Make the kids pay?

Alan Reynolds
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Posted: Nov 27, 2003 12:00 AM

The House and Senate passed a bill called "a $400 billion prescription drug bill for seniors." Much is made of the fact that this bill was supported by AARP, an organization said to "represent 35 million seniors." In reality, the bill will cost four or five times that much in the next decade alone. And AARP represents itself, not seniors.

The prescription drug plan is estimated to cost "only" $410 billion over just the first eight years, not 10, because the plan pays nothing until 2006. The estimated yearly expense quickly triples from $25.7 billion in the first year to $73.1 billion by 2013. The CBO also assumes the monthly premium will rise from $35 to $58 by 2013 and that the deductible will be increased from $250 to $445. Were it not for those increased premiums and deductibles, even the initial cost would far exceed $410 billion.

The most alarming numbers are not in the first eight years but the following 10. That's when the ratio of retirees to working taxpayers tilts dramatically against the latter. The director of the Congressional Budget Office estimates costs of the new drug subsidies during the 10 years starting with 2013 will range from $1.3 trillion to $2 trillion. Congress and the president evidently care more about the next election than the next decade.

AARP does not represent the highly diverse opinions of its members, who include anyone over the age of 50 willing to pay $12.50 a year for discounts and publications. AARP's famed lobbying clout comes from its large tax-free income, and most of that income comes from selling insurance. AARP cannot plausibly claim to "represent" anyone, let alone seniors, because the organization's policy preferences are those of its hierarchy, not its members.

Congress has special interests of its own, particularly in the high voter turnout among older folks. Legislators made no effort to balance new drug benefits against the costs, but instead decided to describe the benefits as free -- something for nothing. Some seniors, they boast, will pay less "out of pocket." But that just means the cost comes out of someone else's pocket.

Who will be willing and able to finance these rapidly escalating drug subsidies? Nobody has the foggiest idea. Medicare is already in the hole by more than $13 trillion over the long haul, and drug subsidies could easily add another $10 trillion to those unfunded promises.

That means the odds just became even greater that the Medicare tax will be raised even more in the future. And that means a massive transfer of income from younger workers (regardless how poor they may be) to older retirees (regardless how rich they may be). As William Graham Sumner once explained, when A and B get together to decide what C should do for D, then C is the forgotten man.

The political hope is that seniors will express appreciation for this mandatory gift from their children by letting incumbent politicians keep their jobs. But even that political payoff is questionable. More than three-fourths of seniors already have drug insurance, and many of the rest don't want it unless someone else pays for it. A fifth of seniors are covered by government plans like veterans benefits and Medicaid. A fourth buy their own drug insurance, despite perverse federal rules allowing drug coverage only in the two most costly Medigap policies. Many who can and do pay their own way will now switch to the government plan because it is artificially cheap, at least at first.

A third of seniors have retirement drug benefits from a former employer, and these plans are often generous. Employers would be delighted to drop costly coverage for former employees and force them into the new federal scheme. That prospect almost scuttled the bill, because there were more votes to be lost from seniors angry about losing their private drug plans than could possibly be gained by bribing other seniors to buy into this new scheme.

Congress fixed that by giving $85 billion in tax-exempt subsidies to corporations to encourage them to not drop their plans. This booty improves the health of nobody, but it seemed a small price to pay for avoiding the wrath of older voters.

The new drug plan leaves participating seniors overinsured for small yearly drug bills yet totally uninsured for medium-sized drug bills. After using up a tiny $250 deductible, participating seniors would pay only 25 percent on the first $2,000 of drug bills, then 100 percent on the next $2850, and then 5 percent on anything above $5,100. The problem is not the "hole in the donut" but the donut itself. Paying a big share of routine bills is extremely expensive, so it leaves no money for bigger bills. This is like insuring cars for oil changes but not for a total wreck, or like insuring homes for the cost gutter cleaning but not for fire.

Catastrophic coverage kicks in when annual drug bills reach $5,100, but the CBO figures that cutoff will exceed $9,000 by 2013. This is by far the most important type of insurance, and also by far the cheapest. The bill's architects project that half of all seniors will pay less than $1891 for drugs in 2006, which explains why coverage is so generous on the first $2,000: That's where the votes are. But subsidizing a large number of minor drug bills provides the least useful insurance at the highest possible expense.

If Congress and the president were not so anxious to define "reform" as taking money from the forgotten young Smith and giving it to old Jones, many useful reforms could have been cheap or free. Prescription discounts have long been sold by drug stores and others, without federal involvement, and this bill may or may not encourage wider access to them. Catastrophic drug insurance could be virtually self-financing if the premium was subsidized only for seniors with low incomes and few assets. Rather than provide a stand-alone drug benefit for Medicare (costly because it encourages only those with oversized drug bills to sign up), insurance companies could have simply been permitted to bundle such a benefit with some of the lower-cost Medigap plans.

The bill's best feature is also cheap or free. Everyone will be able to put up to $2,250 a year into a Health Savings Account (HSA), which is similar to an IRA except the funds are dedicated to medical expenses. The HSA can be tapped to pay premiums for health and long-term care insurance. Because this will make future generations much less dependent on taxpayers as they grow older, its favorable long-term impact on the spending side of the budget (long-term care is bleeding Medicaid to death) should far outweigh any static short-term losses on the revenue side.

Everyone approaching middle age had better start building a Health Saving Account as quickly as possible, because Congress just promised seniors another few trillion in future benefits without having the slightest idea how to make good on those promises.