Principles On Life Support
Medicare expansion and the mirage of fiscal responsibility.


The House voted “yes,” but the Senate could still say “no” to the budget-busting Medicare bill. In the midst of all the sound and fury generated by conservatives battling over the Medicare bill, one fact stands out: It is the largest expansion of the welfare state in 40 years. GOP support demonstrates beyond any question (not that there really was any question) that the Republicans are merely Democrats-lite when it comes to using taxpayer monies to buy votes. The measure being pushed by the White House and congressional leadership expands the sense of entitlement among the elderly, further mortgages the future of young workers, and, if approved, will cost far, far more than the $395 billion estimated by the Congressional Budget Office.

Any legislator who takes fiscal responsibility seriously should be particularly concerned about the latter. Pegged at a ten-year cost of $395 billion, the real increase in the government’s presently unfunded liability will be several trillion dollars: Estimates ranged from $6 trillion for the House bill to $12 trillion for the Senate measure, with the compromise likely falling somewhere in between. The latter number is 40 percent of Medicare’s current projected future red ink.

Nor does anyone take the $395 billion figure seriously; if a private company offered that estimate, its officers would be headed for jail. For one thing, that number stops before the baby-boomer wave starts retiring, after which costs will explode. Leonard Burman of the Urban Institute projects the second decade’s costs will run $1 trillion, and even that figure, given current cost trends, “is likely to be an underestimate,” he says. But why should today’s elected officials worry? Many will be out of office when Medicare’s fiscal house collapses.

Equally important, federal benefits always increase demand for subsidized services and election-minded politicians always increase benefits. In this case the benefits have rightly been described as “a bit wacky” by the Brookings Institution’s Henry Aaron, and Democrats can be counted on to routinely propose increases to “fix” the problem. And can anyone seriously deny that dozens, if not scores, of GOP congressmen would vote for such increases? The Republican leadership will probably endorse such measures, arguing that it is important for the GOP to retain control in the next election, after which the Republicans will–promises, promises!–fix everything currently amiss in Medicare. The cycle will never end.

Even if vote-minded politicians were not likely to further inflate benefits, the program would cost more than predicted. As Gail Wilensky, a health official in the first Bush administration, observes: “We have never been able to correctly estimate the cost of a new benefit, and this one is much bigger than most.”

In fact, every federal social program has cost far more than originally predicted. For instance, in 1967 the House Ways and Means Committee predicted that Medicare would cost $12 billion in 1990, a staggering $95 billion underestimate. Medicare first exceeded $12 billion in 1975. In 1965 federal actuaries figured the Medicare hospital program would end up running $9 billion in 1990. The cost was more than $66 billion.

In 1987 Congress estimated that the Medicaid Special Hospitals Subsidy would hit $100 million in 1992. The actual bill came to $11 billion. The initial costs of Medicare’s kidney-dialysis program, passed in 1972, were more than twice projected levels.

The Congressional Budget Office doubled the estimated cost of Medicare’s catastrophic insurance benefit–subsequently repealed–from $5.7 billion to $11.8 billion annually within the first year of its passage. The agency increased the projected cost of the skilled nursing benefit an astonishing sevenfold over roughly the same time frame, from $2.1 billion to $13.5 billion. And in 1935 a naive Congress predicted $3.5 billion in Social Security outlays in 1980, one-thirtieth the actual level of $105 billion.

Are there any reasons to support the bill? Certainly the proposed Health Savings Accounts are positive, but the GOP could fight for them independently, forcing Democrats to formally oppose a tax reduction that also is good medical policy. The limited demonstration projects intended to create competition for Medicare will almost certainly be gutted and ignored, even if Republicans continue to control the Department of Health and Human Services, which is by no means certain.

Passage might relieve political pressure on the pharmaceutical industry, currently being demonized for having the temerity to try to recover its investment in the provision of life-saving products to people the world over. But this effect is likely to be only temporary, especially if seniors are dissatisfied with the benefits voted by Congress. And as Medicare drug spending spirals out of control, as it inevitably will, legislators are likely to turn to the good old standby: arbitrary price cuts and formularies.

Finally, it has been argued, if this bill fails, Congress is likely to vote on something worse next year. Maybe, if the Republican leadership and President George W. Bush turn out to have chocolate eclairs as backbones. But surely it is better to fight with some chance of success than to yield on the basic issue: the massive expansion of an unreformed, financially unsustainable social-welfare program. Voting for the proposed bill means preemptive surrender.

Congressional Republicans need to decide whether they believe in limited constitutional government or not. If not, then why are they Republicans? The Senate should reject the Medicare bill.

Doug Bandow is a senior fellow at the Cato Institute.