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Another $80-some Billion Down the Tubes

Business Week (which I wouldn't normally bother to read, but it shows up at our house and has actually been really good on Washington coverage lately) seems to be the only publication to pick up the issue that I thought was the single most disturbing aspect of the Medicare bill: the huge tax giveaway to companies that already provide retiree prescription drug benefits to "incentivize" them to keep doing so.

When I last commented on this, the number I had seen was $70 billion. In the end, apparently, it reached $86 billion, just $1 billion short of the supplemental cost for operations in Iraq that was so upsetting to people. And yet this has happened with almost no notice at all. Twenty-two cents of every dollar in the Medicare bill will go to this corporate tax subsidy.

Business Week confirms what had been my instinct: that these tax breaks will go to companies that would continue to provide retiree coverage anyway, or are bound to do so by long-term labor agreements, while the companies that want to drop coverage and can drop coverage will do so anyway. In other words, in addition to the fact that not one penny of this $86 billion tax break will improve the current conditions of life for any American, most of it will not even serve the purpose intended.

BW Online | December 15, 2003 | Commentary: Medicare's $86 Billion Band-Aid (requires registration)

[The bill] also threatens the nearly 12 million retirees who now get drug insurance from their former employers. The reason: With a government-financed option now available, many companies will consider dumping coverage and letting Medicare provide drugs for their retirees instead.

To prevent such a shift, Congress bought a little insurance of its own: It set aside $86 billion to induce employers to keep providing prescription drug benefits over the next decade. Problem is, much of that funding will be wasted. That's because it will provide a windfall for some employers unlikely ever to drop coverage. And it isn't enough to forestall others from joining the trend toward slashing retiree benefits. In fact, the new legislation will allow some companies to blame Washington for dropped coverage. "Retirees will get a letter from their former employer that begins, 'Due to recent legislative changes in Congress..."' says Heritage Foundation health policy analyst Edmund F. Haislmaier.

WHY DIDN'T CONGRESS design a better solution? Mostly, because nobody can think of one -- short of redesigning the entire Medicare program, a step Congress rejected. The subsidy may have its flaws, but without it, most retirees would wind up with Medicare coverage, which is less comprehensive than private plans.

That conclusion, though, is maddeningly weak. The article pretty solidly establishes that many retirees will end up shifted to Medicare coverage anyway, and that those who won't, wouldn't have been shifted even without the subsidy. In other words, it is entirely likely that there would be zero net difference in employer coverage of retiree drug benefits as a result of the tax break. So how is this the only solution anyone could think of? How about the alternative of a stick instead of a carrot? Companies that cut off benefits could have been denied existing tax breaks for their executives' health benefits. Or, Democrats could have offered a plan focused on catastrophic coverage. Instead of cutting off drug coverage completely at $2400 in costs, real insurance would mean coverage that starts at about that level, and covers everything above a certain amount. It would be cheaper for the insured, cheaper for the taxpayer, and it would actually avoid this problem, because it would be complementary to most retiree plans, rather than duplicative.

That $86 billion, by the way, is likely to be much more in the next ten years. Just another big slice out of our long-term ability to fix Social Security, deal with future recessions, repair the entire health care system, etc. There ought to be more outrage.

Posted by Mark Schmitt on December 14, 2003 | Permalink

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