The Case against John Kerry's Health Plan
Taxpayer Burdens
“The cost of government health care programs are consistently underestimated.”
Thorpe initially estimated Kerry’s plan’s cost at $895 billion over nine years.38 Subsequently, he revised his spending estimate upward to $951.8 billion, but came up with $298.8 billion in anticipated “savings,” leaving the nine-year cost at $653 billion39 — a figure less than the value of Bush tax cuts Kerry hopes to repeal for the highest income taxpayers. Are these numbers realistic? As noted in the Introduction, we believe Kerry has underestimated the spending and overestimated the savings.
A. Underestimating the Cost.
Since the introduction of Medicare and Medicaid almost 40 years ago, policy analysts have consistently underestimated the costs of new health care programs — usually by wide margins.40 Take Medicare, for example. In the first year, the program’s budget was 50 percent higher than predicted. By the sixth year, costs were running nearly 90 percent ahead of forecasts. Does Kerry’s plan suffer from the same tendency to underestimate?
The reason for these inaccurate projections has been the failure to appreciate the tendency of people to increase their use of health care when out-of-pocket costs are negligible. If price is no object, we could easily spend the entire gross domestic product on health care.41 Yet for 26 million enrollees in Medicaid and SCHIP (8 million of whom will come from private plans with such features as deductibles and copayments) price will suddenly become no object under the Kerry plan. Moreover, 10 million additional newly insured people will have new incentives to spend simply because they now have private health insurance. And we have seen how the many new subsidies under the Kerry plan will give people new incentives to overinsure and overconsume.
Another factor pushing up costs is a predicted new round of health care inflation. As discussed below, $100 billion a year in new government spending, coupled with additional private spending, will force up health care prices for everyone - causing more government spending through such programs as Medicare and Medicaid and lower tax revenues, as nontaxable health benefits crowd out taxable wages at the work place.
B. Expected Reduction in Uncompensated Care.
Sen. Kerry plans to save money by reducing federal Disproportionate Share Hospital (DSH) payments for treating indigent patients. Currently, the government makes payments through Medicaid to those hospitals that serve a disproportionate share of charity care patients. But if the number of the uninsured is reduced, one would expect the cost of uncompensated indigent care to fall as well, as should the federal government's share of the burden. Even if the number of uninsured low-income families diminishes, however, we expect fierce political resistance to a reduction in DSH payments.
“Kerry proposes illusory savings.”
Unfortunately, that is where any savings will likely end. Yet in addition to fewer DSH payments, Sen. Kerry also hopes to save through aggressive use of disease management, by investing in information technology, and by rolling back payments to Medicare+Choice private plans. Let’s briefly look at each of these proposals.
C. Disease Management and Information Technology.
Kerry hopes to save $116.5 billion over 10 years by employing disease management techniques and information technology. There is little doubt that, in principle, health care could be provided more efficiently, and that information technology seems promising. But Kerry’s approach lacks the appropriate incentives. The economic principle that applies here is: He who does the economizing must be the one who gains from the economization. The Kerry approach reverses that principle. It expects doctors, nurses, hospital personnel and insurers to realize economies so that taxpayers can save money. The question is: Why should they?
Appropriate disease management and increasing use of information technology are likely to be adopted, whether or not we implement the Kerry plan. It is doubtful that any additional savings to the federal government will be realized by putting more people in Medicaid and by encouraging managed competition. An additional problem, noted above, is that the projected savings from disease management seem to be negated by Sen. Kerry’s Democratic convention promise to avoid all forms of managed care.
D. Reduction of Payments to Private Medicare Plans.
The Kerry plan’s final cost-reduction proposal (an estimated $14.4 billion savings over nine years) would eliminate the recently legislated increase in payments to Medicare+Choice insurers, who provide seniors with health insurance coverage similar to what nonseniors have.
Of all Kerry’s cost savings schemes, this one is most unfair. And it may not save any money, since without the coverage for drugs and other services that private insurers provide, low income seniors may turn to more expensive Medicaid and Medicare services.
Studies show that seniors who enroll in Medicare+Choice plans tend to be those who have low incomes and who previously lacked Medicare supplemental (medigap) insurance. Thus, without a private plan, these seniors would be most vulnerable to the cost of expenses not paid by Medicare, including prescription drugs.
Kenneth Thorpe admits that seniors in private plans receive about $1,000 worth of benefits over and above those promised by Medicare, including coverage for drugs.42 Without the private plans, these seniors would likely turn to more expensive hospital and doctor therapies, ultimately paid for by taxpayers. As a result, making Medicare+Choice plans available to Medicare enrollees probably reduces overall government spending.
Precisely for these reasons, Congress increased payments to Medicare+Choice plans in the Medicare reform bill passed last year. Prior to passage, private plans were abandoning the market because the compensation was too low. Congress sought to reverse that trend and encourage more such plans to enter the market. This desirable reform, well worth the money it costs, is what Kerry wants to eliminate.