Medicare Malpractice
BARRON'S NOVEMBER 22, 1999
Medicare Malpractice
Price controls reduce spending without fixing the program
By Thomas G. Donlan
At last! After all those years of back-and-forth palaver
between Democrats making accusations about reducing the
deficit on the backs of the elderly and Republicans explaining
how reducing the rate of growth is not really a cut, fiscal year
1999 produced an unambiguous decline in the cost of the
Medicare program.
Congress and the President deserve bipartisan credit for the
reduction because most of the savings were mandated in the
Balanced Budget Act of 1997, a fiscal compromise that ended
the budget battles that year. They deserve the credit and they
are getting it, right where it hurts.
Hospitals, nursing homes and other health-care institutions are
screaming with financial pain. Under the pressure of an
assortment of caps, cuts and controls, admissions have
declined, length of stays have declined and Medicare
reimbursement rates have declined, while the fixed costs of
running a hospital have continued to rise. Measure the result in
the market: Stock prices of publicly traded health-care
companies have been falling as rapidly as reimbursement rates.
Most years, the Medicare program costs more than expected,
and health-care stocks go up. There are usually more people
and more costs than the politicians are willing to admit, and
since Medicare is an entitlement program, cost overruns must
be paid despite any hole they put in the federal budget. Even
though the government has legislated successively sterner
forms of price controls on the health-care industry, the total
cost of the program has grown from $9 billion in 1967 to $212
billion last year.
We must admit the benefits have been enormous. A whole
generation of Americans received better health care
THEY DID NOT PAY FOR .
The taxes have also been enormous; the program
is partly paid for by payroll taxes on workers and their
employers, currently amounting to 2.9% of the national
payroll, and partly paid for out of general federal revenues and
borrowings.
Last year's decline in the cost of Medicare relieved the burden
only on general revenues -- the payroll tax goes on and on.
Still, the decline of a little more than 1% was in dramatic
contrast to the steady cost increases of about 10% from 1990
to 1997. It showed at last that there is no such thing as an
"uncontrollable" item of federal expenditure.
It also showed that Congress and the President lack the
courage of their alleged convictions. Both sides agreed this
month to restore some of the Medicare cuts in the 1997 budget
act.
This year's changes are expected to increase Medicare
spending by more than $2 billion a year. And they are certain
to increase the complexity of a program that is already
complex beyond any human capacity to administer it.
Consider what happened when lawmakers sought to roll back
cuts in Medicare's extra payments to teaching hospitals. The
program has always subsidized medical education by paying
more to hospitals affiliated with medical schools. The 1997 law
cut the teaching subsidy, perhaps more than lawmakers
intended.
The law for fiscal 2000 will give increases, but only to those
teaching hospitals that were below the national average for
payments to teaching hospitals. The new increases, however,
are to be phased in over five years. Perhaps the lawmakers
hope to confuse hospitals into going along without further
protest. It won't work: The biggest losers are in New York.
City teaching hospitals can claim the attention of the White
House through the candidacy of Hillary Clinton for the U.S.
Senate from New York.
Complexity rules throughout the Medicare legislation.
Phase-ins, phase-outs and special adjustments for special
interests and locations are applied to the other health-care
providers that will benefit from the legislation, such as nursing
homes, home health agencies and HMOs.
Grand Evasion
Meanwhile, Capitol Hill and the White House have agreed to
ignore the real issues for another year. After beginning the year
with brave talk of bold initiatives, there is complete silence on
the financial impossibility of continuing the existing Medicare
program after the Baby Boom generation begins to retire.
Last March it seemed as if there was a chance for real change.
A bipartisan commission on Medicare reform had written a
plan to convert to a system of private insurance with federal
vouchers to support premium payments for those who could
not afford them. At a stroke, this idea would have introduced
competition into the market for health insurance for the elderly
and disabled, reduced subsidies for people who do not need
them, and set a predictable path for future government
expenditures without price controls.
For reasons never adequately explained, President Clinton
pressured his appointees on the commission to reject the plan,
and again pressured Democratic senators not to let it be
brought to Congress for a vote. Instead, he dawdled for
several months and produced a plan with no important
changes in the Medicare program except the addition of an
expensive new prescription-drug benefit.
Advocates of the President's plan keep saying that nobody
would create the Medicare program today without a
pharmaceutical benefit. True enough, but incomplete. We
would hope that nobody would create the Medicare program
today at all. Today, we should be able to see that private
medical insurance with government subsidies for the poor
would have worked better than the Great Society plan.
And even though prescription drugs are at the center of
effective health care today, we ought also to remember an
important reason why.
Compared with other parts of the health-care system, the
pharmaceutical industry labors under very little economic
regulation. The Food and Drug Administration reviews
scientific evidence of whether new drugs are safe and
effective, but there is no agency that tells drug companies what
drugs to invent, what drugs to produce, what prices to charge
or what quantities to produce.
For our money, and the money of millions of patients,
economic liberty explains why there have been stunning
advances in pharmaceuticals while the rest of health care
stumbles along behind, cuffed by price controls and service
restrictions.
Perhaps we should be thankful there was a legislative stalemate
this year. Once President Clinton decided to try to add a
prescription-drug benefit without changing the basic structure
of Medicare, real reform was dead. All that was left was the
first spending cut in the program's history, and that's much
less important.
Fortunately, nothing dies forever in Washington. Medicare
reform will come back next year, and the next and for as long
as it takes until liberty rules the health-care market.
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