THE BUDGET : Medicare Reform? GOP Didn’t Go Far Enough

In the budget battle, the Democrats believe they are scoring major political points by insisting Medicare beneficiaries shouldn’t pay more and by continually repeating that the Republicans are trying to balance the budget and pay for tax breaks for the rich on the backs of the elderly. This is an irresponsible position, because failure to fix Medicare now will cost Medicare recipients and the rest of the country a great deal in the long run.

The Republicans are right when they say Medicare is badly in need of reform. It has not kept pace with developments in the private health-care delivery system. The problem with their plan is not that it goes too far, but that it doesn’t go far enough in making the changes necessary to ensure Medicare’s financial solvency into the next century. They were afraid of doing anything too radical because it would anger important constituencies.

The Republicans say they can save $270 billion in Medicare costs over the next seven years, largely by moving people into managed care and implementing the kind of price controls on doctors and hospitals that the Democrats have used for years. Many health-care analysts are skeptical they will see those kind of savings. One reason: The government may be paying HMOs too much for enrolling Medicare patients because the oldest and sickest people are likely to stay in the traditional fee-for-service system.

But their reforms ignore one of the most serious problems--the explosive growth and inefficiency in the traditional fee-for-service program that roughly 90% of Medicare beneficiaries now use.

About half the current 10% growth in Medicare costs is due to expansion in use of services, not to inflation or the increasing number of recipients. This growth is largely due to overuse and abuse of the system. Medicare could save much money by making the fee-for-service program more efficient. After all, this is exactly the standard the GOP hopes to set for the rest of government.

The Republicans aimed all their savings efforts at providers. But if you limit the rate doctors and hospitals receive for each procedure, they will simply find a way to make up the money somewhere else--with more lab tests and unnecessary office visits, for example.

Kirk Johnson, general counsel of the American Medical Assn., acknowledges this problem. If you put price controls on physician fees, “there will be an inclination on the part of providers basically to retain a certain income level,” he admits.

Many employers are controlling health-care costs by requiring employees who opt for choice plans to pay higher premiums, deductibles and co-payments than those who go into HMOs. If you pay something whenever you use medical services, they feel, you’ll be more aware of billing mistakes and make more effort to forego unnecessary expenses.

This is the most compelling argument for increasing beneficiary costs--not to raise money but to induce more responsible use of the system. Now, there is almost no reason for providers or beneficiaries to make decisions based on cost.

Assuming that adequate managed-care plans are available, and the elderly poor are protected, seniors who want to remain in the traditional fee-for-service system should have to pay more, just as people in the private sector do. But such reasoning elicits howls of protest.

Unlike Social Security, with fixed payments and a fixed rate of growth, Medicare is essentially an “open-ended entitlement.” Of course, that’s the way the nearly 40 million beneficiaries like it and the political ramifications of messing with it are enormous--as both parties know. Senior citizens vote.

But they are also getting a lot more than they paid for. The average Medicare recipient retiring this year will get $100,000 more in benefits over the rest of their life than they paid into the system.

Today, four workers support each Medicare beneficiary through payroll deductions and employer contributions. But when the baby boomers begin hitting age 65, in the year 2010, that number will be cut in half: Only two workers will be paying for each Medicare recipient, making this “crisis” seem like a hiccup.

The GOP has managed to convince Americans that Medicare is in trouble and must be changed. But a large part of their motivation is coming up with money they need to balance the budget--not fixing the system. Medicare Part B, which pays for doctor visits and other non-hospital expenses, has nothing to do with the trust fund’s solvency. But it is an enormous drain on the budget because it’s largely financed by taxes. When Medicare was created in 1965, beneficiary premiums paid 50% of its costs, but as they increased, the ratio changed. In 1995, Medicare’s monthly premiums of $46 cover only 31% and taxpayers subsidize nearly three-quarters of Part B costs.

This is where much of the skirmishing over Medicare has been focused. The percentage is set to go down to 25% in January. The Republicans want to leave it at 31%. That would mean a minimal increase next year--less than $10 a month--and would raise about $50 billion over seven years, according to the Congressional Budget Office.

Such a small increase is more than fair but President Bill Clinton continues to oppose it, along with the idea of wealthier beneficiaries paying more--though means testing for Medicare premiums was part of his health-reform plan last year.

Roland E. (Guy) King, chief actuary of the Health Care Financing Administration from 1978-1994, says he fears if the GOP plan is approved, “We’ll spend five years pretending this was going to solve our problem and be five years closer to bankruptcy without making any real reform.”

King suggests raising the deductible for traditional fee-for-service Medicare and instituting co-payments for lab tests and home health services that have tripled in cost since 1990. Changes in beneficiary behavior would be enormous if they were linked to what beneficiaries are actually using, he says.

’ What Congress should do is start over. Nothing substantive will be done on Medicare reform if it is part of the budget battle. Significant reform can only be sold to the public if it is handled in a bipartisan way. Democrats must stop posturing and work with the GOP to make the needed tough choices.

It may be too much to hope that either party can look beyond the next election and consider doing what is right even if it is painful. But Medicare’s problems aren’t going to go away. If this Congress doesn’t deal with them, it just means a future Congress has to.