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The Never-Ending Dilemma
Over Medicare and Social Security
USA Today Magazine
May 2006
By Murray Weidenbaum
There is a basic mismatch in the national debate
on health care. On the one hand, the actuaries tell us that
the Medicare program will run into very serious financial
problems in the years ahead. In contrast, the public concern
is focusing on the inadequacy of benefits and the lack of
health insurance on the part of many Americans. In effect,
the experts are saying that there is not enough revenue coming
into the health care system, while the public is saying we
are not spending enough. That is going to be a very difficult
question of public policy to deal with.
Unfortunately, there is no simple way of cutting medical
costs. Of course, there is a certain amount of avoidable waste
and more widespread use of information technology would make
for both cost efficiency and perhaps fewer medical errors.
Also, legal reform might reduce medical insurance costs. All
that would help, but the major driver in increasing medical
costs is technological advance.
Let us remember that Americans are living longer. That is
not merely good luck or adopting healthier lifestyles such
as better diets. In this case, bigger is not better. Americans
are getting bigger, or rather fatter. The real life extenders
are those MRIs and other medical gadgets that minimize invasive
surgery and enable physicians to successfully do procedures
which were not feasible a generation ago. Let us not forget
the medicines that cure or contain many diseases without surgery
and the research breakthroughs that are increasing physicians'
knowledge of our illnesses. They all have one characteristic
in common: They are very expensive.
After all, nobody wants to shorten his or her life in order
to balance the health care budget. Rather, the general attitude
is often, "I want the best possible medical care, especially
if I don't have to pay for it."
To summarize a great amount of professional research and
writing on the subject of financing Medicare and health care,
there are no simple or straightforward answers. It will probably
take a combination of actions over a long period of time without
any assurance that the problem will be solved. Some background
information may be a useful start.
The average citizen is not aware of or concerned about the
financial status of the Medicare Trust Fund, or the rising
share of GDP going to health care. Citizens worry about losing
their health insurance, especially if they lose their job
or if the employer cuts the benefits. That is becoming increasingly
likely, with employees sharing more of the costs. However,
all those factors are pressures to maintain demand for health
care. So is the concern over those who lack health insurance.
That makes dealing with the financial problem very difficult.
Some factual background: today, about 85 percent of the
population has health care coverage, mainly working people
and their families through their jobs. In contrast, buying
a policy for an individual or a family is very expensive.
People over 65 receive health care through Medicare. That
federal program is financed primarily by a payroll tax and
a deduction from the monthly social security benefit. In addition,
the Medicare Trust Fund receives a large and growing contribution
from the Treasury paid by taxpayers generally (mainly from
income taxes).
Most of the uncovered 15 percent work for very small businesses
(plus their families). The problem here essentially is the
high insurance costs faced by small businesses. A little explanation
is in order. There are huge economies of scale in insurance
premiums. First of all, the labor forces of large firms are
more representative of population as a whole (they constitute
good "risk pools"). Moreover, overhead costs for
health insurance coverage varies from 5 percent for employers
of 10,000 or more, to 25 percent for employers of 20-49, and
40 percent for employers of 1-4.
As a result, premiums for small business (per worker) are
much higher than on bigger companies. Off the record, insurance
companies tell us that they lose money on the Mom-and-Pop
businesses. As a practical matter, they cannot raise premiums
high enough to cover their costs.
To compound the problem, state governments mandate the minimum
composition of health insurance policies. That provides great
opportunity for lobbying. For example, some states require
covering hair transplants and other optional items. Thus,
the small company cannot buy a "Chevy" when it comes
to health insurance. It must buy a Cadillac or Lincoln - or
nothing.
Many other uncovered people are young. They turn down health
insurance if they have to pay a part of the cost. They think
they are too healthy to bear the cost. We forget that one-third
of the uninsured report household incomes of more than $50,000
a year. Also, one-fourth are covered by Medicaid, which they
do not consider as insurance. About one-fifth without healthcare
coverage are foreign born, including many illegal aliens.
Some historical perspective is useful. Prior to World War
II, most people paid their own medical bills directly, like
other essentials such as food, clothing, and shelter. Health
insurance (and company-paid retirement) developed as a loophole
in government regulation of business. During World War II,
government tightly controlled wages in an effort to fight
inflation. So how did employers react to the labor shortages
which occurred? At that time, military demand for equipment
was rising rapidly, while many workers went into the armed
forces. In response, employers offered generous fringe benefits,
which were not covered by the wage controls.
After the war, fringe benefits continued to be popular.
This was especially so because employees realized they did
not have to pay tax on the employer payments on their behalf.
Excluding employer-financed health care from taxable income
is now the largest loophole in the Internal Revenue Code.
It costs the Treasury $126 billion a year.
Unions especially pushed hard for these "freebies."
Not taking courses in economics, most people did not realize
that wages and fringes are both part of the same compensation
package.
The upshot of all this is the rise of third-party payers.
Even during the depression of the 1930s, the patient paid
the doctor and the hospital. Today, a third party makes most
of these payments, especially insurance companies and government
agencies (Medicare for those over 65, Medicaid for poor people,
and veterans hospitals). Most of us are only aware of our
co-payments (if any), rather than the full cost of providing
the medical care we receive.
What can we do to improve the situation? Let us start with
Medicare, which has two parts: the Hospital Insurance Fund
and the Supplementary Trust fund covering doctors' bills.
The actuaries tell us that the Hospital Fund is already running
in the red. The situation will worsen as baby boomers start
to retire. The Fund will be exhausted in about 2020. The second
Medicare fund also covers the new prescription drug benefits.
That will require a massive bailout, mainly from the general
taxpayer who already provides three-fourths of the money.
Unlike Social Security, hardly anybody is even beginning
to talk about reforming Medicare. The problem is too massive,
and it is tied up with health care generally. That is why
everybody shies away from the Medicare issue except some business
leaders. Of course, they oppose new government programs in
general - but would love the government to take the responsibility
for the entire subject of health care. As they point out,
most of the nations we compete against do just that. Moreover,
the United States already spends more on health care per person
than any other nation.
Let us explore the major alternatives. (1) Government provides
health care (socialized medicine), (2) Government provides
health insurance for all (single payer), (3) We let the market
work and the patient pays (eliminate or reduce third party
payments), and (4) make marginal improvements now (no grand
solution), using feedback from experience for further rounds
of reform. Each of these approaches has pluses and minuses.
In the case of socialized medicine, it seems fair because,
supposedly, everybody gets the care they need. We save some
money by eliminating all those insurance forms and other paperwork.
Costs are controlled directly because the government hires
all medical personnel and tells them how much they will be
paid. The government uses its monopoly position to set prices
of medicines and medical equipment.
Of course, there are many counterarguments. For example,
government will have to ration health care somehow. There
just are not enough resources to give everyone all the care
they want. Some nations use waiting or delay as their rationing
method. In the United Kingdom, 36 percent of patients wait
more than 4 months for non-emergency surgery. In contrast,
the average wait in the United States is only 5 percent. Likewise,
quality of health care also suffers. In the United Kingdom,
the average physician sees 3,176 patients while doctors here
average 2,222 patients.
Another argument against socialized medicine is that the
government will find it difficult to attract and keep good
health care personnel. They will go to other countries or
into other fields. In many countries, with socialized medicine,
two health care systems arise: (1) A private system for the
wealthy, and (2) a bureaucratic system for those who cannot
afford better. More fundamentally, there is a lack of economic
incentives to improve efficiency or curb use.
Under the single payer system, everybody automatically receives
health insurance and much paperwork is eliminated. However,
providing universal health insurance does not deal with the
basic issue as to how to ration a limited supply of health
care. Nevertheless, government inevitably winds up restricting
use arbitrarily or bureaucratically because here, too, there
is a lack of economic incentives. We can imagine rules limiting
transplants to people under a certain age, also restricting
serious surgery for those over another age. What about comatose
patients? Politically weak groups might suffer.
The third major approach to fundamental health care is to
let the market work. Advantages include eliminating lots of
paperwork and promoting patient choice. In general, we could
expect more pressure for economy and efficiency in health
care, although competition in some circumstances may raise
costs with every hospital wanting an MRI facility to increase
its market share.
Many counterarguments have been made, such as consumer ignorance
prevents informed choices on technical matters involving disease
treating and surgery. As a practical matter, the family physicians
will still make the major decisions, although they are interested
parties in those transactions. It is also contended that letting
the market work is unfair. Rich people will bid away preferred
doctors and hospitals. The rest of the society will be unable
to afford good health care. Moreover, the political process
will determine tax and other benefits, and provide new subsidies
to politically powerful groups.
The final alternative to health care reform is to avoid
any of these grand solutions. That approach reduces the risk
of upheaval in what is now a world class, health care system.
Marginal changes are more likely to be enacted and sooner.
This approach also provides feedback as we see the effects
of initial reforms. An example that comes to mind is to introduce
information technology more widely. For example, a simple
medical data card would reduce clerical errors and save lots
of clerical time. Raising deductibles and co-payments would
reduce demand for health care. Also increases in taxes to
pay for Medicare would help deal with the fiscal squeeze.
On a different approach, the medical profession could do
more self-policing. That would be a positive response to all
those legal problems. We are told that much of the bad-quality
medicine arises from three sources: (1) physicians who themselves
suffer from serious medical problems, (2) physicians who just
are not very competent, and (3) competent physicians who take
on cases outside of their expertise. Many inside and outside
the medical profession say it is very difficult to get medical
societies to sanction bad practitioners.
The major criticism of the marginal approach to health care
reform is that it is inadequate to meet the major fiscal and
program challenges facing the United States. These include
the impending fiscal collapse of Medicare and the accelerated
reductions in employer-financed health insurance that are
occurring, especially for retirees, particularly those not
covered by union contracts.
The long-term outlook may be more favorable than the short-term.
A common experience in public policy is that the situation
has to get really bad before the country takes serious action.
Then we act decisively or even overreact. However, we are
now far from a meeting of minds on the issue of health care
reform. In this regard, delay can be useful. It provides time
to raise public knowledge and awareness - if we take advantage
of the time. It is likely that we may never get a neat once-and-for-all
solution to Medicare and other health financing and service
issues. What may result is an eclectic combination of elements
of several of the four approaches presented here.
Murray Weidenbaum is the Mallinckrodt Distinguished University
Professor and the honorary chairman of the Weidenbaum Center
on the Economy, Government, and the Public at Washington University
in St. Louis.
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