WHY DOES a nation that boasts of (1) being the richest nation on earth, (2) being the most generous people on earth, and (3) having the best health system in the world find it so difficult to protect its elderly citizens from financial destitution through acute or chronic illness, particularly since the United States is also (4) among the least-taxed nations in the industrialized world?
I raise this question because less than two weeks ago, the House of Representatives voted for the largest one-time expansion of health-insurance benefits offered the nation's elderly since the inception of the Medicare program in 1966. Although the bill passed the House by an overwhelming margin, it has its share of critics -- including the president -- and its ultimate fate is by no means clear.
To an immigrant reared in the social ethic of countries that have long shielded their aged completely from catastrophic health bills -- Canada and West Germany -- the flap over this legislation is especially curious, the more so because it would still not approach the level of protection that other western democracies have long provided.
It strikes me that taking a proper view of this measure requires facing up to two facts:
This country has still not met its full obligation to protect the vulnerable among its elderly population.
Providing that protection will require that the elderly who can afford it must pitch in more to cover the costs.
If it became law, the Medicare expansion approved by the House would put a cap on the amount that elderly people might have to pay for hospital and physician services, cover added days of care in skilled nursing facilities, hospices or at home (though most long-term care would still be uncovered),, and cover 80 percent of the cost of prescription drugs beyond a deductible of $500 per year. In a sharp break with past tradition, these added benefits would be financed not by new payroll taxes, but entirely by the aged themselves through an income-related premium levied on some 40 percent or so of the elderly with higher-incomes.
Champions of the aged -- among them Rep. Claude Pepper (D-Fla.) -- applaud the added benefits, but would rather have seen them financed by additional payroll taxes on the young. The commercial insurance industry and its champions see the added benefits as unwanted substitutes for the lucrative private "Medigap" policies the industry now sells to many of the aged. President Reagan has assailed the bill as a reckless extension of his own, much less ambitious catastrophic health insurance proposal.
Part of the president's opposition rests on misgivings over the added premium called for in the bill which would reach $580 a year for elderly people with incomes in excess of $19,000. This, he correctly perceives, amounts to nothing less than that dreadful thing called a "tax". By the president's reckoning, apparently, the collection of a $580 tax from a retired corporate executive is a far more onerous burden than the payment of $2,000 or more per year that many sick, low-income elderly might have to make to their pharmacist, hospital or physicians under the president's less ambitious proposal.
However the expanded benefits are paid for, the need for some extension of Medicare coverage is widely recognized. In 1984, for example, America's aged still financed about one third of their health expenditures with their own money. That degree of cost sharing might not be objectionable on ethical grounds were its incidence not so brutally regressive. Insurance premiums and out-of-pocket expenses claimed an average of 22 percent of the already meager resources of poor elderly persons with an annual per-capita income of $5,000 or less. They amounted to only three percent for those with a per-capita income of $20,000 or more.
Health and Human Services Secretary Otis Bowen reported last November that hundreds of thousands of our elderly Americans still bear annual out-of-pocket expenses in excess of $2,000. That report subsequently moved the president to observe, in his 1987 State of the Union Address, that "for too long, many of our senior citizens have been faced with making an intolerable choice -- a choice between bankruptcy or death." No senior citizen in Canada or West Germany would ever have to make such a choice, and these nations' political leaders would be mortified by an admission such as Reagan's.
How, then, have these relatively poorer nations achieved what appears so far to have eluded the land of Yankee ingenuity?
First, these other nations, wisely or unwisely, tax themselves more heavily than do Americans. In 1984, all national and local taxes (including Social Security contributions) constituted only 29 percent of the United States' Gross Domestic Product. That is the lowest percentage of any industrialized country save Japan's 27.4. In neighboring Canada, the percentage was 33.7. In West Germany, it was 37.7 percent. In France and Holland, it exceeded 45 percent, and in the Scandinavian countries it was higher still.
Second, with its proportionately smaller government revenue, the United States spends a much larger percentage of its GNP on defense than do these other nations. Thus, in 1983 the United States spent 6.6 percent of its GNP on defense, Canada only 2.2 percent, West Germany 3.4, France 4.2 and the United Kingdom 5.4 percent.
Granted, few nations are likely to be as wasteful as the United States in buying military hardware. But it is still true that America's mighty defense umbrella allows her allies to channel added resources to their senior citizens. To the extent that this umbrella is purchased at the expense of America's elderly poor, the latter continue to bear sacrifices not asked of the foreign contemporaries they helped liberate or vanquish some 40 years ago.
Finally, these other nations procure health-care for their aged through universal National Health Insurance (NHI) systems. By concentrating market power in the hands of one or a few large third-party payers, these systems have been able to exert far more effective control over health-care cost than would ever be possible under the loosely structured, pluralistic American health system. Thus, while American national health expenditures now exceed 11 percent of GNP, these nations have been able to limit their expenditures to between 8 and 9.5 percent of GNP.
Perhaps some of these lower costs reflect lower quality health care. But a good part of the cost difference surely reflects the lower prices that can be negotiated with doctors and hospitals under National Health Insurance. Differences in practice costs (including malpractice insurance) cannot account for the fact that for a triple coronary bypass, U.S. physicians charge more than three times as much as physicians in Ontario, Canada and seven times as much for a hip replacement. Much of that difference simply reflects the superior market (and political) power of American physicians.
This country, however, would find it hard to adopt the Canadian or West German strategy for reducing the costs of protecting the poor and aged. Americans are strongly attached to their pluralistic, and therefore very expensive, health-care system. It is also likely that the free world will continue to rely on American defense and America will continue to prefer a very expensive defense system.
Still, most people in this country would probably agree that today's elderly have a compelling moral claim for a dignified, comfortable evening of their lives, a claim that must surely imply that no elderly American should suffer financial hardship over acute or chronic illness. We are talking, after all, about the "Iwo Jima" generation who, in their younger years, successfully saw this country through the great depression, valiantly fought in World War II to free the world from tyranny, and subsequently lavished upon their children, the Baby Boom generation, a material comfort and educational opportunities unmatched in history or elsewhere in the world. What, then, realistically can be done to own up to that claim?
One approach might be simply to raise taxes overall and to broaden Medicare benefits even further within the program's current structure. By raising taxes by another two percentage points of GNP, for example, we could more than double the current Medicare budget, keep within humane limits the percentage of disposable income any aged would have to pay for health care (including longterm care) and still remain one of the least-taxed nations in the industrialized world.
From a macro-economic perspective, that strategy would be eminently feasible. But one must doubt that it would be politically feasible within the next decade or so. After all, in the last few elections the aged themselves have voted just as enthusiastically as have younger voters for candidates committed to cutting taxes, and they are likely to do so in the next few elections as well.
But even if taxes could be raised, we should question whether there is, under current circumstances, a morally compelling case for a further massive transfer from the young to the old. And in looking for ways to extend protection at a reasonable cost, we should also ask whether it is absolutely imperative that the Medicare program continue to avoid, as it has in the past, means testing of any sort.
Although 30 years ago the term "aged" was indeed synonymous with poverty, that imagery is outdated. By the onset of this decade both the average per-capita income among the aged and their average household net worth had begun to surpass that of Baby Boomers in the age groups 25 to 45. In 1985, 11.4 percent of all American families -- and 13.1 percent of families headed by persons between ages 25 and 44 -- had incomes below the poverty level. In that year, only seven percent of families with householders aged 65 or older fell into that category. And while many young families increasingly find themselves priced out of the housing market, the aged now hold real estate valued in excess of $700 billion.
Of course, no one would ever propose to chase the elderly out of their homes in the evening of their lives. But that wealth could still be made liquid through a government-supervised system of reverse mortgages. Under such a program the aged would sell their homes in installments without relinquishing title or possession during their lifetime.
A system of reverse mortgages might fit well into the alternative strategy now embraced by the Congress, namely, to compel at least some noblesse oblige among the aged themselves through income-related premiums. It is means-testing through the back door. In the bill passed by the House, that strategy is applied only to finance the additional benefits provided in the bill. But the graduated premium strategy could be broadened to the entire Medicare program, as has been proposed by several experts.
The idea would be to charge the aged for the total Medicare package a premium progressively linked to their income and wealth. The proceeds would be used to reduce even further the currently burdensome cost-sharing for hospital and physician care (at least for the elderly poor) and to expand the benefit package (again, at least for the elderly poor). Some of the new premiums might also be used to replace general revenues currently devoted to Medicare with the savings redirected to programs for poor, younger Americans. Would such a program necessarily be a default on our debt to the accomplished "Iwo Jima Generation?" I think not.
Yet a third alternative, of course, would be continued diversion of federal funds from programs for low-income children and younger adults toward Medicare. It is an approach a majority of the elderly wittingly or unwittingly have countenanced by supporting with their votes, in 1980 and 1984, a fiscal policy to cut tax rates, increase defense expenditures and reduce domestic spending other than Social Security and Medicare.
The political feasibility of this last alternative has been amply demonstrated. Between 1980 and 1986, for example, when the working poor and their children lost their foodstamps and Medicaid coverage, federal outlays for the Medicare program more than doubled and Social Security payments outpaced GNP by a wide margin.
Unfortunately, continuing this strategy puts a troublesome lien upon the nation's future, and that should give the elderly pause. Since 1973, the lowest income-quintile of American households with children have seen their real income erode by 25 to 30 percent. In 1985, over 20 percent of American children aged 18 or younger lived in families below the poverty line, up significantly from about 16 percent in 1978.
America has never educated adequately those of her children who live in poverty. But a public policy that neglects the education (and health care) of these young ones writes a truly ominous mortgage on future generations. That neglect is not only cruel; it is also grossly inefficient from a purely economic viewpoint. One must wonder whether the proud "Iwo Jima Generation," whose members have served this nation so splendidly in their younger years, really wishes to be party to such a stupid and shabby deal.
Uwe Reinhardt is James Madison professor of political economy at Princeton University.