There Ain’t No Such Thing As A Free Lunch

A Costly Freebie (washingtonpost.com)
President Bush, during the 2000 campaign and since, promised a prescription drug benefit predicated on reform of the Medicare system. Reforms aren’t imminent and the ones being proposed mean moving seniors to HMOs, which does nothing to deal with the real problem in health care — the disconnect between the consumers of health care and the cost of their care.

Robert Samuelson, who is always refreshingly honest, says flatly that a prescription drug benefit for Medicare is a bad idea. I agree. My solution, as I’ve said numerous times, is to provide Medical Savings Accounts (MSAs) coupled with catastrophic care insurance for hospitalization. The MSAs could be used to buy drugs, but would also cover doctor’s visits, blood tests and the like. Insurance would only be used for emergencies, as it was originally intended.

Social Security has an unfunded liability of $8.7 trillion in 2002 dollars and Medicare has an unfunded liability of $5.9 trillion in 1999 dollars. Together they represent more than our annual GDP. Nothing less than radical reform of both systems is required or the burden placed on future workers will be crippling. Adding a prescription drug benefit will only add to an already tremendous problem.

The Republicans are being dishonest but are trying to add a cheap version of the drug benefit. The Democrats are being even more dishonest in saying they can provide universal care and the drug benefit and pay for it by simply repealing the Bush tax cuts. As Samuelson points out, the real cost of the drug benefit doesn’t kick in until 2011 and the projections currently being used only account for two of those years. Nor does it include the inevitable increase in demand for prescription drugs because they will now be “free”.

Numerous surveys have said that most young people don’t expect Social Security will be available for them when it’s time for them to retire. If we continue to ignore the problem and tell seniors they can have a free lunch, those young people will be right.

We cannot know the full consequences of these larger burdens. But the possibilities must include slower economic growth and smaller families — because the economy becomes less dynamic and because young couples feel they can’t afford children. The Congressional Budget Office projects that the costs of today’s Social Security and Medicare benefits will nearly double by 2030 — from 6.4 percent of national income (gross domestic product) to 11.1 percent.

Put differently, the increase equals 25 percent of today’s federal budget. It implies a massive transfer from the working-age population that must occur through (a) higher taxes, (b) higher deficits, (c) cuts in other government programs — or all three. Now, suppose Congress adds a drug benefit. Some will say that the costs aren’t high, especially if compared with President Bush’s tax cuts. On paper, this is true. Bush has reserved almost $400 billion for a drug benefit over the decade (2004-2013); past proposals suggest that some Democratic plans may double that. Still, both figures are under the cost of Bush’s tax cuts, now roughly $2 trillion over the decade.

The trouble is that the costs of a drug benefit are dramatically understated, for three reasons.

First, costs will rise rapidly after baby boomers reach eligibility, but that starts only in 2011. Estimates for the next decade miss these increases. Second, even today’s generous proposals cover half or less of the elderly’s drug costs, which the CBO estimates at $1.8 trillion over the decade. If Congress enacts a drug benefit, the 41 million Medicare recipients will discover its stinginess and agitate for improvements. Covering all of retirees’ drug costs would raise Medicare spending by nearly 50 percent. Finally, better Medicare drug coverage undoubtedly will encourage more drug use.

Nor would reversing the Bush tax cuts easily pay for a drug benefit. Eliminating present budget deficits — plus providing already promised benefits — would absorb tax increases. The same money can’t be used twice. Of course, Congress could also cut spending sharply. Either way, there’s no cheap way out.

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