The Problem with Comparing the Public Option to Medicare
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While the fever-pitch surrounding the debate on health care reform continues to rise, it is increasingly apparent that many citizens may not know what they’re actually asking for. In an effort to illustrate the public ignorance that is complicating comprehensive health care reform, commentators have highlighted the fact that some town hall attendees have asked their elected officials to “keep the government out of Medicare.” The joke here is that Medicare is a government program – and a single-payer health care program at that. It is clear from these repeated episodes that the rational and workable success of health care reform depends, in part, on getting the typical voter to appreciate that the reform plan seeks to extend this very popular existing program to tens of millions of additional Americans and what the consequences of that would be.
Medicare’s popularity should come as no surprise given that there is a huge imbalance in promised benefits versus personal contributions. According to the Medicare Trustees, the average Medicare benefit in 2008 was $11,018. Of this amount, the typical Medicare patient is expected to cover about $1,500 through Part B (medical insurance) and Part D (prescription drug plan) premium payments– in addition to the deductibles. Where does the rest come from? The bulk of the remainder comes from the 2.9% Medicare Hospital Insurance (HI) payroll tax that finances Part A (hospital insurance). While this part of the program continues to generate a small surplus, this is due to the program’s PAYGO design, not because the program isn’t being subsidized. In essence, the program continues to run “in the black” because the government is pumping in more money, not because we’re collecting enough to break even. In fact, the present value of the HI payroll taxes paid into the system by a typical worker reaching age 65 in 2009 (one who earned the national average wage from 1973 to 2008) would be equal to just over 50% of the value of his Part A insurance - far short of what is needed to sustain the system.
The more people emphasize the popularity of Medicare, the more likely fence-sitters will feel ill at ease towards the whole heath care reform effort. On its current path, the Medicare program itself seems doomed for failure, so the idea of expanding it only gives moderates more heartburn. The present value of the 75-year Part A deficit is $13.4 trillion. Fully funding Parts B and D within the system would require the typical senior to hand over an additional $5,000 per year in premiums. And, the program costs as a whole grow so much faster than GDP that its Trustees have to assume sizeable reductions in growth rates just so the program does not consume an unrealistically large proportion of the entire economy.
It is interesting to consider how quickly support for Medicare would wither if Americans were forced to acknowledge the magnitude by which taxes and premiums would have to increase to close the funding gap and make the program sustainable. The answer has big implications for health care reform, especially considering that the latest House bill would finance over half of its $1 trillion expansion through an income tax surcharge on an entirely disparate group of citizens. Instead of bringing existing costs in line with expenditures, the health care reform package would actually expand the amount of health care services financed outside of premiums and dedicated payroll taxes, increasing the long-term problem rather than solving it.
The popularity of the social insurance expansions of the 1930s and 1960s did not depend on someone else shouldering their cost. Although Social Security and Medicare were established as PAYGO systems that required one generation’s workers to support the previous generation’s retirees, both established dedicated funding sources that limited the amount of earnings that would be subject to taxation and established a “traditional link” between a household’s taxes and benefits. This ethic was challenged by the 1972 reduction in Part B premium payments and further compromised by the increase, and eventual elimination, of the HI earnings limit in the 1990s. The aging of the population and increases in per-capita medical costs – a good portion of which is attributable to the increase in utilization and investment in health care services brought about by the introduction of Medicare – made the gap between the program’s costs and its benefits even larger.
The latest effort to expand public health insurance is a continuation of this disturbing trend. Hiding or transferring costs obscures the household-level cost-benefit analysis that could otherwise provide the political impetus to curb excessive growth. The lesson of Medicare is that households that rely on someone else’s money to pay for care are unlikely to choose the types of sacrifices necessary to bring long-term spending in line.