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Medicare Reform: The Real Winners

Story: This commentary from The New Republic was written by Jonathan Cohn.

If the measure of a good compromise is the number of different parties it disappoints, then the new bill on Medicare reform would seem to be a smashing success. The AFL-CIO and Ted Kennedy hate it, but so do anti-government Republicans in the House and a gaggle of policy wonks at the Heritage Foundation. Even the bill's supporters -- most important among them, the American Association of Retired People (AARP) -- admit it's seriously flawed. And that's just the way the architects of the compromise say they want things. As Louisiana Senator John Breaux, one of two Democrats who participated in the final negotiations, put it, "No one got everything they wanted."

In fact, there's a long list of people -- from insurance companies to prescription drug manufacturers -- who got exactly what they wanted, and then some. Magically enough, they also happen to be groups that have spent a ton of money financing political campaigns and then lobbying the members they helped elect.

First on this list is the pharmaceutical industry. The Medicare compromise pumps $400 billion over ten years into the purchase of prescription drugs. Some of that money will simply displace money people already spend on their own, but much of it will be new money that would not otherwise have been spent. For the drug industry, that means more revenues and profits. But even more important here is what the government isn't doing: forcing down drug prices. Because private insurance companies, and not the government, will in theory be administering the benefit, the government won't have the power to bargain with drug makers the way that foreign governments do. Meanwhile, drug company lobbyists managed to gut a provision that would have legalized limited re-importation of drugs from Canada, where prescriptions cost less. Also gone is a proposal that would have eliminated some of the legal tricks drug makers use to thwart competition by generic manufacturers.

So the drug industry ends up with bigger sales but no pressure to lower its prices. Pretty sweet. Apparently that $22 million the industry spent on political contributions in 2002, 80 percent of it on Republicans, was a worthwhile investment.

It turns out that the insurance industry has also given a lot of money to political campaigns, most of them Republicans. And -- surprise! -- they make out extremely well, too. The compromise envisions the insurance companies playing two roles in the new Medicare universe: as a provider of stand-alone drug benefits, to those beneficiaries who wish to remain in traditional Medicare, and as a provider of traditional Medicare services plus drugs, for those beneficiaries willing to opt out of the system altogether and go with a private plan instead. Because participation is entirely voluntary for the insurance companies, the compromise authorizes the federal government to spend up to $12 billion effectively bribing companies to enter the program and then stick with it.

In other words, the insurance industry gets extra money to take on more customers -- plus the right to drop out whenever they decide the business is no longer sufficiently profitable. What else could they want?

Medical providers -- i.e., doctors -- are not exactly big fans of the private insurance industry. So you might think they'd oppose this compromise, given that it means more Medicare recipients will end up in managed care. But, no, they like the plan, too. And who can blame them? Buried within the text of the bill is a 1 percent increase in the money Medicare pays physicians -- this instead of a 4 percent decrease that the existing formula would have imposed.

So the doctors get more money out of a bill that's supposed to be about giving seniors assistance with prescription drugs. Again, not too shabby -- although, again, not so surprising given that health professionals donated $42 million in the 2002 elections, two-thirds of it to the Republican majority.

This explains why, for all the talk about making nobody happy, trade groups are tripping over themselves to push the bill through Congress. As Robert Pear and Robin Toner reported this week in "The New York Times," the former chief of staff to House Majority Leader Tom DeLay is coordinating a massive lobbying effort by everybody from the American Medical Association -- which vowed to "blitz Capitol Hill with an advertising and grass roots campaign" -- to the American Association of Health Plans -- whose director declared that "America's seniors are a giant step closer to having more health-care choices and prescription drug coverage under Medicare."

Of course, given the fundamental irrationality of the American health care system, sometimes doing the right thing in the long-term -- i.e., reforming Medicare -- requires doing the wrong thing in the short-term -- i.e., buying votes by subsidizing politically influential interest groups. But far from doing the right thing in the long-term, this bill actually makes Medicare less efficient and undermines its long-term financial stability.

It does this, first, by trying to introduce more competition into Medicare -- a cause Breaux and others have championed for years. In addition to authorizing a future demonstration program in which private insurers would bid for business against traditional Medicare in up to six communities, competition advocates secured financial incentives that would entice more insurance companies to offer Medicare benefits under the existing Medicare-plus-choice program. If this works, it would shift more people out of the old, government-run program and into private managed care plans.

Breaux and his allies justify their position by arguing that the private sector can adapt to changing medical technology and public health data more quickly than the Medicare bureaucracy -- and that the private sector is, by definition, more efficient than a government program. But it's not clear that either argument is true. Medicare certainly has its problems, but it incorporates new treatments pretty quickly -- so much so that much of the private sector frequently takes its cues from the program. And, assuming your measure of performance is the share of insurance spending that actually goes to medical care, Medicare is actually more efficient than the private sector. In traditional Medicare, just 2 percent of the money goes to overhead. Private sector plans, by contrast, spend an average of 15 percent on overhead. That might seem counter-intuitive if you assume, as many Americans do, that government is inherently inefficient. But it makes sense when you consider that the government doesn't have to spend money on advertising, among other things.

Not only does this brand of "competition" not make Medicare more efficient; it dramatically depletes the program's funds. According to the non-partisan Medicare Payment Advisory Commission, for every beneficiary who enrolls in a private plan today, the government already pays 119 percent of what it would have paid for that person's benefits in the traditional Medicare plan. The compromise bill would jack that rate even higher, up to around 130 percent. So if this reform becomes law, Medicare will actually wind up spending more money on less efficient coverage.

Unfortunately, it may also have less money to spend, period, thanks to a second major -- and less well-understood -- provision in the bill. As things stand, Medicare gets part of its money from payroll taxes, part from premiums, which beneficiaries pay, and part from general tax revenues. Under the compromise, if the actuaries who oversee the program determine for two consecutive years that general revenues will be covering more than 45 percent of the program's total costs, then Congress will have to act to change the program -- either by cutting benefits or raising payroll taxes. What's more, under the provisions of this law, those changes will be filibuster-proof, requiring only 51 votes instead of the usual 60.

In theory, there's nothing wrong with mandating that the federal government find a way to pay for entitlement programs like Medicare. But if the idea here were really to limit the share of the federal budget that goes to Medicare, then the plan could have called for doing precisely that. Instead, it merely calls for limiting the amount of program funding that comes from income taxes, which are progressive, thereby shifting the relative financial burden of the program from the wealthy to the poor. Needless to say, a program that relies on the poor to provide an ever-larger portion of its financing is hardly one you'd consider stable.

It's only when you consider the impact of these two efforts simultaneously that the larger "reform" agenda starts to come into focus. First it makes a Medicare financial crisis more likely. Then it demands that, in case of such a crisis, Congress either cut benefits or raise payroll taxes -- either of which will hurt the poor and middle class. The more you think about it, the more this starts to seem a lot like the Bush tax cuts: Once again, Republicans and a handful of conservative Democrats have come up with a plan that would shift taxpayer dollars from those who need it to those who don't, making it more and more difficult to sustain vital government programs.

But for all these flaws, at least seniors get a generous new drug benefit out of the bargain, right? Well, not exactly. To be sure, the bill would make prescription drug coverage available to every senior for the first time in American history -- an important step. Unfortunately, the people who need the help the most -- low-income seniors facing daunting medical bills -- don't actually make out so well under this scheme. Many low-income seniors now rely on both Medicaid as well as Medicare, with Medicaid covering the co-payments and deductibles they might not otherwise be able to afford. Unless the bill's language changes at the last minute, the new law would prohibit Medicaid from plugging these gaps. As a result, estimates the Center on Budget and Policy Priorities, about 6 million elderly people -- all of them low-income, most of them in nursing homes -- would end up paying more for drugs than they do now.

All of which would, at the very least, seem to call for careful consideration -- and maybe some more negotiation. Instead, the Republican leadership is insisting on a quick vote before Thanksgiving, this despite the fact that the bill's final language hasn't even been written -- and that the Congressional Budget Office hasn't even calculated its cost. Promoters of the compromise say an early vote would keep the debate from becoming too partisan. More likely, it would keep critics from letting Americans know what's really in the bill -- and killing a bad idea before it's too late.

Jonathan Cohn is a senior editor at TNR and a Kaiser Family Foundation media fellow.

By Jonathan Cohn