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A good idea that needs updating – Twin Cities

Edward Lotterman

President Joe Biden last week released a fact sheet with his Medicare funding proposals prior to his proposed actual budget blueprint that includes details on this and all other programs.

He wants to broaden income subject to tax for filers who earn above $400,000. Since 2013, this has included some, but not all, investment income beyond the “earned income” of wages, salaries and small-business and farm profits subject to FICA for decades.

He also wants to reduce outlays by extending negotiation of drug prices and reduce costs to beneficiaries by limiting copays on common generic drugs.

So — are these good or bad ideas?

The adage “too little, too late,” comes to mind but is a bit harsh. “Better something than nothing;” “better late than never;” “at least we’re headed in the right direction” are better metaphors. Yes, Biden’s proposals are good; they also would delay the day of reckoning for Medicare’s checking account a couple more decades down the road.

Indeed something better than nothing.

But — to the main point — there is no attempt at finding a solution to a more fundamental problem — addressing the reasons why we as a nation spend nearly twice as much per person on health care as most other nations in the world. This is something we could and must begin to fix. But the political stars are not aligned.

Rather than poring over the entrails of Biden’s specific proposal, which is unlikely to get through a GOP Congress in its present form anyway, let’s start with a broad review of Medicare and Social Security itself. The problems of health care delivery in old age certainly overlaps with those of funding retirement, survivors and disability benefits generally.

Start from the beginning. Government-organized pensions for retirement and for dependents of deceased workers who died was a high priority in President Franklin Roosevelt’s New Deal. Its measures were closer to the government-mandated “social insurance” approach of Germany rather than the socialist model eventually followed after World War II in Scandinavia and elsewhere in Europe.

The act establishing survivors and old age benefits was passed in 1935. FICA “contributions” were collected in 1937 and benefit payments started in 1940. Disability was added in 1956.

That covered three of the four recognized needs, retirement, survivors and disability. Health care remained. Democrats wanted it, many for the whole population. But some Republicans remained dead against Social Security itself. Moreover, the powerful American Medical Association lobby deeply opposed government controlled medicine.

Democrat Lyndon Johnson wanted health benefits, at least for the elderly, and Medicare was a high priority in 1964 as he finished John Kennedy’s term. A bill awaited his signature weeks after he was inaugurated.

It was not radical and was limited enough in scope to satisfy the AMA and gather enough Republican votes for bipartisan passage. (Search SSA and “Vote Tallies for Passage of Medicare in 1965” for details).

The initial level of .035% of wages and salaries low-balled taxes needed for full funding. This was in part to overcome GOP opposition. Yet doctor and hospital costs in 1965 were minimal by today’s standards. The economy boomed. Most importantly, the eldest of the 81 million-strong baby boom generation were reaching age 19 and entering the labor force. This torrent of new workers, and hence new FICA payers, would continue for nearly two decades — making the Medicare checking account seem flush.

Little thought was given to long-term sustainability and changing demographics. Just having cash on hand to last a couple years into the future was the only thing. Between the low tax rate and the low cap on earnings subject to FICA, the maximum amount anyone had to pay in Medicare taxes for 1966 was $23. But it had to rise. By 1973 the tax was 1% and high earners had to pay up to a staggering $108 for the year.

The program was extremely popular, not least because it was a windfall for those already retired and those nearing retirement. Unlike Social Security, there was no variation in benefits according to what one had earned. If 65 and qualified for Social Security, people all got the same benefit, rich or poor.

The program gained its enduring popularity because the “return” to early beneficiaries was astronomical. A one-earner couple born in 1905 and retiring in 1970 could have paid, at most, $197 in Medicare taxes. With an equal amount from the employer, $396 entitled them to health care funding over a statistically expected 13 years of life for him and 17 for her. And since they had paid FICA for this benefit, unlike siblings five or more years older, they were “just getting their own money back.” It was not “welfare.”

Costs rose however. So did FICA rates. The fifth jump in 16 years took it to 1.3% by 1981. Top earners had to pay a whopping $386 a year in taxes for the program. If you were 65 that year, you and your employer might have paid in $1,302 in your life. That would give the man well over 14 years and the woman nearly 19 years of medical benefits. (Life expectancies at six different ages for men and for women for birth years from 1900 projected to 2100 can be found by searching for “Life Tables for the United States Social Security Area 1900-2100.”)

Medicare is complex of course, with Part A and Part B and so on. Beneficiaries always had to pay an annual premium and copays. But they nevertheless got a very high “return” on their “investment” in a mandatory government health plan.

Problems — and demographics — loomed however, especially for the baby boom, the oldest members of which would, by the mid-1980s, soon be 40. Ronald Reagan sensibly established the very able Greenspan Commission to study how their eventual retirement would be managed. They produced sensible recommendations including the last hike in FICA rates. Most were adopted, including making half of benefits subject to income tax for higher-income people. But Congress ignored the subtleties of its provisions for the baby boom and that chance was lost.

Moreover, other forces were loose in the economy.

Medical science advanced. The number of new tests, procedures, treatments and drugs grew apace. These made people’s lives better but cost a lot. Unit prices for care, treatments, drugs and devices grew faster than general prices.

Health care shifted structurally. It moved from mostly nonprofit institutions to for-profit ones and from managers paid modestly to much higher compensation. Small hospitals and practices agglomerated into larger and larger ones. Competition and price transparency fell.

In pharmaceuticals and medical devices, monopoly power similarly grew. Patent laws became more favorable in extending monopoly power in the pricing of critical products.

So myriad factors pushed up health care costs nationally, Medicare and its funding aside. But then, on January, 2011, the first baby boomer qualified for Medicare. And now, 12 years later, here we are. More on that soon in another column.

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