Why Bush's Plan Threatens Medicare As We Know It

In the "compassionate conservative" portion of his State of the Union address, President George W. Bush called Medicare the binding commitment of a caring society. Yet in the few sentences that followed this mellifluous but misleading phrasing, he signaled his intention to launch an assault on the Medicare system.

Medicare currently provides elderly Americans with two kinds of entitlements: the right to a specified set of services and the right to choose among providers offering these services in a traditional fee-for-service setting. Despite his vow that "seniors happy with the current Medicare system should be able to keep their coverage just the way it is," President Bush's plan represents a profound threat to both entitlements. Behind his soothing language, the President is signaling his willingness to break Medicare's fundamental promise of providing the same coverage to all beneficiaries, regardless of income.

Instead, he proposes to add new Medicare prescription drug benefits but to limit them to beneficiaries who select private health-care plans. In other words, seniors dissatisfied with the current Medicare system because it does not include prescription drug coverage would not be allowed to keep their current Medicare coverage. Rather, they would be forced to choose among private health-care plans that provide prescription drugs but might well not provide access to the other Medicare services they currently receive at the same prices and levels of quality. Nor would there be any guarantee that such plans would offer beneficiaries unrestricted choice among providers. Indeed, the federal employee health benefits system on which the Bush approach is based suggests that Medicare's entitlement of choice among providers would be seriously eroded.

Bush's plan reflects two conflicting political realities: growing pressure to provide senior citizens with prescription drug coverage and the implacable opposition of the pharmaceutical companies to the reimbursement rate, or price-control process used to contain costs in the current Medicare system.

There is a flaw in the President's compromise solution, however. Absent a generous subsidy, private health plans already resist offering adequate and affordable drug coverage to the elderly because those most likely to choose such coverage are precisely those most likely to incur significant drug costs. President Bush's proposal gives private providers the option of skimping on other Medicare services to cover the costs of adding prescription drug benefits.

Competition among private health plans lies at the core of the President's scheme to reform Medicare. Private plans would be allowed to compete with one another and with the government program. To foster such competition, the government would offer beneficiaries a choice between participating in the traditional Medicare program and buying private insurance plans approved by the government for Medicare services, with the government paying a percentage of the premium. In theory, such competition could encourage more cost-sensitive decision-making by both providers and users. Providers could become more efficient by competing for Medicare beneficiaries and dollars. And consumers could be encouraged to become more cost-conscious in their use of Medicare services if they were allowed to pay lower premiums by choosing cheaper plans.

But for such competition to foster efficiency rather than to compromise quality, all of the plans granted permission to compete for Medicare beneficiaries would have to be required to offer the same set of benefits, guaranteeing that competition revolve around differences in price and quality, not differences in coverage. Bush's proposal clearly violates this condition.

Even a carefully constructed proposal to add competition to the Medicare program would not do much to ease Medicare's long-run financing gap. Medicare's critics imply that its costs are out of control because of bureaucratic mismanagement and the excessive generosity of its benefits package, but the evidence is at odds with both interpretations. Two factors feed rising Medicare costs: the aging of the population and the fact that health-care spending, driven by strong demand for health-care services and technological breakthroughs, is rising faster than the overall economy.

Medicare faces a future financing gap even if its per capita costs continue to grow at about the same pace as per capita private health-care spending. President Bush's promise of an additional $400 billion for Medicare over the next decade will not fill this gap, let alone fund a meaningful drug benefit.

Soon after coming to Washington, President Bush rejected Democratic proposals to dedicate a share of projected budget surpluses to Medicare. Now, these surpluses have disappeared, largely as a result of the President's tax cuts. Bush's plan to inject more competition into Medicare will undermine its twin entitlements, but won't make up for the missing resources.

By Laura D'Andrea Tyson

    Before it's here, it's on the Bloomberg Terminal.