Opinion pieces and speeches by EPI staff and associates.
[ THIS PIECE FIRST APPEARED IN THE MAY 2004 ISSUE OF DOLLARS & SENSE MAGAZINE. ]
Bush strikes out on health care, making sense
In his State of the Union address in January, President Bush claimed to be addressing the twin crises of rising health care costs and declining access. He touted the Medicare bill Congress passed late last year for adding a prescription drug benefit for seniors, creating tax-free health savings accounts, and generally “strengthening Medicare.” He then made some new proposals, including a tax credit to help uninsured people buy health insurance and a tax deduction to encourage people to buy catastrophic (or high-deductible) health insurance policies.
Dollars & Sense asked Economic Policy Institute economist Elise Gould to explain what these programs are — or are not — likely to accomplish.
Private Insurers and Prescription Drugs: Strike One
The 2003 Medicare Modernization Act is an inadequate, poorly-devised excuse for Medicare expansion. Its key provisions include new money for private insurers involved with Medicare, a prescription drug benefit, and tax-advantaged Health Savings Accounts. Originally scored at $395 billion, now estimated to cost $534 billion, the bill makes big payments to private insurance and pharmaceutical companies, but provides little bang for the buck for Medicare beneficiaries.
One aspect of the new law has received almost no attention: it raises payments to private insurers to entice them into the business of providing insurance for the Medicare population. Actually, Medicare is already partially privatized. For a number of years, the government has contracted with private insurance companies to offer their own Medicare plans to seniors. As it turned out, many of these companies, unable to turn a profit, ended up dropping their Medicare plans. (Meantime, traditional Medicare has rolled right along, with an excellent track record of beneficiary satisfaction and a super-low overhead cost under 4%.) The new, higher payments included in the 2003 law are designed to attract private companies back into the Medicare business. Proponents argue that private industry is more efficient than government and that privatization will lower Medicare’s costs. But if private insurance companies are so efficient, why do they need higher reimbursement rates?
In one respect, private insurers may prove to be cheaper–but not because they’re more efficient. Private insurers can tailor their plans — what’s covered, what’s not, whether patients have a choice of specialists, and so forth — to attract the healthiest of the Medicare population and discourage sicker elders from signing on. Of course, the healthiest are also the least expensive to insure. Splitting the Medicare pool in this way decreases the viability of the system in the long run.
What about the prescription drug benefit? It’s full of holes — literally. There’s the so-called donut hole in the coverage: for seniors who spend between $ 2,250 and $ 5,100 annually on prescription drugs, the amount they spend above $ 2,250 is entirely out-of-pocket.
Then there are the rate increases. The premiums and deductibles for the new drug coverage are expected to rise at average annual rates of 7.5% and 8.6%, respectively, from 2006 to 2013. This far exceeds the annual cost-of-living adjustments Social Security recipients get, which have averaged just 2.4% over the past 10 years. Medicare Part B (the section that provides coverage for doctor visits) has built-in protections that keep out-of-pocket expenses from rising faster than seniors’ Social Security checks; the prescription drug benefit, however, includes no such protection. Even with the new benefit, then, drug costs will eat up a growing share of Medicare beneficiaries’ incomes over time.
The new law also fails to treat “dual eligibles” — that is, low-income seniors eligible for both Medicare and Medicaid — fairly. The law prohibits the use of federal Medicaid dollars to pay for prescription drugs not covered by the new Medicare drug plan. This means that individuals currently on Medicaid can actually lose some of their existing coverage.
If the prescription drug benefit is offering less-than-meets-the-eye to seniors, then who does benefit from the massive new expenditure? Primarily, the pharmaceutical companies. The new law specifically prohibits the government from negotiating lower prices with drug companies. The Medicare population accounts for about half the prescription drug market. If the government were allowed to negotiate over prices — the same type of negotiation that goes on between private insurers and providers already–costs of the program would go down substantially.
Private insurers also stand to gain. The new prescription drug benefit will not be administered as part of traditional Medicare. Instead, seniors who want the benefit will have to choose a private drug plan; the plans will in turn be paid by Medicare. It’s no surprise that the drug benefit is structured so as to accelerate the privatization of Medicare.
Instead of an inadequate program that wastes billions of dollars subsidizing private insurers and pharmaceutical companies, the government should offer a drug benefit that helps people who most need the care and cannot afford it.
Health Savings Accounts: Strike Two
The new law also provides for health savings accounts (HSAs). HSAs provide tax benefits for individuals and families who buy eligible high-deductible health insurance plans–those with an annual deductible of at least $1,000 (for individuals, or $2,000 for a family). If you purchase such a plan, which typically has relatively low premiums, you can contribute to an HSA up to a set maximum. HSA contributions are fully tax deductible. Nor do you pay any tax — even on accrued interest — when you withdraw funds from the account to pay medical expenses.
HSAs were billed as a health cost-containment vehicle and a savings mechanism designed to help people prepare for future medical expenses. Their most likely primary use, however, will be as a generous tax shelter for the upper-income set. Consider two people with HSAs, a higher-income person in the 35% tax bracket and a lower-income person in the 10% bracket. The lower-income person pays 90 cents for every dollar she puts in her HSA then withdraws for medical bills, while the higher-income person pays only 65 cents. (Assuming that the lower-income person has any extra money to contribute to the HSA in the first place!) Clearly, higher-income families have much more to gain from these accounts than middle-or low-income families. And unlike many tax deductions, there is no phase-out range or maximum income limit. Further, wealthy people who have exhausted their other tax-advantaged savings vehicles or who have income too high to qualify for traditional IRAs will be most likely to participate.
Since people over 65 can withdraw money from their accounts tax-free for any reason — not only for medical expenses — with no penalty, HSAs subsidize the retirement savings of wealthy people at the expense of lost tax revenue.
Because the benefits of an HSA come through a tax deduction, they are of no use to the many Americans who do not file taxes or who have little tax liability. A married couple with two children would receive no tax benefit whatsoever from contributing to an HSA unless their income was at least $ 40,200 — more than twice the poverty level.
HSAs are not an effective means of cost containment as they create conflicting incentives. It’s true that moving people to high-deductible plans ought to induce lower spending on health ca
re. But by giving people a tax break when they spend money on health care, this plan reduces the cost-containment advantage of high-deductible insurance.
Nor is encouraging people to move to high-deductible plans good for the health insurance system as a whole. High-deductible plans have lower premiums and are a good deal for healthy people who don’t need much care. When the healthy are siphoned off into these plans, risk pools become unbalanced and costs rise for everyone else. The result: it gets harder and harder for the less healthy to afford adequate coverage.
Tax Proposals: Strike Three
New Bush administration proposals for improving health care access suffer from the same problems. The president proposes an income tax deduction for high-deductible health insurance premiums. Only families with income tax liability gain from the proposal; it will do little to reduce the number of uninsured, about half of whom are from households with income too low to benefit from the deduction at all.
The Health Insurance Tax Credit (HITC), another administration proposal introduced in the Senate this March, is intended to help the uninsured obtain coverage. The HITC would provide low-income Americans with a tax credit of up to $1,000 for individuals and $500 per child to assist them in buying private health insurance. Individuals with incomes up to $30,000 and families with incomes up to $60,000 who have no job-based or government health insurance are eligible for the credit, which is refundable — in other words, those with little or no income tax liability will receive the amount of the credit as a direct payment from the government.
The HITC has three major problems as a vehicle for widening health insurance access: it doesn’t help the sick, it isn’t age adjusted, and it simply isn’t generous enough. The HITC applies only to the purchase of individual or nongroup health coverage. People who are already sick have an extremely difficult time getting insurance in the individual market. When they are not turned down outright, the premiums are prohibitively high, and insurers often add riders that disallow coverage on pre-existing conditions and reserve the right not to renew. The benefit isn’t age adjusted, but premiums are. So the HITC disproportionately benefits younger people, the least in need of health insurance.
Non-group insurance is expensive: premiums and deductibles are higher and overall plan benefits are less generous than for group plans. In one market, premiums for nongroup family plans average $13,214 a year. Even with the maximum $3,000 per family credit, eligible families would still have to pay over $10,000 a year for coverage — far beyond the means of most low- and moderate-income families. And while non-group health plans are a poor substitute for employer-provided health insurance, tax preferences for these plans may give companies an excuse to stop offering insurance to their employees.
A Whole New Ballgame
If the administration really wants to lower the number of uninsured, there are better ways than through the tax system. For the estimated cost of $95 billion in the first five years, researchers estimate the HITC and the new tax deduction for high-deductible plan premiums combined will insure an additional 1.3 million people — barely a dent in the estimated 43 million uninsured Americans. Why not expand Medicaid to cover more people, encourage the creation of risk pools to cover the sick, provide an affordable safety net for the unemployed — or dare to think about a single-payer system?
U.S. Congressional Budget Office, “Estimating the Cost of the Medicare Modernization Act,” testimony before the House Ways and Means Committee, 3/24/04.
U.S. Treasury Dept., “General Explanations of the Administration’s Fiscal Year 2005 Revenue Proposals,” February 2004.
Kaiser Family Foundation, Employer Health Benefits 2003 Annual Survey.
Kaiser Family Foundation, “Coverage and Cost Impacts of the President’s Health Insurance Tax Credit and Tax Deduction Proposals,” March 2004, Massachusetts Blue Cross and Blue Shield.
U.S. Census Bureau, “Health Insurance Coverage in the United States: 2002,” September 2003.
Elise Gould is an economist at the Economic Policy Institute.
[ POSTED TO VIEWPOINTS ON AUGUST 25, 2004. ]