Some Bigger Ideas for the Presidential Race

Think about the main themes projected by our Congressional leaders on domestic policy:

Republicans say:
1. Don't repeal current or future tax cuts -- anyone who even discusses this is an unbeliever
2. Deficits don't matter much
3. Compassion means never really cutting spending
4. We got an expensive drug benefit for seniors, but that's it for health care
5. We should probably reform the entitlement programs in the future, but let's not talk specifics now

Democrats say:
1. Repeal at least some of the current or future tax cuts
2. Deficits are bad, but we're not very committed to reducing them
3. Compassion means never really cutting spending
4. We need a more generous drug benefit for seniors, plus a big push toward universal health coverage
5. Don't even think about reforming entitlement programs -- anyone who even discusses this is an unbeliever.

Are we headed for an election where domestic policy boils down to: "Bush is for tax cuts and against health coverage" and "Democrats are against tax cuts and for health coverage?"

That's an OK debate, but it seems a little thin, given the additional large problems the nation should address.

President Bush made a campaign speech in his State of the Union Address last week. It didn't contain many visionary new ideas. Make the tax cuts permanent. Get steroids out of baseball. Go to Mars, maybe.

The Democratic candidates are talking about rescinding some of Bush's tax cuts to pay for universal health coverage. (The fact that they are talking about getting rid of tax cuts means they're serious about health coverage -- policy ideas only become "real" when candidates talk about how to budget for them.)

The Democratic candidates also have lots of smaller ideas about other aspects of domestic policy. But other than health coverage, they can't really point to any true blockbuster ideas to challenge and engage the public. There are some reform plans, but nothing that would really move the country in a bold new direction. It's pretty humdrum stuff, mostly.

Here are five larger, not-so-boring ideas President Bush and the Democratic candidates might consider. None of them is ready for immediate legislative action -- many of the exact policy details would take a while to develop. (Some might not work out in the final analysis.)

But they would be a little more interesting than "I'm for tax cuts and he's not." Or "I'm for health coverage and he's not."

Cut Taxes on New Savings, Not "Old Money" -- A Progressive Consumption Tax. Republicans want to shift taxation away from savings and investment; Democrats want to keep the tax code progressive. There might be a way to do both things at once.

Unlike sales or value-added taxes, which generally have one flat rate and are collected at the point of purchase, a progressive consumption tax would have a progressive rate structure. It would be collected like an income tax. However, all new savings would be deductible.

But don't Democrat's complain that President Bush is already moving taxation away from investments and savings and toward work?

There is a key difference. President Bush and Congress have reduced taxes on capital gains, dividends and inheritances. The biggest tax breaks go to people who saved and invested years ago.

A progressive consumption tax would be prospective, not retrospective. It wouldn't help "old money" -- it would help people who save right now, and in the future.

A progressive consumption tax is not a flat tax. We would still be taxing income, or more specifically "unsaved" income. Consumption equals income less savings. Taxing unsaved income, therefore, equals taxing consumption. We could still have progressive rates.

It wouldn't be easy to figure out which types of savings to exempt from tax. But we have precedents to follow, with 401k and other savings vehicles exempt from income taxes.

Stakeholder Accounts -- Savings Incentives for the People Who Really Need Them. Representative Harold Ford is trying to resurrect an old think tank idea: Stakeholder Accounts. In Great Britain, these accounts are known as "baby bonds." The idea is to give each newborn a financial stake, a savings account that would compound over time, and could be used later in life.

There are about 4 million children born in the U.S. each year. A $1,000 stake for each newborn would only cost $4 billion a year, or roughly $40 billion over the first 10 years.

By comparison, President Bush's first tax cut was about $1.35 trillion -- 33 times more expensive. (And the Bush tax cut included some dubious "sunset" provisions and applications of the Alternative Minimum Tax or AMT, which reduced the apparent cost). All told, a proper accounting of all of Bush's tax cuts amounts to roughly $3 trillion over ten years, 75 times more than the cost of a stakeholder account plan.

Which is better, cutting taxes by enormous amounts for people with high incomes and lots of investments already in place, or gradually creating a financial stake for all citizens, so they can raise their own incomes in the future?

Taxing Corporate Cash Flow Instead of Accounting Income. The corporate tax system is sufficiently complex that many companies effectively have two sets of books: one for tax purposes, and one for financial purposes. Businesses routinely engage in tax avoidance activities that would otherwise be inefficient.

Perhaps it would be better to tax corporations on their cash flow, which is observable, not their profits, which can be massaged and "managed." Firms spending heavily to make investments might avoid taxation, because their net cash flow from operations and investing would be negative. There's nothing necessarily wrong with that.

Of course, economists and accountants would have to design such a system carefully, to prevent new problems and distortions from replacing the old. But it's hard to believe the system could get much worse than what we have now. Why aren't we having this sort of discussion?

Oil Taxes Instead of Payroll Taxes. For years, environmentalists have complained that U.S. gasoline and energy prices were too low to spur conservation and reduce pollution. Americans have heard these arguments, and have largely rejected them. We just don't seem to think that pollution is bad enough or conservation important enough to embrace higher energy taxes. We want our McMansions and our McHummers and all that, as Gov. Schwarzenegger would say.

But we should reconsider "green" taxes in light of September 11. There's no point beating around the bush: Our extravagant oil consumption indirectly funds terrorists who want to kill us and destroy our democratic, tolerant way of life.

One idea: substituting higher oil taxes for lower payroll taxes. Payroll taxes -- taxes on the work of working people -- are regressive. Oil taxes would also be regressive. But oil taxes could help de-fund our enemies. New oil taxes wouldn't be a net tax increase if payroll taxes were cut in an equal amount. And the new oil tax revenues could be added to the Social Security and Medicare "trust funds" just like the payroll taxes they replaced.

Finally, new hybrid trucks and SUVs will make higher gasoline prices bearable in farm and ranch country. Western states, where people have to drive long distances, would no longer be disfavored by higher fuel prices.

Putting the "Insurance" back in Social Insurance Programs. Republicans believe that by enacting a prescription drug benefit last year, they can be sure that senior citizens will vote for them this fall. Democrats believe if they complain enough about the drug benefit not being very generous, seniors will vote for them instead. Both of those beliefs are debatable, but the political wizards in both parties take it as Holy Writ.

However, neither party is really interested in insurance -- protecting people from devastating misfortune or financial loss. Instead, they are trying to tailor the drug benefit so that most seniors -- healthy or sick -- will get tangible pocketbook relief. The Medicare debate is about social benefits, really, not social insurance.

Politicians may be right when they assume that seniors don't want mere insurance -- they want financial relief they can spend. Cash in hand, so to speak. But are voters really comfortable re-designating our social insurance programs -- Medicare and Social Security -- as social benefit programs, with policymakers falling all over each other to promise cash benefits to all seniors, regardless of need?

These programs aren't free. In fact, the cost of the social insurance programs will severely strain the federal budget when the huge baby boom generation retires and joins the entitlement rolls in large numbers, after about 2010.

Our candidates should ask: Why are we falling all over ourselves to provide "benefits" to all seniors, when basic "insurance" would suffice for many of them? Do we really need to bribe seniors with cash benefits to ensure the political future of these programs? Wouldn't Medicare and Social Security be even more popular with the next generations of taxpayers if their costs weren't so high?

A First Step -- Bipartisan Budget and Tax Reform Commission. President Bush desperately needs a Budget and Tax Reform Commission to provide political cover for the almost inevitable (and painful) tax increases and budget cuts that we will be forced to make after the 2004 elections. A Democratic winner in 2004 would face the same budgetary pressures. The federal deficits aren't likely to go away on their own.

We need to get started on budget and tax reform for a simple reason -- it could be a socially acceptable smokescreen for at least some modest revenue increases and spending cuts. The Congressional Budget Office projects that federal revenues will be only 15.8 percent of GDP in 2004, about 2.5 percentage points below their long-run average of 18.2 percent.

Meanwhile, President Bush and Congressional leaders are spending money hand over fist. Assuming a continuation of large military expenditures overseas, federal spending will remain at or above 20 percent of GDP for years.

In the absence of large-scale entitlement reforms or dramatic spending cuts, the federal government will not be able to pay its bills without tax increases in coming decades. If we continue to run huge deficits, the interest costs of our debt -- whether it's held by U.S. or foreign investors -- would grow to gigantic proportions.

Links:
Maya MacGuineas Radical Tax Reform The Atlantic Monthly (January 20, 2004)
Harold Ford Jr. For Children, A Stake in the Future Washington Post (January 25, 2004)
Centrists.Org Suggestions for Income Testing in Social Insurance Programs (October 27, 2003)
Sen. Voinovich Tax Reform Commission Proposal
Centrists.Org The Fourth Entitlement: Interest (December 1, 2003)

A Disappointing SOTU for Domestic Policy

Now that the furious first wave of spinning and counter-spinning is dying down, it's time to take a closer look at what President Bush's State of the Union Address means for domestic policy this year.

Specifically, did the highly partisan speech create any opportunities for bipartisan legislation on budget issues, entitlement reform, and health care?

Taxes, Spending and Deficits. President Bush's words on economic and fiscal policy were surprisingly defiant, as if Democratic barbs on deficits, jobs and tax cuts for the rich had really struck a nerve.

Maybe the Administration’s manifestation of “compassionate conservatism” -- tax cuts coupled with spending increases to make everybody happy -- isn’t working as well as his advisors had hoped?

The President’ message was forceful and simple: jobs will go up, deficits will go down, tax cuts are good -- they helped the economy through recession.

Those assertions may or not be true. But what was striking was how little explanation the President provided. Why has job growth been so disappointing? If tax cuts were mostly designed to fight recession, why is it so important they be made permanent 5 or 10 years from now?

The biggest unexplained assertion was how the deficit will be cut in half. Since the beginning of his Administration, the President has pitched a 4 percent growth rate for domestic, non-entitlement spending.

Needless to say, spending is growing much faster than that. The 4 percent figure has been interpreted in Congress like this:

"Spending for priority items like defense and homeland security, and for politically important items like agriculture or prescription drug benefits can grow as fast as needed -- all other spending programs should grow by 4 percent."

When conservatives howled at the 4 percent figure (and the Moon and Mars mission), the Administration tried to get tough on spending. Turns out non-entitlement, non-defense, non-homeland security spending would grow only 1 percent in 2005 under the President's new budget.

But that completely misses the point -- budget austerity only works when there is an attitude of shared sacrifice in Congress. Congress is unlikely to go along with spending cuts in a few areas when everything else is growing like crazy, and taxes are being cut like mad.

Worse, Congress is now using “earmarks” and pork-barrel appropriations as the basic tool of governance. There is no embarrassment or shame about this. It's very simple: Senators and Representatives must vote for higher spending or they will get no share in the vast amount of domestic appropriations earmarked to each state or district. Principles and ideas are second banana to crass Congressional logrolling.

In his speech, President Bush missed a huge opportunity to run against an irresponsible Congress. Other than a vague (and therefore meaningless) admonition that Congress should be careful with taxpayers’ funds, President Bush essentially associated his Administration with Congressional spending habits.

Fiscal hawks should also be dismayed by the President's unwillingness to acknowledge the proliferation of budgetary gimmicks designed to mask the true size of the future deficits. For example, the President acted indignant that his signature tax cuts are scheduled to expire. He didn't mention that his allies in Congress inserted the "sunset" provisions on purpose, to disguise the tax cuts' real cost. Congress and the President also held down the apparent cost by allowing many of the promised middle-class tax cuts to be negated by the Alternative Minimum Tax (AMT).

Expect the President's Budget (due on February 2) to perpetuate these sorts of gimmicks.

What can moderates and fiscal conservatives do? There may be room for bipartisan work on budget process reform. We might also agree to take some first steps towards a broader tax reform (both to simplify the tax code and nudge revenues higher after 2010). If the President and the Congressional leadership refuse to lead on cutting the budget, then moderates on both sides of the aisle will have to step up and demand progress.

One way to dramatize the future budget problems would be to talk about the "interest entitlement," which could grow to be larger than Social Security, Medicare, or Medicaid over the next 25 years if action is not taken to reduce the deficits and reform entitlement programs. When Congress starts to realize the interest costs of its current borrowing binge, perhaps we can begin to narrow the yawning gap between spending and revenues.

Entitlement Reform. As a candidate in 2000, President Bush’s advocacy for entitlement reform was bold and refreshing. With great political courage and without apology, he pitched Social Security reform based on pre-funding and personal retirement accounts, and Medicare reform based on the Federal Employees Health Benefits (FEHB) program.

Now things are different. A Medicare prescription drug benefit passed last year, but without much actual reform. To be fair, the new Medicare law will probably help build private sector alternatives to Medicare’s traditional fee-for-service program, an important precursor step toward future reforms based on competition. Moreover, a drug benefit is an essential part of any health insurance plan, especially for senior citizens living with long-term or chronic illnesses.

But let’s face it, the Medicare bill wasn’t really about reform -- it wasn’t an exercise in austerity to protect future taxpayers. It was a new handout, to show compassion. It wasn’t about providing seamless health benefits, it was a vote-buying effort.

On Social Security, the President continues to delay. Of course, leadership on Social Security reform is politically treacherous -- it will be attacked, often unfairly, by Democrats (and some Republicans) who don’t have an alternative plan of their own. Critics complain about "privatization" without mentioning that the "do-nothing" approach would inevitably lead to higher taxes in the future.

Is the President wimping out on Social Security reform? The Administration has not pushed actual legislation, or even a specific plan. The transition costs of reform have not been included in any of the President's budgets -- that sends an unmistakable signal that the President is not serious about reform, at least not until a (possible) second term.

Centrist Senators and Representatives interested in controlling future entitlement costs will have to carry on without much help this year from the President and Congressional leaders in 2004, it seems.

Health Costs and Coverage. On the plus side, President Bush dedicated 10 sentences of his speech to health costs and coverage. And we expect the President's Budget to include about $100 billion over the next ten years to reduce the number of uninsured Americans.

However, the Administration offered no significant new policy ideas to break the gridlock in Congress. There was money in the budget last year, but it wasn't spent because a bipartisan, non-controversial bill wasn't teed up early enough. (Proposals to cover the uninsured always seem to get lost when the Congressional session nears its close.)

The Administration's main policy prescriptions have remained mostly unchanged for the last three years:

- A refundable tax credit that cannot be used for health coverage at work
- Association Health Plans (AHPs)
- Caps on medical malpractice claims

These "same old" policies are not likely to be passed in Congress this year either.

First, the Administration continues to offer a refundable tax credit (a very good idea), but only for individual coverage (a big problem).

Liberals will claim that the tax credits aren't enough, or would "throw a 10 foot rope to people in a 30 foot hole." That's idiotic. Some people only need 10 feet of rope -- would we fail to rescue them first? If we can only afford 10 feet of rope, would we rescue no one because we can't help everyone?

The real problem with the Bush tax credit plan is this: Limiting the tax credit to individual coverage scares virtually all Democrats (and many Republicans) because it would reduce the availability of employer-based health coverage.

Second, AHPs are a decent idea that has been twisted for partisan advantage. It's right to give small businesses new ways to band together to purchase cheaper health insurance. And it's right to take a hard look at expensive "benefit mandates" imposed by many states. But it's wrong to disrupt the current insurance that small businesses are already struggling to afford.

AHPs are mostly a zero-sum game -- a better deal for some small businesses at the expense of others. Most insurance brokers and companies are bitterly opposed to AHPs. State insurance commissioners are afraid unregulated AHPs will be a magnet for fraud.

The Bush Administration is using AHPs as a wedge issue against Democrats, complaining that Democrats opposed to AHPs are against small business. It's an unfair claim. Policymakers are starting to realize that the longer the Administration uses AHPs as a "message" issue, the longer we fail to actually help small businesses.

Finally, the Bush approach to malpractice reform also seems designed more for political purposes than actual enactment. Caps on "pain and suffering" awards are a good idea (which Democrats are foolish to resist). But we need more than caps to pass a bill. The Administration has never provided a vision for a truly reformed health quality and compensation system, which would protect patients while it held down malpractice claims.

The good news is that centrists could lead compromises in all these areas. First, we can push health tax credits that don't hurt employer coverage. (For example, we've suggested transitional coverage for the unemployed and tax credits that could be used at work.)

Centrists can also lead Congress toward new health purchasing systems for small employers (watch this space for new proposals in February).

And there has got to be a way to break the gridlock on medical malpractice -- some combination of caps on damage awards and new expert "health courts" that could quickly compensate victims of poor care or medical accidents without burdening health providers and suppliers with the fear of enormous lawsuits.

Links:
Centrists.Org A Closer Look at the Latest Jobs Figures -- Plenty of Stimulus, a Scarcity of Confidence (January 11, 2004)
Centrists.Org Preparing for CBO's Updated Baseline Projections and the President's New Budget (January 10, 2004)
Senator Voinovich's Tax Reform Commission Proposal
Centrists.Org The Fourth Entitlement: Interest (December 1, 2003)
Centrist Policy Network Medicare Follow-Up (January 4, 2004)
Centrists.Org Social Security Reform Index Page
Centrists.Org Issue Summary Health Costs and Competition (AHPs)
Centrist Policy Network Transitional Coverage Resource Page
Text of H.R. 2698, Bilirakis-Towns "Health Insurance Certificate Act of 2003" (as introduced in the House)
Troyen A. Brennan and Philip K. Howard Heal the Law, Then Health Care Washington Post (January 25, 2003)
Common Good (Ideas for Legal Reform in Health Care)

When Treasury Secretaries Attack!

Last week, former Clinton Treasury Secretary Robert Rubin released an economic paper arguing that the ballooning budget deficit could cause a sudden financial crisis of confidence, which could lead to an abrupt downturn in the U.S. economy.

Now, former Bush Treasury Secretary Paul O'Neill alleges in a new book that the White House's political operation has completely taken over policy decisions within the Administration, leading to wrongheaded economic choices like steel tariffs, long-term budget deficits, backpedaling on entitlement reforms, and so on.

These two themes -- (1) that public confidence is an increasingly important driver of real economic behavior, and (2) that over-politization of public affairs is detrimental to confidence in the future -- are familiar to centrists.

Here is an excerpt from the "Centrist Manifesto," published by the website Centrists.Org:

"... the ability of a democratic government to responsibly address national problems helps build economic confidence, especially among businesses and investors.

In an era of sudden change and instant capital mobility, with global investors and consumers more forward-looking than ever, a nation's willingness to address big problems, and the ability of its government to make tough choices to resolve problems and adapt to changing circumstances, can create a sense of confidence that is, in turn, an extraordinary economic asset.

Long-term investors don't know what the future will bring. But they do know whether or not they have confidence in a nation's ability to solve the inevitable problems that do arise.

And they know that countries whose governments can't solve problems or adapt to a changing economic climate are not good places to invest."

Lack of confidence in the U.S. government, especially on economic and budgetary matters, is showing up in several ways. For one, it's sort of pathetic that the economy has absorbed such an enormous amount of economic stimulus (ultra-low interest rates and large federal budget deficits) without creating more jobs and sparking new long-term investments in expanded capacity.

We believe that the Bush Administration and the Federal Reserve were fundamentally correct to re-inflate early and vigorously. Quick tax cuts and interest rate cuts in 2001 will go down in history as an excellent and farsighted policy response to the bursting of the Y2K stock bubble and the corresponding over-investment in the U.S. technology and telecom sectors. Stimulative fiscal and monetary policies in 2002 and 2003 have helped the U.S. work through the corporate mismanagement and fraud scandals.

Moreover, we understand the dangers of persistent deflation as the global economy absorbs hundreds of millions of hard-working laborers and new investors from the old Communist states (especially China) and increasingly open economies like India.

We also know that national leaders need to focus on security and anti-terrorism efforts, even if that means economic matters sometimes get less attention.

Finally, we agree that bold proposals cannot get through Congress without a degree of compromise -- leaders sometimes have to "buy" their policies into place by promising to spend more or tax less to please certain factions. And we understand that sometimes nations just have to clean up budgetary messes later.

But the U.S. budget situation is descending from mess into madness.

Economic shortsightedness and hyper-partisanship are dimming the medium- and longer-term economic outlook in the U.S. (and therefore the world).

The long-term budget deficit is symbolic. It sends the world a message: The era of sacrifice in the public (and global) interest is over. Now the U.S. government is only worried about day-to-day politics, and the future be damned.

This is not only the fault of the Bush Administration, of course. Partisan Democrats certainly aren't paragons of responsibility these days either.

But with Republicans in control of the White House and Congress, the leadership will have to come from that side of the aisle. The U.S. Congress has to be told -- by the President -- that the deficit must be reduced, and that to do so will require tough choices, including rescinding some prized tax cuts and trimming some popular spending programs.

We should be especially wary of new unfunded promises, like attractive sounding long-term savings proposals that wouldn't cost the Treasury much now, but would reduce tax revenues at just the wrong time: after the baby boom generation has started to retire and draw entitlement benefits.

The media may focus on the more personal motivations for both Secretaries' books. Secretary Rubin is upset that his largely successful policy approach of deficit reduction has been overturned. Secretary O'Neill is upset that his ideas on Social Security reform and other items were largely ignored, and that his dismissal was handled tactlessly.

But the larger message -- that politics shouldn't dominate economic policy and that rapid swings in global economic confidence can have devastating consequences -- should not be lost. Brushing off the Secretaries' warnings as just personal would be foolish, and wrong.

Links:
Robert Rubin, Peter Orszag and Allen Sinai Sustained Budget Deficits: Longer-Run U.S. Economic Performance and the Risk of Financial and Fiscal Disarray (January 5, 2004)

Centrists.Org Secretary Rubin's Theory of Budget Deficits, Economic Confidence, and Financial Crises (January 10, 2004)

Centrists.Org A Closer Look at the Latest Jobs Figures -- Plenty of Stimulus, a Scarcity of Confidence (January 11, 2004)

Centrists.Org Preparing for CBO's Updated Baseline Projections and the President's New Budget (January 10, 2004)

Centrist Policy Network It's the Confidence, Stupid. (September 5, 2003)

Centrists.Org Centrist Policy Manifesto

Centrists.Org Issue Summary Budget and Tax Policy (Basics)

Medicare Follow-Up?

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MPDIMA, aka "DIMA" and "MMA") may be the least understood major piece of health care legislation Congress has ever passed. The bill contains dozens of controversial provisions, and there is a great deal of uncertainty about how those provisions will play out over time.

MPDIMA certainly has the potential to be the most far-reaching Medicare legislation since the program was created in 1964. But there is also a good chance that some of the bill’s more ambitious initiatives will fall short of expectations. In that case, the bill might not ultimately transform Medicare’s essential workings very much.

There is also great uncertainty about the bill’s cost. The drug benefit was estimated to cost about $400 billion within the 10-year Congressional budgeting period from 2004-2013. According to Congressional Budget Office (CBO) director Douglas Holtz-Eakin, the cost could swell to $1-2 trillion over the following 10 years. However, other provisions of the bill create at least the potential for significant long-term cost savings.

There are six main sources of uncertainty:

1. The participation of private health plans in Medicare. Will private health plans, responding to the various incentives and initiatives in the bill, dramatically expand their participation in Medicare? Or will private plans be more cautious, forcing the government to run the new drug benefit and leaving most beneficiaries enrolled in the traditional government-run fee-for-service program?

2. The reaction of seniors to the drug benefit. Will beneficiaries flock to the new drug benefit’s insurance features, regardless of their actual or expected drug costs? Or will seniors make a more individualistic decision, calculating their drug costs and enrolling only if the benefit they would likely receive justifies the premium?

3. Medicare’s overall budgetary cost and the impact on payments to health providers and suppliers. Will the cost of the drug benefit swell over time, creating an untenable budget situation when the baby boomer generation enrolls in Medicare after 2010? Will reimbursement levels to health providers and health plans be slashed in an inevitable budgetary crunch? Will incentives for private plans to provide the drug benefit be replaced by government price controls?

4. The reaction of employers and states. Will employers drop or modify drug coverage offered to their retirees? Will states decide that coordinating with Medicare’s new low-income benefits and asset tests is too difficult and that the “clawback” provision (to ensure states don’t receive a financial windfall) is too onerous? Would either reaction cause a political backlash?

5. The impact of “conceptual” provisions, which could have important transforming or political impacts over time. Will the extra benefits for low-income seniors and the extra premium for high-income retirees drain or rebuild political support for Medicare? Will the chronic care demonstrations begin to transform Medicare from its current emphasis on hospitalization and surgery toward home-based chronic care? Will the e-prescribing initiative be a catalyst for a larger movement toward portable electronic medical records throughout the U.S. health system? Will the bill’s Health Savings Accounts (HSAs) -- which apply to the non-Medicare population -- spark a broad shift toward consumer-directed health care or fizzle like medical savings accounts? Will the procedural cost-control provisions be a harmless “red-flag” meant to warn the public about high Medicare spending, or are they the first step toward turning Medicare into a defined contribution program, with beneficiaries put on the hook for excessive cost increases?

6. The question of implementation. In short, can the private sector and the government do what is required of them, in order to make the new law work?

The bill might spark a surge of participation by private health plans, which could come to dominate the Medicare program over time. On the other hand, it’s possible that the various incentives will not appeal to private health plans, and the new drug benefit would become a government-run system that sets pharmaceutical prices nationally.

To some observers, the bill will be a springboard to competition and market forces in Medicare, which would eventually lead to significant privatization of a previously government-run entitlement program. Others believe the greatest impact of the bill would be to accelerate a government takeover of the drug industry, essentially socializing a large sector of the U.S. economy.

Both possibilities have important implications for Medicare’s long-term costs and the shape of the larger U.S. health system.

The degree of privatization in Medicare could lead to greater cost control over time if the program eventually shifted toward the so-called “premium support” or federal employees’ system, with more competitive reimbursement and premium formulas.

The degree of socialization of the prescription drug sector could have important implications for drug costs, as well for innovation and the creation of new medical treatments. Federal drug prices would probably be lower than current market prices for many drugs, and drugmakers would likely reduce their research and investment levels.

Medicare’s payment decisions will affect the whole health sector. If future payments to hospital or physicians are slashed to keep Medicare’s overall spending under control, the impact could spill over to the rest of the health sector, raising the cost of health insurance for the non-Medicare population. Medicare beneficiaries could face limitations in their access to health providers.

Finally, there may be less to MPDIMA than meets the eye. It is possible that the main impact of the bill will be political -- creating a working alliance between Republican lawmakers and AARP, the largest senior citizens’ advocacy group -- and that the Medicare program itself won’t be dramatically changed. In the end, Medicare might just muddle through an extended process of implementation and subsequent legislation without dramatic change.

One big question is: What to do in 2004?

On the one hand, Republican committee staffers have said they would prefer not to do a follow-up bill in 2004, for fear or opening some of those "conceptual" or reform provisions -- like the extra premium for high-income beneficiaries -- to repeal votes.

On the other hand, Democrats will probably force quite of few of those issues to votes anyway, one way or another. And as the Medicare program attempts to write regulations implementing the bill, we may learn that clarifying legislation is needed anyway.

Here are three ideas for a subsequent "Medicare Follow-Up" bill that mostly steer clear of ideological wars, and instead address economic and workability concerns:

1. Allow the "catastrophic" part of the drug benefit to kick in after $5,100 in total drug spending, regardless of how much beneficiaries have actually paid out of their own pockets. The MPDIMA benefit kicks in at $3,600 of out-of-pocket spending -- this modification would be equivalent to that for people with no other drug coverage. However, basing the catastrophic benefit on total spending instead of out-of-pocket spending would help preserve employers' incentives to provide extra retiree drug coverage. It would cost more, but the improved incentives to retain private coverage would be worth it.

2. Get rid of the asset tests for the low-income benefits. Asset tests are just abhorrent to economists, because they create incentives for people either not to save in the first place, or to needlessly divest themselves of assets in order to qualify for benefits.

3. Allow prescription drug plans (PDPs) to provide more than just drug benefits. PDPs should be encouraged to offer Medigap-like benefits (hospital deductible, physician coinsurance etc.) or HMO-like preventive or chronic care benefits, in addition to drug coverage. That would give them a much broader and more attractive product to offer, and could reduce adverse selection problems. (With stand-alone drug benefits, seniors might just tote up their drug costs when deciding whether or not to enroll. If those with high costs purchased coverage, and those with low costs did not, premiums would be driven higher over time and the benefit could unravel.) The rules for this could say that PDPs offering non-drug benefits couldn’t have absolute 100% coverage for those items, leaving seniors to pay at least a small copayment on every health service. That would be economically preferable to current Medigap rules, which often include 100% coverage, leaving beneficiaries with no incentive at all to be careful consumers.

Of course, these changes would cost more, which would be a problem for many fiscal conservatives and deficit-worried moderates.

However, the question is: Is it better to leave the $400 billion Medicare bill alone even if it might not work very well, or start the process of smoothing over the bill's rougher edges so that the drug benefit is as effective as possible, even if it means spending more?

The latter course might be a better value for taxpayers in the long run. It would be worth it to sacrifice a new tax cut or spending program to "pay for" necessary improvements to the drug benefit.

Finally, the MPDIMA drug benefit has become a test case for private-sector participation in Medicare. If it doesn't work, the private sector would be discredited. No one will go back to the 2003 law and point out its flaws -- that a stand-alone drug benefit has inherent actuarial problems, or that the drug benefit design was unfriendly to employer-based retiree coverage -- they will just say the private sector didn't work.

For those who believe that public-private participation and competition in Medicare is ultimately the best way to control the program's budgetary problems (in lieu of benefit cuts or tax increases), a poorly functioning or unpopular drug benefit would be a setback.

Links:
CentristPolicyNetwork.Org 2003 Medicare and Rx Drug Resource Page

Douglas Holtz-Eakin and Jeff Lemieux The Cost of Medicare: What the Future Holds Heritage Foundation Lecture #815 (December 15, 2003)