular Medicare.

Even if the White House numbers prove correct, the president's proposal is only the initial bid. We can expect the program's generosity and costs to go up. As proposed, the program will be limited to those who can afford to fork over as much as $4,800 a year. But Congressional Democrats are already talking about the need to subsidize the premiums for lower-income retirees. And pressures will surely mount to lower the premium even middle-income retirees pay - just as current Medicare enrollees pay an artificially low premium of $43.80 per month, no matter how wealthy.

Medicare is already on a collision course with reality. The Office of Management and Budget predicts the Medicare Trust Fund - which consists of IOUs the government has written to itself rather than real assets - will be depleted by 2010. For the long run, Medicare's burden on the economy will keep rising as far as the eye can see. Take the year 2045, when today's 22-year-olds will reach the age of 65.

According to Medicare trustees Medicare Part A (which pays hospital bills) will take 10.2 percent of the nation's taxable payroll, that year, up from the current 2.9 percent. When Part B (which pays physicians' fees) is included, Medicare will take 16 percent of the taxable payroll. According to the trustees' pessimistic forecast, Medicare Part A will require 19.6 percent of taxable payroll and both parts of Medicare combined will require 30.8 percent.

By the middle of the next century, we'll have fewer than 2 workers for every retiree (compared to three to one today). This is partly due to the elderly living longer and women having fewer children. But it's also due to people retiring earlier and becoming beneficiaries rather than taxpayers. In recognition of this problem, federal policy since 1983 has been designed to encourage later retirement. For example, beginning in 2003, the Social Security retirement age will gradually increase from 65 to 67. Last year the Senate voted to raise the eligibility age for Medicare to 67 as well, but this was eventually dropped from the budget agreement.

The Clinton proposal is a step backward. One of the reasons many near-retirees remain in the labor market is to take advantage of employer-provided health insurance. The Clinton proposal would encourage early retirement by removing this incentive. To insure eligibility for those ages 55 to 61, "retirements" would be relabeled "layoffs." Earlier retirement, in turn, would mean fewer people paying into the Medicare and Social Security system and more people drawing benefits.

Since the employer buy-in provision would penalize companies with retiree health insurance plans, the proposal would discourage companies from providing such benefits in the future. Employers would help their retirees qualify for Medicare instead.

Rather than substitute government insurance for employer-provided insurance a better solution is to make it easier for people to purchase coverage on their own. Current tax law excludes employer premiums from the employee's taxable income, a subsidy that can reduce the cost of health insurance by 30 percent or more for an average-income family. Employees who purchase their own insurance should get similar relief under the tax law. Employer also would be less dependent on employers if they could save in tax free medical IRAs during their working years for postretirement health care costs.