The working nonaged paid for Medicare and Medicaid in two ways: first, they paid higher payroll taxes to finance Medicare Part A and higher income taxes to pay for Medicare Part B, and second, they paid higher prices for medical services. Medicare stimulated demand for medical services by the aged, which led physicians and hospitals to increase their prices. These increased prices and expenditures were also passed on to the private sector. Consequently, employees paid higher premiums for their own health insurance. These increased prices for medical services led to a decrease in demand for health services by the nonaged. The uninsured as well as those with the least comprehensive insurance policies were also those workers with the lowest-paying jobs.
Health insurance premiums for medical services in the private sector increased as medical prices and utilization increased. Although the burden of these higher premiums affected everyone, their impact was proportionately greater on those with low incomes. Higher-income employees and unions with higher-income members did not bear as large a burden. Employer-purchased health insurance is considered a nontaxable fringe benefit to employees. Had the employee received the fringe benefit in cash, for those higher-income employees in higher marginal tax brackets, a greater portion of it would have been taxed away. As the employer paid increased premiums for health insurance to keep up with rising medical health care prices, this was not as great a loss to higher-income employees receiving tax-free benefits. Thus, higher-income employees did not bear the full cost of increased medical prices.
The method used to directly finance Medicare also placed a greater burden on low-income employees. When Medicare is viewed as a redistributive program based on economic interests rather than charity, the method insisted on for financing makes more sense. Medicare was financed by a separate payroll tax up to a maximum income limit. Both the employees' and employers' Social Security taxes were increased. However, as noted earlier, regardless of whether the tax is placed on the employee or on the employer, the effect is the same. The tax is borne by the employee.
The advantage of placing part of the tax on the employer is to disguise its cost to the employee; it is not as visible. Employees are unaware that they are also bearing the employer portion of the tax. The working-age population bears the cost of the Medicare program as it does the Social Security system. The use of a payroll tax, such as used to finance Medicare Part A, is a clever method of financing a program for which the motivation is based on the desire for an intergenerational transfer of wealth rather than charity for the poor. The original group of aged that became eligible for Medicare had never contributed to the cost of the program. Subsequent aged have, on average, incurred higher Medicare Part A expenses than they contributed to the Medicare payroll tax when they were employed.
The benefit-to-cost ratio is very different for future retirees compared to current or near-aged. Representing the tax as an entitlement for future retirees tends to blur the burden of this method of financing. Future retirees are unlikely to receive the same benefits as current or past retirees as the costs of medical care increase rapidly and the number of employees per aged decline. Rather than just increase the tax on the working population, the burden would become too great, and benefits to the aged will have to be reduced. An increase in the Social Security tax to finance Medicare not only has this intergenerational effect but also places the heaviest burden on lowincome employees. A fixed dollar amount (the Social Security tax) on a lower income represents a greater percentage of that income than if the tax were proportional to income. Hence Social Security is a regressive tax; lower-income employees pay a greater portion of their income than do higher-income employees. Currently, the Medicare payroll tax has been increased to become a fixed portion of all earned income. Although this has increased the progressivity of the tax, it is still regressive because unearned income is not taxed.
Another adverse effect of financing Medicare through an increase in Social Security taxes is that it raises the cost of labor - low-wage labor in particular - to employers. Employers cannot shift the entire payroll tax back to those employees whose wages are at or near the minimum wage. The resultant effect is a decrease in the quantity of low-wage labor demanded. Thus, the method selected for financing Medicare placed a proportionately greater burden on the lowest-income employees; they pay a greater percentage of their income to finance the program, they have to pay increased prices for medical care, and their health insurance coverage is more limited. These consequences are inconsistent with any program whose purpose could be considered charitable.
Paradoxically, the one group also adversely affected by Medicare or any universal redistributive program is the poor. There are two reasons for this. First, the explosion in medical and hospital prices, and consequently in health insurance premiums, resulting from the Medicare program has made it more difficult for the poor and near-poor, who are not covered by Medicaid, to receive health care. At times these groups became medically indigent and qualified for Medicaid. However, not all of these groups sought Medicaid assistance or were eligible. Because Medicaid is administered by each state, there are wide variations in eligibility requirements; in some states, people may lose all of their eligibility if their income rises slightly above the cutoff level. Eligibility is not graduated according to income levels. In 2003, 57.9 percent of those below the federal poverty level were not covered by Medicaid because of differences in eligibility among states.
Perhaps the major impact of Medicare on the medically indigent is the lost opportunity of what might have been done. In 2003 federal and state expenditures under Medicare and Medicaid exceeded $550 billion a year. Both the aged and many of the poor benefited from the hundreds of billions of dollars spent on Medicare and Medicaid. However, a significant portion of government expenditures under Medicare are used by those in the middle- and high-income groups. A more limited program that did not provide such large subsidies to middle- and high-income aged could have been redirected toward the poor. A federal program that emphasized the poor would have cost less, would have led to smaller increases in demand, and would not have caused rapid price increases.
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Note: This article was sent to us by: Gene Parter at 03302010
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