I like to oversimplify the Medicare debate into three questions:

  1. Do you think we need to slow the growth of Medicare spending?
  2. If yes, what should we do with the savings?
  3. How should we change Medicare to slow the growth of its spending?

I will address the first two questions in this post by creating a 2X2 box:

We should use Medicare savings to offset new entitlement spending We should use Medicare savings to reduce future deficits
We must slow the growth of Medicare spending Obama
Democratic Congress
Rep. Paul Ryan
Sen. Judd Gregg
Some Republicans, especially younger ones
We should not slow the growth of Medicare spending AARP
Hospitals, doctors, nursing homes, drug companies, health insurers
Other (scared) Republicans

Yes, AARP’s position is nonsensical. I’ll come back to that.

Medicare spending this year will be $516 billion. Seniors will pay about $78 B in premiums, and taxpayers will pay the other $444 B, making it the second largest item in the federal budget after Social Security (at about $700 B). The taxpayer cost of Medicare is projected to grow about 6.6% per year over the next decade, while the economy is projected to grow 4.5% per year over the same time period. If the projections are right, our economy will grow 54% (in nominal dollars) and Medicare will grow 89%. The cost to taxpayers will grow from 3% of GDP to 3.5% of GDP. (All data is from CBO.)

If Medicare spending growth is not slowed, then some combination of three bad things will happen, and sooner than you might think:

  • budget deficits will grow to unsustainable levels, forcing a U.S. debt and currency crisis;
  • taxes will have to be increased to historically high levels, and then they will have to be raised again, and again, and again;
  • other spending priorities within the federal budget will be squeezed. Federal spending for education and defense, cancer research and agriculture, border security and clean energy research will all suffer.

The President and Congressional Democrats

For most of my time in Washington, Congressional Democrats were in the bottom left green box. They opposed any attempts to slow the growth of Medicare spending, and played the politics of the “senior card” to try to scare off Republicans. Before 2009 the defining feature of Beltway Democrats on Medicare was their opposition to “cuts.” This provided them with a potent political weapon.

They were supported by both the seniors lobby (most notably AARP) and all classes of health providers. This alliance is why Medicare is so much harder to reform than Social Security. Elected officials may be willing to challenge AARP if the alternative is raising taxes, but few elected officials are willing to brave the additional onslaught from their local hospitals, doctors, and nursing homes.

President Obama moved Congressional Democrats and even AARP from the bottom left green box to the top left blue box. The President argued that Medicare spending should be slowed and proposed policy changes to do so. He combined these savings proposals with a new federal entitlement program for the uninsured.

This was a radical idea:

  • Democrats were now proposing to slow Medicare spending growth.
  • When combined with the new entitlement, the politics play out as a transfer from seniors to the uninsured. Seniors vote far more consistently than do uninsured people.

The Administration and its Congressional allies (most notably Senate Finance Committee Chairman Baucus) brokered explicit deals with the health sector to move them to the top left green box. They (legitimately) argued that health providers would benefit from the increased health care usage resulting from millions more Americans having taxpayer-financed prepaid health insurance. This explains the back room deals with the formerly-evil health plans and the formerly-evil drug companies. Baucus’ staff were explicit with health industry lobbyists: “Your industry will make $X B more from increased demand. You therefore need to support nearly $X B in Medicare savings in our bill.”

Unfortunately, our best evidence that these health care bills would not slow national health care spending is that these health sector interest groups made this rational decision. Had these bills actually achieved the President’s stated goal of slowing national health care spending, the industry groups would almost certainly have opposed them.

AARP’s support for the health care bills is harder to understand. Their position is best described as “We oppose ‘cutting’ Medicare spending, but if you do it, then spend it on a new health entitlement for the uninsured.” I will guess that their support for the President’s plan and Democratic bills was a combination of three factors.

  1. AARP’s leadership leans heavily leftward and Democratic. In this respect they were placing their own ideologies above the interests of their members.
  2. Some of the uninsured are near retirement. They would benefit from the new entitlement. (AARP accepts members as young as 50.)
  3. AARP’s leadership probably made a strategic decision to support the new President who can help and/or hurt them on any number of fronts.

Little discussed in the past year of debate on health care reform is that Beltway Democrats are now for slowing the growth of Medicare spending, as long as those savings are “used” to offset a new health care entitlement for the uninsured.

Congressional Republicans

In 1995 the Republicans proposed to slow the growth of Medicare spending as part of the Balanced Budget Act. That bill was paired with a separate tax cut bill. Congressional Republicans argued they were slowing the unsustainable growth of Medicare spending as part of a shared sacrifice to balance the budget. President Clinton and Congressional Democrats argued Republicans were cutting Medicare to pay for tax cuts. Republicans argued they were in the top right red box above. Democrats would have argued that Republicans were in a different box labeled “Use the Medicare savings for tax cuts.” President Clinton vetoed both 1995 bills. (At the time I worked on Medicare for Senate Budget Committee Chairman Pete Domenici.)

In 1997 President Clinton negotiated a balanced budget (and tax cutting) deal with Congressional Republicans which significantly slowed the growth of Medicare and Medicaid spending. The structure of the 1997 law was parallel to that in 1995, but the magnitudes were smaller and President Clinton got some of his spending priorities addressed as well. That deal could have been attacked in the same way as the 1995 deal, but instead everyone agreed to frame the Medicare savings as contributing to deficit reduction and a balanced budget, putting Congressional Republicans, Democrats, and President Clinton squarely in the top right red box above. (At the time I worked on budget and health issues for Senate Majority Leader Trent Lott.)

Today Congressional Republicans make two arguments:

  1. We need to slow the growth of Medicare spending as part of a solution to long-term entitlement spending and deficit problems.
  2. We should not use Medicare savings to finance a new entitlement.

The key to understanding Congressional Republicans’ behavior over the past year is that all of them have made argument #2, while only a few of them bravely make argument #1 as well.

I have argued for both. I wrote a few months ago that I believe our long-term deficit and entitlement spending problems are more important than the lack of health insurance today. While I support slowing the growth of Medicare spending, I oppose doing so if we’re just going to turn around and create a new entitlement program. We would then lose a key opportunity to address what I believe is America’s most important economic policy problem.

Last year Congressional Republicans discovered that policy weaknesses in ObamaCare created political vulnerabilities. One of their criticisms was #2 above, that the pending legislation would slow the growth of Medicare spending but also create a new entitlement program.

Most Congressional Republicans were careful in their language. They said they opposed “cutting Medicare to pay for a new entitlement.” Even in being responsible, they were using the intentionally inflammatory word “cut.” They were turning the seniors card back against Democrats. This was savvy politics but damaging to efforts to slow the growth of Medicare spending for deficit reduction. As a policy matter it helped kill a bill that was both fiscally irresponsible and terrible health policy, but at the cost of validating the word “cut” and the senior scare tactic.

Other Congressional Republicans short-handed their criticism to “I oppose this bill, which cuts Medicare by $500 billion.” This is much harder to justify, unless you go with an ends-justify-the-means argument.

It’s easy for me to sit on the outside, after a terrible health care bill has died, and say “I wish they hadn’t used attack X to kill the bill because of its long-term damage to other policy goals.” We cannot know if that attack was dispositive, and those in office have the responsibility for making those judgment calls. At the same time, it’s amazing that it was effective in contributing to the bill’s death, given that AARP and the entire health sector were essentially paid for their silence.

To see the Medicare battle playing out today, continue reading with Medicare: Krugman v. Gingrich, and Krugman v. Ryan.

(photo credit: WILL I GET A REFUND FROM MEDICARE? by roberthuffstutter)