Federal expenditures under Medicare and Medicaid have been rising rapidly. The Medicare Trust Fund, which collects payroll taxes to pay for Medicare Part A, is expected to be bankrupt in the relatively near future. To forestall bankruptcy of the trust fund, the government will have to increase the Medicare portion of the Social Security tax, which is already 2.9 percent on all earned income; pay physicians and hospitals less; and/or reduce Medicare benefits to future and/or current aged.
Because it is politically difficult to reduce benefits to current aged, previous impending bankruptcies of the trust fund were resolved by increasing both the Medicare tax and the wage base to which it applied and by paying hospitals and physicians less. Both of these choices are becoming more difficult. Although the Medicare payroll tax is now a proportional tax on all earned income, increasing it further raises its visibility and opposition. To continue reducing Medicare payments for physicians and hospitals will result in fewer services being provided to the aged and/or decreased access to health care. Thus, the government must explore other approaches for reducing the rise in Medicare Part A payments.
Similarly, Medicaid and Medicare Part B (which pays for nonhospital services) and Part C (the newly enacted prescription drug benefit) contribute to the federal deficit. These programs are subsidized from general tax revenues. Controlling the federal deficit is a goal that has a large amount of political support. If expenditures under these programs continue their rapid rise, other politically popular programs will have to be sharply reduced, or taxes increased, if the deficit is not to be increased further. Increasing taxes and/or reducing benefits under Medicare Parts B and C would be politically unpopular.
The states have also seen their expenditures under Medicaid rise rapidly. Because the states' portion of Medicaid is funded from general tax revenues, and states, unlike the federal government, are required to balance their budgets each year, rising Medicaid expenditures leave the states with few options. States could reduce expenditures on other politically popular programs, such as prisons and education; taxes could be increased; Medicaid eligibility could be limited; or payments to providers, hospitals, physicians, and nursing homes could be reduced. To minimize their loss of political support, legislators have previously chosen to limit Medicaid eligibility and reduce provider payments.
Thus, both the federal and state governments have developed a concentrated interest in reducing the rise in Medicare and Medicaid expenditures. Legislators at both the federal and state level are likely to oppose health care reform proposals that place an even greater financial commitment on the federal and state governments. Instead, such legislators view health reform as a means of reducing and/or shifting governments' health expenditures.
As health insurance premiums have rapidly increased over time, the cost of health care to employers and unions has changed from a diffuse to a concentrated cost. As such, both have attempted to reduce these costs through legislative action.
The 1993 requirement by the Financial Accounting Standards Board required employers to accrue the costs of providing retiree medical benefits over the working careers of their employees, in the same way corporations account for retirement plans. Companies had to list such benefits on their balance sheet and annually expense their (current and future) retiree medical obligations. This ruling (FASB 106) caused many large firms that provide retiree medical benefits, particularly those located in the Midwest and Northeast, to reduce their net worth and earnings per share. GM, which provides health insurance for 1.1 million active and retired workers and their families in the United States, has unfunded retiree medical liabilities of $77 billion. Any reduction in the rate of increase in medical expenditures reduces these company's retiree medical liabilities.
Many large unions, such as the UAW, have very generous medical benefits. (UAW members pay, on average, only 7 percent of their health care costs compared to salaried employees at GM, who pay 27 percent of their costs.) As the cost of medical care has risen, these unions have had to accept smaller wage increases to maintain their comprehensive medical benefits. GM will spend $5.6 billion in 2005 (up $800 million from 2003) on medical expenses for its employees, retirees, and dependents. When calculated per employee, GM spends $14,000 annually on health care, which would otherwise be used to increase employee wages if these costs were to be shifted to the taxpayer. The unions' legislative objective has been to maintain benefits without having to pay the required cost.
To achieve the employers' goal of reducing their unfunded retirees' medical liabilities, and the union's goal of reducing the employees' cost of rising medical costs, these costs have to be shifted to others. Automobile firms and their unions favor a government financing mechanism that requires union members to pay less than their full costs by shifting part of the cost to taxpayers. For example, they have favored an employer mandate that limits the percent of payroll that goes for medical care (such as the 12 percent proposed in the Clinton health reform plan), as that amount for auto workers greatly exceed the national average (it is close to 18 percent). Large employers and unions hope to achieve through national health insurance a reduction in the rise of (and their obligation for) their medical expenditures. In this regard, it should come as no surprise if the auto companies and their unions were to support a regulatory system that limits overall expenditure and/or premium increases, similar in its effects to a single-payer system, such as the Canadian health care system.
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