Wrong Fix, Wrong Time

By Joe White

If being a centrist means endorsing dangerous policies that anger liberals, President Clinton is getting more centrist every day. His support for the Senate's "means-test" of Medicare premiums is nowhere near so bad as his signing of last year's welfare bill. But it puts Medicare at greater risk than is necessary to "save" it.

There may still be no agreement, due to Republican concerns that administering the means test through the IRS (the only sensible way to do it) makes the provision a "tax". But the rest of the Senate proposal is still a bad idea. There is nothing wrong with the principle of relating contributions for a social insurance program to income. That is how Social Security and the hospital portion of Medicare, "Part A," work. But this is the wrong proposal, at the wrong time.

Any income-relating should be done in ways that minimize the risk that Medicare will become more like a program with means-tested benefits. The proposal charges extra premiums for Medicare "Part B" (physician and some other services), to only a very small percentage of beneficiaries. And it charges the full cost of Part B to even fewer. So, in the short run, it cannot threaten political support for Part B the way means tests threaten other programs, where only a minority of the public receives benefits.

But the point of the proposal, supposedly, is not the short run. Cutting costs of Part B has nothing to do with the short-run problems financing the Part A trust fund. So the point is to help "solve" Medicare's long-term financing problems. And in the long run, since the thresholds at which people begin paying more are not indexed, many more people will be affected. It is impossible to predict the income distribution of the elderly in the distant future. But if you took estimates of the current distribution and applied modest assumptions about increases over time, then in forty years or less well over half of beneficiaries could easily be paying extra, and at least twenty percent could be getting no benefit at all.

The people paying "full price" could then reasonably wonder why they were paying taxes for Part B when they were getting nothing. For them, Part B would be like a welfare program, that they supported out of charity. Wealthier workers at the time could project that they too would not eventually get benefits. Political support for coverage would have to decline.

Moreover, since Part B is voluntary, the healthier wealthy elderly, who could be charged a lower premium in the private market, might opt out of the program. The result of this adverse selection could be to actually raise program costs per capita for the sicker group left in the program, eliminating some of the savings from the higher premiums.

It is not necessary now to take such risks with Medicare's long-term future.

The basic alternative to cutting some peoples' benefits is to do a better job of controlling the cost of medical services per person. No set of cost controls may be enacted and expected to work for all time. Doctors and hospital administrators are too clever for that. So we cannot "solve" the problem with any cost controls now. But any effective measures lower the base for future inflation, so help with long-term costs (that's why the current savings help in the long-term).

And, over time, a series of incremental steps could add up to large savings. Obviously, various political forces would like to avoid that. But the idea that it's impossible, so benefits must be cut, is absurd. Medicare and American private health care costs per capita greatly exceed those in other nations that have universal health insurance. The idea that that could not be significantly changed over thirty or forty years is silly.

Nor is means testing the premium necessary for "fairness." After all, 75 percent of Part B costs now are paid from general revenues, which are progressive. So if the goal were such "fairness," it would make more sense to abolish the separate premium and raise general revenues a bit. (Somehow conservatives who talk about progressivity never mean the tax code, however).

There are other ways to change contribution rules. Some would be controversial, but at least maintain the right principle. For example, Parts A and B could be merged and the same percentage of income could be charged to all beneficiaries, making all of Medicare clearly a social insurance program. At a minimum, "means testing premiums" could be designed to limit the risks of people quitting Part B and the program losing much of its support.

So, a proposal like the current one could have the thresholds indexed, so it did not grow to include most of the beneficiaries. Or, as in the president's proposal at the time of his health care reform effort, the premium could rise only to 75 percent of the value of Part B, so the wealthier elderly would still be getting some benefit.

Sticking the Senate's long-term change on the current budget package only favors those who are more interested in limiting the universality of, and political support for, Medicare than in controlling costs per capita. They can figure the wealthier elderly would pay the inflated costs out of pocket. In a subsequent Medicare commission, for example, they would argue for lowering the new means-test thresholds as an "incremental" reform.

This just is not necessary. The budget situation over the next decade is excellent. There is time to consider a wider range of alternatives, and enact better reforms. Unfortunately, President Clinton seems likely to sacrifice Medicare substance to give Republicans a sop in the budget deal.

White is a Visiting Fellow in Governmental Studies at the Brookings Institution.