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How Seniors and Taxpayers Got Enron-ed

July 1, 2002

The following is a book review by John Hood, President, John Locke Foundation.
(Sue A. Blevins,
Medicare's Midlife Crisis, Washington, D.C.: The Cato Institute, 2001, 136 pages.)

Okay, so this multi-billion-dollar enterprise is on the verge of going belly-up. Despite recent assurances from the executives in charge that its assets exceeded its liabilities--indeed, the debate has been about what to do with the surplus in the coming years--it now comes out that these rosy scenarios were based on faulty projections and fraudulent accounting. In fact, it comes to light that the enterprise has had a long history of manufacturing budget numbers and purposefully misleading the public. But through political manipulation and careful marketing, it headed off criticism and corrective action until its status as a house of cards was too obvious to obscure.

This financial miscreant is the Medicare program, founded in 1965. And as described in a new book by Sue Blevins, [founder and president] of the Institute for Health Freedom, Medicare got its start with generous use of hype and fraud, and never got out of the prevarication habit.

Early Attempts to Socialize U.S. Health Care

Serious leftists had sought a government-run health care system in the United States since the turn of the century, taking their lead from Bismarck's Germany and the other nascent welfare states of Europe. Early attempts, just after the first and second world wars, were rebuffed by Congress and the public as contrary to American principles of freedom and self-reliance. So in the 1950s, the activists changed their strategy, dumping honest socialism for dishonest incrementalism. While in other countries, the welfare state had gotten its start in the class warfare of employer vs. worker, America had resisted such simplistic divisions. So big-government advocates decided to start with beneficiary populations more likely to attract public sympathy: the elderly and disabled.

The first fruits of the new political strategy came in 1957 and 1960.

Incremental Strategy and Kerr-Mills Bill

In the first case, Congress and President Eisenhower added disability benefits to the Social Security system. In 1960, the same alliance created Medical Assistance, also known as the Kerr-Mills program, to provide basic health care services to the elderly poor using a joint federal-state model that later became the Medicaid program. In both cases, advocates skillfully built political constituencies made up of families with elderly or disabled dependents, state governments struggling with revenue shortfalls, and organized medicine--the various, powerful state associations of doctors and hospitals--to overcome opposition from congressmen espousing traditional concerns for the size of government and cost to taxpayers.

Still, the political movement for national health care wasn't satisfied with Kerr-Mills. As a means-tested program, it would never grow to encompass the entire population and would likely remain relatively limited in scope and expense. Moreover, it gave far too much power to state governments, which political liberals tended to distrust.

King-Anderson Bill

So, despite passage of the [Kerr-Mills] program in 1960, advocates immediately set to work on a more ambitious goal, seizing on an alternative proposed during the 1960 debate over Kerr-Mills by Sen. John F. Kennedy of Massachusetts, who later in the year would narrowly defeat Richard Nixon to become president.

His [Kennedy's] bill, to create national and mandatory health insurance for all seniors, paid for by payroll taxes, was renamed the King-Anderson bill after its two main sponsors. Unlike Kerr-Mills, it was strenuously opposed by organized medicine and other groups fearful that a federal monopoly would result in federal regulation of virtually all aspects of health care (a fear that ultimately proved to be solidly rooted in reality).

Congressional Republicans offered an alternative plan, "Bettercare," that used general federal revenues to subsidize a voluntary insurance plan for which seniors would pay monthly premiums. Meanwhile, doctors and hospitals decided to offer a counterplan of their own, dubbed "Eldercare," that would expand the Kerr-Mills program and retain a state-run design. It would also employ the services of the Blue Cross and Blue Shield associations, run respectively by the nation's hospitals and physicians, in order to keep commercial insurers at bay.

Blue Cross and Blue Shield Plans Seize Control over Most Medicare Administration

Organized medicine had already used government power, in the form of tax exclusions and regulatory exemptions, to keep the dreaded private insurers from playing a large role in health care, since the latter tended to pay claims in cash directly to patients, giving them power as consumers to shop around for better rates and service. The Blues paid providers instead of patients, thus keeping those pesky market forces from reducing hospital and physician incomes. Ultimately, Eldercare turned into Medicaid, and the Blues did in fact seize control over most Medicare administration.

This period, the legislative run-up to the pivotal 1965 creation of Medicare, is the subject of Blevins' most telling revelations. She provides persuasive evidence, for example, that the administrators of Kerr-Mills in the Kennedy and Johnson administrations sabotaged the implementation of Medical Assistance in many states. Being [strong advocates] of Medicare, they didn't want to see an effective alternative program set up in the states to care for the elderly poor, whom they needed as poster children for Medicare. Furthermore, after the Kennedy assassination, Medicare advocates apparently saw their chance for legislative victory and sought to manufacture bogus projections of how many seniors lacked access to health care and how much the new program would cost.

Misleading the Public with Enron-Like Accounting?

In 1965, actuaries in the Department of Health, Education, and Welfare projected that the hospitalization part of Medicare would cost $9 billion by 1990. The program actually cost $66 billion in 1990. Meanwhile, Medicare Part B, which basically adopted the Bettercare concept advanced by Republicans to subsidize doctor visits, was itself the subject of faulty predictions. The original design called for only 50 percent subsidy by federal taxpayers. But by 1990 the subsidy was 75 percent of cost, tens of billions of dollars higher than the ratio originally anticipated would have yielded.

Were these revenue numbers, which make Enron's bad accounting look comparatively accurate, the result of simple error? Alas, it doesn't look like it. Blevins points to the prescient warnings of Dr. Barkev Sanders, a renowned statistician who had done health and welfare cost estimates for 35 years for the Social Security Administration, the U.S. Public Health Service, and other agencies. During the 1960s, he warned his colleagues and the nation that "the Social Security Administration has been concealing the truth by means of its actuarial estimates" in selling national health insurance. In 1962 he sent the Social Security Administration a 33-page memo detailing numerous problems with its Medicare cost estimates, such as failing to adjust for increasing hospitalization and faulty numbers on eligibility. Seeing no effort to correct the "errors," Sanders told a business magazine in 1964 that "if a sound, realistic health program cannot be accepted by the public on its merits, it should not be imposed on them by the government." Blevins further points out that Sanders was not a conservative opponent of Medicare but was actually an advocate, albeit an honest one.

The fuzzy math and misrepresentation continues. Because Medicare Part B does not earmark payroll taxes for a trust fund to pay providers, unlike Part A, its financial problems have traditionally not been factored into computations about the Medicare "surplus." That has allowed the federal government to shift services from A to B, as the Clinton administration did in the case of home health care, in order to mask the size of Medicare's unfunded liability. In its 2001 budget plan, the Bush administration came clean, noting that projected revenues from payroll taxes and the current share of other federal taxes devoted to Medicare would fall short of projected expenditures through 2011 by a cumulative $645 billion. In other words, there is no Medicare surplus--despite attempts by Democrats to blame Bush for using "it" to fund his tax cuts.

Blevins adequately discusses market-friendly reforms of Medicare, such as giving younger workers the ability to opt out of the program in favor of personal savings accounts or private insurance. I wish she had worked in a discussion of Medicaid reform, which might have prompted her to consider merging the programs and transferring their administration to the states. Nevertheless, Medicare's Midlife Crisis is an excellent, concise, and readable treatment of how shameless politicians, left-wing federal bureaucrats, and brazen special interest groups tricked the American public into becoming "investors" in their giant, and unsustainable, pyramid scheme. Somehow, I doubt the Senate will be holding any hearings on this scandal.

John Hood is president of the John Locke Foundation in Raleigh, NC and publisher of Carolina Journal.