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2003-11-14 -- Paul Krugman, The (Medicare) Trojan Horse

The Medicare Prescription-Privatization legislation is so complicated
that sometimes you need to hear the same thing explained in different
ways.

This is a good explanation of how "HMO/PPO competition" and "premium
support" gives managed care plans the advantage of allowing them to
choose healthy, low-cost, profitable customers and then demands
Medicare compete on a level playing field when its rates are
necessarily higher. Then the government, instead of paying each
person's Medicare premium, gives everyone person the same voucher
based on the HMO's lower rates, so sicker people remaining in Medicare
must pay extra. Each year, people who are less sick will bail out of
original Medicare to escape the penalty. Each year original Medicare
with be left with sicker, more expensive patients and less money to
care for them, leading to a death spiral.

There is also a good explanation of Medicare cost containment
proposals.


New York Times, November 14, 2003

The Trojan Horse By PAUL KRUGMAN

What are we going to do about Medicare? That should be the subject of
an open national debate. But right now Congressional leaders are
trying to settle the question by stealth, with legislation that
purports to be doing something else.

An aging population and rising medical costs will eventually require
the nation to provide Medicare with more money or to cut benefits, or
both. Meanwhile, there are demands for a new benefit: a gradual shift
away from hospital treatment and toward the use of drugs has turned
the program's failure to cover prescription drugs into a gaping hole.

A Congressional conference is now trying to agree on prescription drug
legislation. But beware of politicians bearing gifts - the bill will
contain measures that have nothing to do with prescription drugs, and
a lot to do with hostility to Medicare as we know it. Indeed, it may
turn out to be a Trojan horse that finally allows conservative
ideologues, who have unsuccessfully laid siege to Medicare since the
days of Barry Goldwater, to breach its political defenses.

Some background: originally, Medicare provided only hospital
insurance, paid for with a special tax on wages - and this tax,
according to estimates from the trustees, will be enough to cover
hospital insurance costs for at least 20 more years. Medicare now also
includes additional benefits, but the costs of these benefits have
always been covered out of general revenue - that is, money raised by
other taxes.

But one of the proposals being negotiated behind closed doors -
misleadingly described as "cost containment" - would set a limit on
Medicare's use of general revenue, and would require action seven
years before projections say that limit will be breached. This rule is
reinforced with a peculiar new definition of "general revenue" that
includes interest on the Medicare trust fund, accumulated out of past
payroll taxes. The effect would be to force the government to declare
a Medicare crisis in 2010 or 2011.

You might say it's a good idea to face up to Medicare's problems
early. But the legislation would allow only two responses: either an
increase in the payroll tax (a regressive tax that bears more heavily
on middle-class families than on the wealthy) or benefit cuts. Other
possibilities, like increases in other taxes or other spending cuts,
would be ruled out. In short, this is an attempt to pre-empt
discussion of how we want to deal with Medicare's future and impose a
solution reflecting a particular ideology.

Meanwhile, another proposal - to force Medicare to compete with
private insurers - seems intended to undermine the whole system. This
proposal goes under the name of "premium support." Medicare would no
longer cover whatever medical costs an individual faced; instead,
retirees would receive a lump sum to buy private insurance. (Those who
opted to remain with the traditional system would have to pay extra
premiums.) The ostensible rationale for this change is the claim that
private insurers can provide better, cheaper medical care.

But many studies predict that private insurers would cherry-pick the
best (healthiest) prospects, leaving traditional Medicare with
retirees who are likely to have high medical costs. These higher costs
would then be reflected in the extra payments required to stay in
traditional fee-for-service coverage. The effect would be to put
health care out of reach for many older Americans. As a 2002 study by
the Kaiser Family Foundation judiciously put it, "Difficulties in
adjusting for beneficiary health status . . . could make the
traditional Medicare FFS program unaffordable to a large portion of
beneficiaries." What's going on? Why, bait and switch, of course. Few
politicians want to be seen opposing a bill that finally provides
retirees with prescription drug coverage. That makes a prescription
drug bill a perfect vehicle for smuggling in provisions that sound as
if they have something to do with improving Medicare, yet are actually
designed to undermine it.

Faced with adamant opposition from Democrats who understand exactly
what's going on, like Senator Edward Kennedy, the Republicans are
reported to have retreated a bit. The consequences of the crunch
planned for 2011 will apparently be less drastic, and premium support
will be introduced as an experiment - albeit one involving millions of
people - rather than all at once. But this bill is still a Trojan
horse.