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Health for Sale


That the US has adopted a more and more constricted view of the uses of government is especially evident in the recent debate over a prescription drug plan for the elderly. After bitter negotiations to reconcile the House and Senate versions of the legislation, a bill was reported on November 17 to Congress for a vote. If it passes, it will be the most expensive addition to federal health care since the 1960s. Even so, at a projected cost of $400 billion over ten years, it is widely considered inadequate. Medicare, the federal health plan for the elderly, now reimburses recipients almost exclusively for drugs administered in hospitals. But the costs of outpatient prescription drugs for the average Medicare beneficiary are reaching punitive levels. Out-of-pocket costs are expected to rise from $644 a year in 2000 to $1,454 in 2006. Even with $400 billion, the new legislation will reimburse only about one third of the beneficiaries’ total out-of-pocket drug costs,1 and the program will not even begin until 2006. The current bill will also make it possible to impose a limit on future increases in Medicare expenditures and create tax-free savings plans for individuals to pay for private services.

In a clear sign of the times, the new federal program will be administered privately. Both the plan originally passed by the House as well as the Senate plan, backed by many Democrats, had the prescription drugs distributed not by government but entirely by private insurance companies or specialized drug distribution firms. Even Senator Edward Kennedy, long the nation’s leading defender of government-run social welfare, agreed to private distribution for the drug plan.

In a different political atmosphere, Kennedy probably would not have taken that position. The government could have administered the distribution of drugs, for example, and reimbursed beneficiaries for their use; it could also have used its buying power to negotiate lower prices for drugs instead of leaving it to the free market. But given the prevailing ideology of the Republicans in control of Congress, Kennedy believes that supporting private distribution of drugs is the only way to get any drug bill for the elderly at all, even if it allocates only half the funds he thinks necessary. “This private-sector delivery system was not the Democrats’ first choice, but it was a reasonable compromise with a Republican Congress and a Republican President,” Kennedy has said. Some of his Democratic colleagues, such as Senators Jay Rockefeller, John Kerry, and John Edwards, have refused to support the plan. And Kennedy has said he will not vote for a bill that contains a limit on future spending.

The intricacies of such legislative battles as the one concerning drugs for the elderly have distracted Americans from recognizing the scale of change that is now being proposed. Over the last twenty-five years, the attitude that government is often more an impediment to economic growth and social justice than a necessity has taken an ever-deeper hold in America. It is fair to say that a battle to determine the future of America’s traditional welfare state is now underway. Always more modest than in Europe, the American “safety net” includes Social Security, unemployment insurance, a minimum wage, Medicare, poverty relief programs like welfare and Medicaid, industry regulations, and at least some support for unionization.

Most of these programs were started during the New Deal and were expanded in succeeding decades. They were painstakingly enacted into law in the face of constant opposition from political opponents and private vested interests. Since Ronald Reagan’s presidency, they have been under effective attack. Reagan narrowed the coverage of unemployment insurance significantly and made benefits taxable. He refused to raise the minimum wage, even when consumer prices were rising rapidly. He cut back welfare programs, eliminated several hundred thousand public service jobs, deregulated industries, and weakened unions.

Even under the Democratic president Bill Clinton, as the economist Robert Pollin points out, total expenditures of the federal government fell from 21.9 percent of the Gross Domestic Product in 1992 to 18.1 percent in 2000.2 Military cutbacks made up a large part of this reduction but there were also substantial cuts, as a percentage of GDP, in transportation, education, and welfare. Clinton was constantly battling a Republican Congress intent on further reductions and eliminating some social programs outright, as well as partially privatizing Social Security and Medicare. But his own preference was for a Third Way that would be less dependent on government to guarantee social welfare. One of his proudest achievements was the dismantling of the old federal welfare program by placing time limits on benefits and imposing work requirements to qualify for them.

Today, the Democratic candidates for president continue to argue over who among them is the most profligate, even as they compete with one another to promote the social programs that will have the most appeal to different groups of voters. Joseph Lieberman, who claims to support the Third Way, criticizes Howard Dean for being naively liberal with government money, while many of the candidates have criticized Dean for supporting reduced Medicare spending in the 1990s. Dean often boasts of his balanced budget in Vermont, and criticizes Congressman Richard Gephardt for promising social benefits like an old-style Democrat. Wesley Clark has proposed the only federal program to create jobs directly, costing some $50 billion, by giving tax incentives to employers.

During his presidency, Clinton himself considered partially privatizing Social Security, which essentially meant that government would no longer guarantee full benefits when people retire. Rather, workers would be responsible for investing part of their payroll taxes in individual retirement accounts. Judging by his recent eagerness to place the blame for such scandals as Enron on Republicans in Congress, Clinton also seems to have forgotten how much he deregulated the financial industry himself.

George Bush has vowed to cut back the new welfare program still further. He has resisted the extension of unemployment insurance in the worst job market since the Depression. He has refused to propose full funding for his own federal education legislation, the much-publicized No Child Left Behind plan. Most important, he has cut taxes so deeply that the nation will be unable to pay for adequate new social programs, and very likely for existing ones. The federal budget deficit will probably exceed $500 billion in the coming fiscal year—nearly 5 percent of GDP. Reasonable projections suggest that when baby boomers start to retire in roughly ten years, and the Social Security surplus dissipates, budget deficits will still be high.

A second term for President Bush, plus continued control of both houses of Congress by the Republicans, would likely mean that Social Security and Medicare would be privatized—as Bush promised in his first presidential campaign. We can also expect that Bush will strongly advocate providing private vouchers for education and reducing the regulation of many industries, ranging from natural gas to telecommunications.

We saw the true motives of the Bush administration when it decided, under intense political pressure, to propose its own prescription drug plan for the elderly last spring. Bush’s original proposal made beneficiaries eligible for new drug benefits only if they signed on to private programs. If they stayed with traditional Medicare, they would receive no drug reimbursement whatever. The administration has since backed off this proposal, but in a second Bush term, it could be revived.

In fact, however, the new prescription drug bill for the elderly also now includes a highly controversial plan to subsidize private health companies to compete with traditional Medicare beginning in 2010. Even though the plan will be tested in only six metropolitan areas, what began as a prescription drug plan for the elderly has been turned into a major revision of the entire Medicare program. Many experts say that the subsidies are designed to drive up Medicare premiums above the cost of private programs, encouraging seniors to abandon it. Senator Kennedy is adamantly opposed to this, but as of this writing the House is holding to its position. “Privatizing the longstanding Medicare benefits for hospital and doctor bills is very different from a distribution system that makes use of the private sector,” Kennedy has said. “It’s an unacceptable right-wing effort to undermine Medicare and destroy a system that has served senior citizens well for almost forty years. No elderly American should have to choose between the doctors they trust and the medical care they need.” Medicare, as we know it, he believes, would be finished.


One has to wonder how conscious the nation has been of the piecemeal but steady destruction of the commitments to social welfare that the US governments have made beginning a century ago. Many think of these programs as the nation’s greatest political achievement. It is true, however, that the nation has become less trusting of government and more parsimonious about social spending. To the extent that there is public discussion of a new government approach to welfare, it has been dominated by slogans like the Third Way and expressions of vehement anger toward government that have had several disturbing sources. One source has been a nostalgic, over-simplified return to America’s individualistic national character—thus, we hear exhortations to self-reliance and personal responsibility as social programs are cut. This excerpt from the introduction to the libertarian Cato Institute’s Handbook for Congress in the 1990s is typical:

The “bourgeois virtues” of work, thrift, sobriety, prudence, fidelity, self-reliance, and a concern for one’s reputation developed and endured in part because they are the virtues necessary for survival and progress in a world where wealth must be produced and people are responsible for their own flourishing. Government can’t do much to instill these virtues in people, but it can do much to undermine them.

Another source of anger toward the government has been a racially prejudiced resistance to social programs that seemed designed to help African-Americans in particular, even though the main beneficiaries of programs like welfare are white Americans.

The political scientist Neil Gilbert, who teaches at the University of California at Berkeley, has long been concerned with providing a clear, consistent, and broad justification for advocating reduced government social policies. He is often cited by proponents of this view as both a disciplined observer and an enlightened advocate. He and his wife Barbara were authors in 1989 of a useful book, The Enabling State, which showed that the US had already adopted a new conception of the role of government based on indirect subsidies such as tax deductions for corporate pension and health care programs, retirement savings programs like Individual Retirement Accounts and 401(k)s, home mortgage interest, and tax credits for the working poor—the Earned Income Tax Credit. When all those were added up, they argued, America’s social generosity was considerably greater than recognized.

Last year, Gilbert published Transformation of the Welfare State, which, though objective in tone, essentially provides a theoretical justification for replacing the old welfare systems with his “enabling state,” which is very close to the Cato Institute’s own philosophy:

  1. 1

    The original House and Senate versions differed substantially. In the new compromise bill, the government would pay 75 percent of all out-of-pocket drug costs up to an annual maximum of $2,200 after a deductible of $275 and a monthly fee of $35. It would pay nothing again until annual out-of-pocket costs reach $3,600, after which it would pay 95 percent of the remainder.

  2. 2

    Robert Pollin, Contours of Descent: US Economic Fractures and the Landscape of Global Austerity (Verso, 2003), p. 29.

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