Bush steps into an entitlement trap

Politically, George W. Bush's Medicare reform is the masterstroke of 2003.

Bring on Election Year. After all, what does a party that has guaranteed pills for retirees have to fear from Florida?

The economic achievement of the programme, however, is not so clear. On the one hand, the plan contains relatively modest- and reasonable-sounding federal subsidies, to ensure that private insurance provides prescription drugs for seniors. To balance this entitlement, there are Health Savings Accounts - tax-favoured programmes to incentivise individuals to rationalise outlays (the less you spend, the more you keep). What is more, big "demonstration projects" will create private-sector competitors to goad the public sector into efficiency. And if the US is the US - or so goes the Bush argument - the private sector will prevail.

But this time, the argument is dangerous. In the US public nearly always trumps private when it comes to healthcare, no matter how many friendly market-oriented phrases are inserted into a reform law.

Consider the 38-year-old Medicare system itself. John Kennedy and Lyndon Johnson decided it was time to guarantee senior citizens healthcare. The Republican opposition had concerns about government intrusion, but Wilbur Mills, the chairman of the House Ways and Means Committee, defused the antagonists by incorporating some of their ideas into his legislation. The new law guaranteed coverage for 19m retirees.

Medicare's founders based their work on premises similar to those underlying today's reform. The first was that Medicare would make government better and more efficient. The second was that costs could be managed. The third was that government would not intervene in the sacred contract between physicians and their patients.

At one point LBJ summoned a belligerent American Medical Association leadership to a private meeting. As an administration official recalled later, the president made a powerful and moving appeal to the doctors. He "read the statement in the bill prohibiting any government interference in any kind of medical practice at any time, and also the statement guaranteeing freedom of choice for both doctors and patients, and assured them there would be no government meddling in these matters. Next, he explained that Blue Cross and private insurance carriers, which are the administrative middlemen under the law, would determine the bill's definition of reasonable charges on the basis of what was customary for a given area". That is to say: no price controls.

"Naturally," the official concluded, "the doctors went for this, because they have great influence with most of those outfits."*

The "Great Society" premises did hold for a couple of years. But by the 1970s, costs for Medicare and its sister programme for the poor, Medicaid, were outstripping Great Society estimates. By the early 1980s, effective price controls were introduced for hospital diagnoses and surgeries. Throughout these decades, private companies, individuals, and insurers were pushed to subsidise the public systems. The Medicare benefit, as well as the abuse of the notion of insurance, encouraged Americans to spend more on health. Private-sector premiums spiked. The number of Americans without coverage moved into the tens of millions.

By the late 1990s, the load on the private sector had become so great that the traditional fee-for-service arrangement was no longer possible. The only thing left to do was to herd doctors and their patients into managed-care programmes, whose nature, whatever the labels, is often solidly anti-choice. As for that proud animal, the American doctor, he has now evolved into a sort of passive-aggressive species not so different from another familiar type, the municipal bureaucrat.

All these problems the White House reform addresses insufficiently. The costs of the new drug entitlement in the long run dwarf those of many other national programmes. The new law, like the original Medicare act, does not institute price controls. But its guarantees strengthen the government's hand, moving it toward the position of monopsony buyer. In other words, the US pharmaceutical industry is set to become more like Germany's, which does not have free prices. This must seem ironic in Berlin, where a government that regards itself as well to the left of George Bush is working on healthcare reform.

Free-market think-thanks have obsessed about the Health Savings Accounts for decades. The trouble, as at Medicare's creation, is that this political gift comes in the same package as an entitlement that will overwhelm it. As for the demo projects, all that needs to be said about them is that they are set for 2010.

The point here is not that the Land of 8 Per Cent Growth is on a Long March to socialism. At certain points, its political leaders have managed to reset the course toward freer markets: Ronald Reagan did it with taxes and Bill Clinton did it with welfare. The issue is rather the assumption that US growth means that the health mis-steps do not matter. The truth is that no one can afford a Great Society - not Lyndon Johnson, not Germany, and not George Bush.

* Guns or Butter, by Irving Bernstein, Oxford Press

© Copyright 2003 Financial Times

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