Posted 1:18 PM by Robert

Medicare Structure

President Bush has just signed a bill adding prescription drug benefits with an estimated 10-year cost of $400 Billion and other features to Medicare.

Many conservatives are lamenting this huge expansion of a government entitlement, and both conservatives and liberals are concerned at the effect on the federal budget and the "solvency" of Medicare.

Suppose one assumes that even before the new bill, the "solvency" of Medicare is already impossible to maintain without benefit cuts or tax rises (maybe even with some of both) and that Medicare's "solvency" will be adversely and substantially affected by the new bill. Could one still make an good argument in the bill's favor?

I think the answer is "yes." The reason is "structure." In fact, the new bill's threat to the "solvency" of Medicare may be exactly what may justify the new drug benefit.

One can attempt to justify Medicare on either economic principles (the program increases overall utility) or political principles (some such program is inevitable in any democracy, since the relevant interest groups will eventually come together and make it happen - even if the result decreases overall utility). It is hard to see how excluding prescription drugs across the board from plan coverage makes sense in either an economic or political analysis.

Consider the economic justification. Assume that Medicare has a maximum sustainable size (whatever that means) and that the program is already structured to go well beyond that size (in other words, its already heading towards "solvency"). If Medicare (or some program like it) can increase overall utility, then including some prescription drugs under the plan probably makes sense because some prescription drugs give a huge amount of value to the beneficiaries compared to services and products already covered. Adding a prescription drug benefit means defunding those lesser-value services and products once the "solvency" wall is actually hit, in favor of covered prescription drugs - then adding the prescription benefit should increase overall utility compared to what Medicare would have yielded in overall utility had the benefits not been added. Yes, the political pain of reducing overall Medicare from a higher

Consider the political justification. If adding the prescription drug benefit increases the aggregate utility of Medicare, then that alone is a big boost to justifying the new bill politically. But even if the economic justification for Medicare and/or the new bill is wholly incorrect, it still seems unlikely that a full exclusion of prescription drugs is the most defensible line politically. Wouldn't it be better as a matter of pure politics to define the structure of Medicare to include some prescription drug coverage for some people and then try to hold the line on the aggregate size of the restructured program?