(Archived document, may contain errors)

132 July 21, 1987

THE CATASTROPHIC HEALTH TAX ON AMERICVS ELDERLYDaRODUCHON

Legislation now pending in the House and the Senate would expand Medicare to provide catastrophic health coverage for the elderly. The problem is that the bills would fund the new benefits through a massive additional income tax exclusively on the elderly, together with a flat rate increase in Medicare premiums. The Treasury Department projects that the additional income tax burden would eventually be as high as $8,000 per year for an elderly couple and $4,000 for widows and widowers, besides substantial increases of hundreds of dollars per year in Medicare premiums. Under the Senate bill, senior citizens would be hit with an income tax surcharge of as much as 16 percent of their current income tax liability. While the marginal tax rates of non-elderly Americans will continue to be indexed, moreover, marginal tax rates for the elderly would increase each year under the legislation to keep pace with unlimited benefit expenditures. The total income tax hike on the elderly would amount initially to $5 billion per year, rising to as much as $35 billion over the first five full years of the catastrophic care program. The Treasury estimates that ten years later the total extra tax burden on the elderly would exceed $40 billion per year, or $20 billion in today's dollars. lmng-Term Care Missing. Yet despite this enormous income tax burden, elderly Americans would not, under either the House or Senate bill, receive coverage against the biggest financial threat associated with ill health. The real catastrophic health care cost problem for the elderly is long-term care in nursing homes. But the proposed legislation would not provide any coverage for such long- term care expenses, nor do anything to encourage the development or purchase of private long-term care insurance. For most retired Americans, in fact, the main effect of the legislation would be to force them to give up the private catastrophic coverage they now have and instead pay heavy taxes for similar services through Medicare. The vast majority of the elderly already have, through the private sector, the main benefits contained in both bills-coverage for acute care provided by hospitals and physicians for a specific illness or medical problem. Indeed, millions of elderly Americans now receive such coverage at no charge through health benefits under their company pensions or through health maintenance organizations. Under the proposed legislation, these retirees could end up paying thousands of dollars in new income taxes for coverage they now receive free of charge. Moreover, the House bill includes costly outpatient prescription drug coverage that would provide no real catastrophic protection for most of the elderly. Even without the drug benefits, the Treasury Department estimates the cost of the House bill at $70 billion per year by 2005, or about $35 billion in constant 1988 dollars. Ile Senate bill would increase spending by $5.2 billion in 1990 and $37.4 billion per year over 1990-1994. By 2005, the Senate bill is projected to cost $64.4 billion, or almost $32 billion in 1988 dollars. As the Treasury points out, these costs far outstrip the enormous tax hikes planned by Congress, leaving a gap of at least $20 billion annually in current dollars.

AEDS DrugL The drug benefits in the House bill could almost double the cost. And these cost figures take only scant account of developments that could increase significantly the total price tag of the program. Expensive advances in technolo and a greater willingness of ph sicians and hospitals to prescribe costly services, lor example, could add billions o7 dollars that will have to be paid for through taxes on America's senior citizens. Even the AIDS crisis could cast a deep shadow over elderly taxpayers, since an unknown number of non-elderly AIDS sufferers could be eligible for drug therapy under the catastrophic care program. Elderly Americans deserve to be informed by Congress about the content and true cost of this legislation. Many senior citizens support the legislation in the mistaken belief that it will remove all their health care financial worries. Yet if the legislation is passed in its current form, they will find themselves victims of a cruel bait-and-switch game in which they could still face financial ruin through ill health yet pay far higher taxes.

TIRE CATASTROPEE[C EWALTH LEGMATION

Under existing law, Medicare comprises two forms of financial aid for medical costs. Medicare Part A (Hospital Insurance or I-H) now pays for up, to 90 days of inpatient ho@pital care for each spell of illness, plus 60 additional "lifetime reserve days" of additional hospital care for the life of each beneficiary. This coverage is subject to a deductible of $520 per hospital stay, plus co-insurance fees of $130 per day for the 61st to 90th days of hospital stay, and $260 for each lifetime reserve day. In addition, Part A pays for up to 100 days of care per spell of illness in a skilled nursing facility, with a daily co-insurance fee of $65 after 20 days. Part A also contributes to the cost of home health care and hospital care. Part A coverage is financed through a portion of the Social Security tax, which includes a mandatory earmarked M payroll tax rate of 1.45 percent each on the employer and the employee.

Medicare Part B (Supplementary Medical Insurance or SMI) pays for physician or other health related services--but not outpatient prescription drugs. This coverage is subject to an annual deductible of $75 and co-insurance fees equal to 20 percent of the approved charges. This coverage is financed by a voluntary monthly premium of $17.90, or about $215 per year, payed by each elderly.beneficiary. Well over 90 percent of the elderly are enrolled in Part B. The premium, however, covers only 25 percent of program costs; general revenues finance the remaining 75 percent. Both the Part B monthly premium and the Part A deductible and co-insurance fees are indexed to increases in health care costs.

Ile House Bill

The Benefits: In the House, catastrophic health care legislation (H.R. 2470), co-sponsored by Fortney "Pete" Stark, the California Democrat, and Willis Gradison, the Ohio Republican, has been approved by committee and is ready for a floor vote. The bill would provide for an unlimited number of days of hospital coverage under Medicare and the elimination of the current co-insurance fees which apply after 60 days. The deductible of $520 for in-hospital care would be applied only once per year (rather than for each spell of illness under current law), regardless of the number of hospital check-ins. Under the legislation, the deductible also would increase only with the general rate of inflation, rather than with the index of health costs.

The deductible and co-insurance fees under Part B would be subject under the House bill to an annual cap of $1,043, indexed for general inflation. Coverage for skilled nursing facility services would be expanded to 150 days per year, with a co- insurance fee estimated at $24 per day in 1988 (tied to rising daily facility charges). The fee, however, would apply only for the first seven days. In addition, Medicare would also cover outpatient prescription drugs, subject to a $500 annual deductible indexed to inflation and a 20 percent co-insurance fee. Coverage would be expanded for home health care services, hospice care, and outpatient mental health services.

The Cost to the Elderly. This increased spending would be financed mainly by a huge income tax increase on the elderly--euphemistically called a "mandatory supplemental premium." This would apply to all Medicare beneficiaries, whether or not they are enrolled in Part B. In addition, all retirees enrolled in Part B would face a flat rate premium increase to cover the balance of cost. Lawmakers argue that this Part B premium increase is not a tax because Part B is voluntary. But for a retiree to avoid this "voluntary" hike in Medicare costs, he or she would have to give up all the Part B services now received. Few elderly Americans would see that as much of a free choice.

The new health tax would start at an adjusted gross income of just $6,000 per year. The tax would climb to a maximum of $580 per year for single elderly persons at $14,166 in income and to $1,160 per year for an elderly couple at $28,332 in income (see Figures I and 2). The tax would be in addition to their regular income tax payments. The new tax, moreover, would increase every yeF to keep pace with the costs of the new Medicare expenditures. By 1992, the maximum supplemental tax is projected at $958 for a single elderly person and $1,916 for an elderly couple (see Figures 3 and 4). The Treasury Department estimates that 13 years later the maximum supplemental tax would be between $3,000 and $4,000 for a single elderly American and $6,000 to $8,000 for an elderly couple, in constant 1988 dollars.

Moreover, even low-income elderly Americans would be forced to pick up the tab for the catastrophic care program, because in addition to the tax on the elderly, Congress intends to fund part of the benefits through a hike in the regular monthly X . . Part B premium paid by almost all Medicare beneficiaries. Under current law, the regular Medicare Part B monthly premium, which is adjusted in line with health costs, is already expected by 1992 to rise to $26 per month. But the Department of Health and Human Services (HHS) estimates that for the new benefits not paid for by the tax hike to be financed by the regular Part B premium could require an additional increase of more than $22 per month by 1992, or $264 per year, on top of the increase expected under current law. This would result in a total monthly premium in that year of $48 per month, or $576 per year. These flat-rate premium increases, which would apply to all retirees enrolled in Part B, regardless of income, would be in addition to the income tax increases envisioned by Congress.

ne Senate BM

The Benefits: In the Senate, legislation (S. 1127) sponsored by Lloyd Bentsen, the Texas Democrat, has also been approved by committee and awaits a floor vote. The bill would provide for benefits similar to those contained in the House legislation, except that there would be no new coverage for outpatient drugs and a single cap of $1,700 per year on combined Part A and Part B out-of-pocket expenses, indexed to general inflation. ne Cost to the Elderly- To finance this new spending, the Senate bill would impose an income tax surcharge on the elderly enrolled in Part B (that is, a tax on tax) of 8 percent of their income tax liability above $150 per year for single = 9 16 percent for married couples. The resulting tax surcharge would be to an annual cap of $800 for a single person, or $1,600 for an elderly couple, increasing by 1992 to $1,000 for a single person and $2,000 for a couple. But these taxes and the cap would continue to increase each year to cover the in the new Medicare expenditures. The Senate bill would also impose a flat 4 per month increase in the regular Medicare Part B premium, with further increases over time to keep pace with the added expenses under the bill.

THE CATASTROPERC TAX ENM ON AAdMCAS EILDERLY

Under last year's tax reform legislation, Americans below age 65 will soon face a simplified system with much lower marginal rates. Indeed, the whole point of the 1986 tax reform was to reduce marginal tax rates as much as possible. But the proposed catastrophic health legislation would increase marginal tax rates for the elderly above the rates for other Americans. Under the House bill, elderly ,,.

Americans could not look forward to the new 15 percent marginal tax rate applying to most citizens--they would face a 22 percent effective rate until the cap on the new health tax was reached. Under the Senate bill, the 15 percent iarginal tax rate would turn out to be 17.4 percent for married elderly couples; the 28 percent rate for other Americans would be 32 .5 percent for the elderly. For single elderly Americans, the 15 percent rate would be increased to 16.2 percent under the Senate bill, and the 28 percent rate would rise to 30.2 percent. Moreover, marginal tax rates for the elderly would continue to increase each year indefinitely under the legislation, while non-elderly Americans will enjoy constant, indexed tax brackets. The reason: Medicare expenses will likely grow faster than national income indefinitely into the future and the new taxes on the elderly are to be raised to keep pace with these expenses. The Treasury Department estimates that under the House bill an American with income subject to the 15 percent marginal tax rate actually would face, by 1992, a 25 percent rate if he or she is retired.

The result under either bill would be a harsh, discriminatory, added tax burden on the elderly. Millions of elderly Americans would pay hundreds or thousands of dollars in increased income taxes each year. Eventually, the additional income tax burden is projected at as much as $8,000 per year for an elderly couple, in constant 1988 dollars, besides the substantial increases in regular Medicare premiums. The total income tax hike shouldered by the elderly would amount initially to $5 billion per year, rising to a cumulative total of $35 billion over the first five full years of the program. The Treasury Department estimates that, by 2005, the total added income tax burden on the elderly would amount to more than $40 billion per year, or $20 billion per year in constant 1988 dollars.

Extra Taxes on Widows and the A&ddle Clan

It has long been a principle of U.S. tax policy to impose a lower income tax burden on elderly Americans than on the rest of the population. The added tax burden under the catastrophic health legislation would dramatically reverse longstanding policy. Indeed, the elderly would bear a higher income tax burden than other Americans with the same income (see Figure 5). In fact, the entire tax reduction for individuals in the tax reform bill would be taken away from millions of elderly taxpayers under the pending catastrophic legislation. "Oderly Widowls Tax." The staggering new tax burden would fall primarily on the middle class elderly. Lawmakers found this necessary because there simply are not enough high income elderly people from which to raise the tax revenues needed for the program. In other words, Congress is targeting the middle class for the same reason bank robber Willie Sutton said he targeted the banks--"because that's where the money is." Moreover, the new tax on the elderly would start accruing on single elderly people at lower income levels than on elderly couples. Since most of the single elderly are widows, a substantial portion of the new tax burden can accurately be designated an "Elderly Widow's Tax."

Some lawmakers have supported the new taxes in the catastrophic health bills on the mistaken notion that such taxes involve means testing Medicare. This is a serious mistake. Medicare would not be means tested at all under either bill. Under means testing, Americans with higher incomes would receive reduced Medicare benefits. But under the catastrophic health bills, all would receive fun Medicare benefits. All that would be means tested is the private incomes of the elderly.

The Explosion in Federal Spending

The catastrophic health legislation would lead to a huge increase in federal spending. In 1990, the first year under the full benefits system of the House bill, including drugs, HHS projects the cost at $12.3 billion. Over the first five full years of the program, the cost would total $85.6 billion. And by 2005, even without drug benefits, the cost would be $70 billion per year, or about $35 billion in constant 1988 dollars. Even the Senate bill would increase spending by $5.2 billion in 1990 and $37.4 billion during 1990-1994. By 2005, the Senate bill is projected to cost $64.4 billion, or about $32 billion in constant 1988 dollars (see Figure 6). Despite the huge new taxes on the elderly proposed in both bills, revenues are not likely to keep pace with this runaway spending. The Treasury Department estimates that, under the House bill, revenues by 2005 would be sufficient to cover only 70 percent of the added costs, leaving a $20 billion deficit in the program in that year alone. Again, this does not even include the drug provisions of the House bill. Medicare is already projected to run short of promised funds to pay benefits before that time. In fact, to pay all current Medicare benefits promised to today's young workers, current Medicare payroll tax rates would have to raised between 2 and 4 times.3 Medicare payroll tax rates alone would then be between 50 percent and 100 percent of today's payroll tax rates for all of Social Security and Medicare.

HOW THE B111S PROVIDE THE NMONG BENEFITS

To compound the folly of this enormous income tax burden, the elderly would receive the wrong benefits under both the House and Senate bills. It is widely agreed that the real catastrophic health care problem for the elderly is long-term care in nursing homes. Such care is very expensive, usually between $1,500 and $3,000 per month, and can soon deplete a patient's entire life savings. Relatives, Fharity, or Medicaid then must take up the burden. Very few of the elderly have insurance against these expenses, although the insurance industry recently has begun to market such coverage. Yet neither of the proposed bills offers any coverage for such long-term care expenses, nor do the bills do anything to encourage the development or purchase of private long-term care insurance. Typically, elderly Americans are supporting the legislation under the delusion that it win protect them against the financial ravages of long-term illnesses, such as Alzheimer's Disease.

Elderly Already Covered. The elderly, in fact, already have the main benefits offered by both the House and Senate bills--catastropb1c coverage for acute care in hospitals. About three-fourths of the elderly have such protection through private sector "Medigap" plans. This includes 72 percent of the elderly who either directly purchase such insurance coverage or have it as part of pension benefits provided by their former employers.4 About 3 percent of the elderly have similar coverage through pre-paid Health Maintenance Organizations (HMOs) under a new government initiative which allows retirees to sign up with an HMO for their Medicare coverage in return for supplemental benefits from the HMO. Medicaid pays for significant medical costs for an additional 10 percent of the elderly.

Millions of these elderly Americans receive this private acute catastrophic care protection without additional charge. Yet they would have to pay hundreds or even thousand of dollars in increased taxes for such coverage under the House and Senate bills. For example, close to one million retirees receive the benefits without charge throu*h the HMO program, where the cost savings resulting from HMOs are used to provide the supplemental benefits. At least another 4 to 5 million retirees receive such coverage from their former employers under pension obligations. The proposed legislation would simply relieve former employers of this responsibility and shift the cost to the elderly themselves in the form of increased taxes. Not surprisingly, several large employers are actively lobbying Congress to pass the proposed catastrophic health bills for precisely this reason. Moreover, most health related expenses for the elderly currently not met by Medicare or most private insurance would still remain uncovered. In addition to the cost of home care, the remaining gap would include doctors' charges above the fee limits for which Medicare reimbursement (many, if not most, doctors charge more than such limits), dental care, hearing aids, eyeglasses, walking aids, and similar items. Tlese uncovered expenses amount to around 40 percent of an medical costs for the elderly. So the proposed legislation would not, in fact, provide a cap on annual medical expenses for the elderly, as many of the elderly have been led to believe.

THE POTINTUL DRUG COS]r EXPLOSION

The House bill, but not the Senate bill, covers one major health cost which is not already covered--outpatient prescription drugs. This insurance coverage is readily available in the private sector, but most of the elderly choose not to buy it--only about 40 percent of the elderly have some private coverage. The main reason for this is that such outpatient drugs do not _generally involve catastrophic costs. Yet the House wishes to add this to the tax-financed package.

Including such drugs in the House bill is likely to stimulate increased utilization of drugs by Medicare beneficiaries. With the government committed to pick up the tab, both doctors and patients would have no concern for costs, and likely would expand substantially the use of expensive and non-essential drugs. But ultimately the elderly would have to pay for this through increased taxes and Medicare premiums all focused on them. This provision in the House bill could double the price tag. How the Elderly May Foot Pkrt of the AIDS Bill

One real, but seemingly unnoticed danger is that this increased Medicare drug coverage might lead the elderly to pay for most of the highly expensive drug therapy and hospitalization costs of thousands of victims of Acquired Immune Deficiency Syndrome (AIDS). The reason: Americans who contract AIDS and are unable to work qualify for Social Security disability benefits. After two years of receiving such benefits, the AIDS patient also qualifies for Medicare and thus would be covered under the House bill for AIDS drug therapy and for hospital costs. But the disabled and unemployed AIDS patient, who is almost always under 65, would pay little or no extra income taxes for the new catastrophic coverage. This means that the elderly would be paying for the hospitalization and drug needs of some AIDS victims. Of course, most, but not all, AIDS patients currently die before completing the two-year eligibility requirement for Medicare benefits. But that may change with medical advances. In any case, legislation has already been introduced in Congress to eliminate the two-year waiting period, and a simple adminstrative change in the disability requirements could scrap the waiting period even without legislation.

CONCLUSION

The Reagan Adminstration began this catastrophic health care fiasco with great fanfare last year with its proposal for what seemed a modest expansion of Medicare, to be financed by a premium increase of just $4.92 per month. Not only did the Congressional Budget Office find that the Administration underestimated the cost of its proposal, but Congress eagerly began to add new benefits to the plan. It has done so to such a degree that the proposed legislation would involve the largest expansion of Medicare since it was first adopted over 20 years a*o. These political and fiscal dynamics were predicted by some at the time but unwisely ignored by Ronald Reagan.6 Now the Administration is even considering a veto of legislation it first proposed. Other Steps Needed. Instead of continuing further down the slippery slope of Medicare expansion, responsible lawmakers should consider providing catastrophic coverage in a fundamentally different way from that championed by congressional leaders. Numerous propo als are available to broaden coverage for long-term care and catastrophic acute care in the private sector.7 Moreover, steps could be taken to alter the rules governing Medigap insurance and to create insurance and savings plans to meet catastrophic CoStS.8 By contrast, the proposed legislation would impose a massive, discriminatory, income tax increase on elderly Americans, eliminating for them the advantages of last yeaes tax reform bill--all to finance the wrong benefits under Medicare. Elderly Americans need better protection against catastrophic health care costs. This legislation does not provide it.

Peter I Ferrara a Washington attorney, formerly a member of the White House Office of Policy Development

and

Edmund F. Haislmaier Schultz Fellow in Health Policy

The electoral tsunami of 1994 was due in no small part to public support for term limits, so the new ma- jority in Congress has a special obligation to deliver on this issue. Indeed, ten of the 12 freshman senators already have announced their support for term limits. As public support continues to grow, long-term in- cumbents opposed to term limitsespecially those from states that already place term limits on their state and local officialsmust explain why they continue to ignore the public will.

TEN LEADING MISCONCEPTIONS ABOUT TERm UmITS

0 Claim: Term limits are an untested innovation.

Fact: Along with the President, 37 governors are subject to term limits. Term limits were con- tained in America's first governing document, the Articles of Confederation of 178 1, but were not writ- ten into the Constitution, primarily because its authors saw them as "entering into too much detail" for a short document.

0 Claim: The election of scores of new Senators and Representatives in 1994 disproves the need for term limits.

Fact: 314 of the 348 incumbent House members who sought re-election wona re-election rate of 90 percent. Fully 92 percent of incumbent Senators-24 of 26 candidates-won re-election.

40 Claim: Campaign finance reform will render term limits obsolete.

Fact: Senator Fred Thompson (R-TN) has called term limits "the ultimate campaign finance re- form vehicle." Term limits create open seats, which lead to contested races. These races are more com- petitive because they are less costly: Challengers do not have to compensate for the fundraising advan- tage held by incumbents, who nearly always win.

0 Claim: Term limits will deprive the nation of talented legislators.

Fact: Self-governance is the basic supposition of democracy. It is sheer arrogance to maintain that only one person in a half-million is qualified to be in Congress. Furthermore, while term-limited Sena- tors and Representatives could serve in different capacities, other talented individuals would be given opportunity for advancement.

0 Claim: Term limits are undemocratic because they restrict voter choice.

Fact: Incumbents enjoy electoral advantages franking, staff, and travel allowances that present huge barriers to entry by challengers. Moreover, experience at the state level suggests that term lim- its actually increase voter choice. In California, for instance, the imposition of state-level term limits in 1990 led to an increase of over 25 percent in campaign filings for the Senate and a similar increase of over 50 percent in filings for the Assembly by 1992. During the past half-century, gubernatorial races have6been more competitive in term-limited states-even in years when governors can run for re-elec- tion. (D Claim: The limited-government agenda of the 104th Congress means that term limits are no longer needed to fight pork-barrel politics.

Fact: The longer individuals serve in Congress, the greater their propensity to support new spending initiatives. 7The frequent rotation imposed by term limits, on the other hand, would help to institutionalize the 104th Congress's bias against big spending.

0 Claim: Conservatives should avoid amending the Constitution at all costs.

Fact: As George Will, a former opponent of term limits, argues, term limits offer a necessary constitutional corrective to the profound extraconstitutional metamorphosis of the federal gov- ernment. The Founders envisioned a citizen legislature as the backbone of limited government; as the interventionist state arose, however, politicians began to view public office as a career.8 Term limits would work to restore the Founders' intent by diminishing the tendency of Members of Congress to ex- ploit their legally acquired powers to remain in office.

0 Claim: As Senators find their terms limited, the Senate's capacity for deliberation and inde- pendent judgment likewise will be restricted.

Fact: Term limits enhance the capacity for independence by discouraging excessive concentration on fund-raising, re-election, and catering to special interests.

4) Claim: If term limits are such a good idea, they should be imposed retroactively.

Fact: Rather than openly oppose term limits, opponents have pursued a shrewd strategy of call- ing for retroactive application. This argument is a red herring. Term limits represent principle, not retribution, and the public has rejected retribution. Only one retroactive congressional term limits measure has been offered to the voters (in Washington State in 199 1), and it was rejected. It is not surprising that opponents of term limits are the only ones pushing for retroactive application.

Claim: Under term limits, unelected individuals will run Congress.

Fact: This argument assumes that the departure of senior incumbents will create a vacuum in which more and more decisions are made by lobbyists and staff. Lobbyists thrive because they cultivate relationships with long-term incumbents; rapid turnover would greatly diminish the value of such contacts. As for staff, anyone who has seen a congressional office knows that Congressmen give assignments rather than take them. The specter of career staff manipulating freshman Members has lit- tle support in reality. In a non-term-limited Congress, staff employees work on average between five and six years.9 Under term limits, new Members would likely replace aides to former Congressmen with employees of their own choosing.

THE SENATE VOTE AND THE THREAT OF A CONSTITUTIONAL CONVENTION

One of the few reforms devised and implemented by people who live beyond the Beltway, term lirruits are a tribute to public involvement in politics. Yet, despite powerful grassroots support, term-limit laws in 23 states were overturned in May 1995 by the U.S. Supreme Court-after the U.S. House of Repre- sentatives had failed to muster the two-thirds majority needed to ratify a federal constitutional amendment. Frustrated by the Court's ruling and skeptical of Congress's desire to pass a constitutional amendment, some activists are pursuing a radical approach: calling for two-thirds of America's 50 state legislatures to approve an unprecedented constitutional convention to impose term limits. State legislatures in North Da- kota and Utah already have called for such a convention. This year, I I states will offer ballot measures to instruct state legislators to vote for a constitutional convention on term limits. Activists hope to garner the support of 34 state legislatures by the year 1999.

CONCLUSION

Term limits will remain a potent issue in 1996. President Clinton has decided to ignore the continued groundswell by opposing term limits. By contrast, Majority Leader Robert Dole (R-KS) deserves credit for assuring that they will be considered by the U.S. Senate. Whether members of the Senate will continue to ignore public opinion-thereby fueling the drive for a term limits constitutional convention-remains to be seen.

Kenneth R. Weinstein Director, Government Reform Project