THE RISE AND FALL OF THE MEDICARE CATASTROPHIC COVERAGE by eot15664

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									                                                             National Tax Journal, Vol. 43, no. 3,
                                                             (September, 1990), pp. 371-81




    THE RISE AND FALL OF THE MEDICARE                                     CATASTROPHIC
                      COVERAGE ACT
                                        MAMLYN MOON*

rphe      Medicare Catastrophic    Coverage           limited to no more than two deductibles
 a Act, the major piece of social legisla-            per year.
tion in the eight-year Reagan administra-                The idea of a limit on cost-sharing was
tion, was repealed a year and a half later,           certainly not new. Private insurance long
marking one of the major legislative fail.            has carried such limits, and proposals to
ures in the history of the U.S. The act em-           add a catastrophic    cap had been consid-
bodied many of the constraints      faced by          ered in some form by the Congress for
legislation seeking to expand the role of             nearly a decade. But what was new was
goverrunent in an era of high deficits and            a willingness  by the Reagan administra-
                                        Mine          tion to co i er roa4iening Medicare
orthcige VeWcongffiWoonmuuzwxo            T;ne
unraveling of the legislation.   In this pa-          proposed in 1986 at a time when federal
per I lay Qut the basic chronology of the             budget submissions         by the administra-
legislation  and then discuss some of the             tion routinely sought reductions          in Med-
lessons to be learned from this experi-               icare spending of at least that amount each
ence.                                                 year. For example, in February 1986, while
                                                      President    Reagan appointed the Bowen
                                                      Commission      to seek long-term solutions,
The Evolution      of the legislation                 he presented to the Congress a budget that
   Medicare Catastrophic     owes its initial         would substantially      increase costs to ben-
political impetus to the Bowen Commis-                eflciaries (OME, 1986). When the White
sion-a group headed by then secretary of              House agreed to support the Bowen pro-
Health and Human Services Otis Bowen                  posal, it did so with a number of stringent
and charged by President Ronald Reagan                constraints    attached-namely,         that new
to consider solutions to the problem of               benefits must be self-financed        by the ben-
catastropluc   expenses borne by those with           efimanes and that the financing must come
major illnesses. The Bowen report, re-                from premiums rather than taxes.
leased in the fall of 1986, proposed to take             Despite some initial concerns, Capitol
on the problem of gaps in coverage of acute           Hill staff and lobbyists           generally     ac-
care for Medicare beneficiaries.      This is-        cepted the framework established             by the
sue was the "easiest" to solve of the major           Reagan administration.         'fhe idea of a flat
health care access problems because it was            cap on spending as a desirable means for
likely to be least expensive. The other               offering catastrophic         protection      went
problems considered by the Commission,                largely unchallenged,        even though some
the younger uninsured,       and long-term            in the re5m&        community questioned the
care, would require massive increases in              effectiveness of caps (Wyozewianski,           1986;
resources.                                            Feder, Moon, Scanlon, 1987). Hill staffers
   The original Bowen proposal called for             and interest groups such as the American
a simple expansion of benefits financed               Association     of Retired Persons (AARP)
with a flat $59 annual premium assessed               began to work within the broad outlines
on all Medicare enrollees. The benefit im-            of the Bowen proposal.
provement     would consist of an annual                 The Democrats vowed not to be outdone
$2000 limit on each beneficiary's       out-of-       by the Republicans        in offering new leg-
pocket expenses arising from hospital and             islation to aid the elderly and disabled. But
physician deductibles    and coinsurance.    In       a dilemma was clearly in the making: how
addition, hospital cost-sharing     would be          could the benefits be enhanced by the
                                                      Democrats       while keeping        to the con-
  *The Urban Iwtitute, Washinoon,   DC 20037.         straints insisted upon by Ronald Reagan?

                                                371
                                                      National Tax Journal, Vol. 43, no. 3,
                                                      (September, 1990), pp. 371-81


372                           NATIONAL TAX JOURNAL                                 [Vol. XLM

   Defining the Benefits. During the spring     and meeting high out-of-pocket health care
of 1987, a number of possible additions to      costs.
the catastrophic package began to sur-             Some of the initial financing proposals
face. The Democrats in Congress clearly         would have supplemented the flat pre-
wanted to embellish upon the Bowen pro-         mium with modest increases in taxes such
posal, adding their own benefits to dem-        as those on alcohol and cigarettes. Sug-
onstrate a stronger commitment to im-           gestions were also made to raise or elim-
provements than that proposed by the            mate the taxable maxunum on payroll
White House. The catastrophic legietla-         taxes used to support Medicare or to re-
tion was also viewed as an opportunity to       quire all state and local workers to pay
take advantage of the only new legietla-        HI taxes. All of these options violated the
tive vehicle available.                         basic tenet set down by the Reagan
   The first additions were modest. For         administration    by assessing new taxes--
example, an early draft from the Ways and       and ones that were not limited to the
Means comnattee added expansions in a           Mechem enrollee populatiorl Instead, both
number of Medicare benefits, tinkering          the House and Senate very quickly moved
with the Bowen approach. But as the             to consider adding an income-related pre-
spring progressed,      broader expansions      mium to solve the &lemma of an expen-
were considered by the House of Repre-          sive program that had gone beyond a rea-
sentatives. Two major additional areas of       sonable flat payment and could be assessed
coverage were added. First, major Medi-         from each enrollee.
caid expansions included relief from Med-           Language proved critical. Although the
ic,are coinsurance and deductibles for the      Internal      Revenue Service was best
low-income elderly and improvements in          equipped to collect an income-related pre-
financial protection of spouses of nursing      milim as part of the yearly personal in-
home residents. Second, drug coverage was       come tax filing, all parties involved in the
added to the package, in part as a way to       discussion took great pains to call this a
offer benefits to higher-income beneficia-      premium and not a tax. It just'liappened
ries who were going to be asked to pay a        to be" part of the 1040 form and related
 greater share of the costs (see below). The    to the amount of personal income taxes
 Senate Finance Committee proceeded more        that beneficiaries owed. (In fact, the House
 cautiously, but its ultimate version also       Waysqnd Means Committee carried this
 looked much like that of the House.             distinction so far as to insist that the pre-
   The estimated costs of the Bowen pro-         miilm be posed per $150 of tax liability
 pomd and the House bill are instructive         rather than per $100 which could be
 of the range of costs of various proposals.     translated more easily into a tax rate.)
 A July Congressional Budget Office study           Under the Ways and Means committee
 (CBO, 1987) indicated that the average          proposal, everyone (except those covered
 benefits per enrollee would be $78 for          by Medicaid) would pay a basic premium.
 Bowen (an increase in the estimated costs       The supplemental, income-related portion
 of the original proposal rather than an         would affect no one with adjusted gross
 expansion in benefits) and $226 for the         income of less than $6,2W, after which the
 House version.                                  premium would rise steeply to a maxi-
    7!ke FMAW4g Iswo- Bo"t             -oo%u-    wW
 sions substantially      escalated the pro-     @r7n@iu-m-)76-@-@os@-with adjusted gross
jected costs of the program creating a di-       income of $14,166 or more. As a conse-
 lemma on the financing side. While $5 per       quence, Medicare enrollees with as little
 month might not be viewed as unduly             as $20,000 in income would have paid as
 burdensome on the near poor, a $20 pre-         much in total premiums as enrollees who
 mium (added to the already escalating Part      were extremely wealthy This prenuum
 B prenuum) could result in a program that       would place the highest burden (as ex-
 hurt those it presumably sought to help         pressed by share of income) on nuddle-alm
 the low-income elderly who had trouble          beneficiaries. Wealthier elderly families
 buying private supplemental        insurance    would pay a smaller &hare of their in-
                                                                                             National Tax Journal, Vol. 43, no. 3,
                                                                                             (September, 1990), pp. 371-81

No. 31                                                     MARILYN M0614                                                                   373
comes in supplemental premiums-a        re.                                         astropbic legislation also had a greater
gremve burden for those with incomes                                                claim to the term "premluiw' since it pro-
above $20,000. The justification for such                                           posed to treat this new benefit as a vol-
an awkward structure was that it pre-                                               untary option. Beneficiaries could choose
giimably would look less like means-te-st-                                          to enroll in the catastrophic benefit or to
ing to older Americans and more like a                                              decline coverage. The actual choice turned
flat (albeit in two pieces) premium.                                                out to be less voluntary than it might ini-
   The Senate came at the issue quite dif-                                          tially seem, however, since individuals
ferently, assessing a higher initial flat                                           would have to forego all of the heavily
prenuura and then adding a supplemen-                                               subsidized Part B coverage as well.
tal prennum that rose much more grad                                                   The Rok of Policy Analysis. The long
ually by income. The maximum income-                                                gestation period of the catastrophic leg.
related premium was set at $800 per en-                                             islation meant that there was araple time
rollee. In this sense, the financing be-                                            and opportunity to analyze the impact of
haved more like a standard surtax on the                                            various options. Hearings were held in
inopkwl       ]*-*@gmoAjlg-wAb&46#W                                                    +
(although it too would-become regrej3,s4ve                                          elap -w         e=r
                                                                                              towc"omnsi comments and other
above about $50,000 of adjusted gross in-                                           options. Analysts at CBO provided de-
come). (See Figure 1.)                                                              tailed simulations on both the House and
   The term "supplemental premium!'was                                              Senate versions of the legislation, on the
still carefully fostered to distinguish it                                          conference report and on the final act.
from a tax., The Senate version of the cat-                                            The administration provided its own


                           Figure 1. Additional Premiums Under
                       Selected Catastrophic Plans by AGI, 1989
              1000- Additior@W and Income-Related
                             Flat
                          Premiums In Dollars
                800-
                                                       House
                600-
                                                                                        ......................
                                                                                       87FO SFO
                400-

                                         ........................................
                200-
                                             I          I       I                                        Bowen
                    ........... .... I.................... ........................................................................
                    =.==I@
                    .... ....1    1-                                       I           I                                               I
                 0-
                  0         6   10 16 20 25 30 36 40 46 60 66                                                 L-                      00
                                                          AGI In Thousands of Dollars
         Sourow. Oongreasional Budget Offloo

         Note:         For single enrollees. Assumes that individuals would either claim
                       itemized deductions equal to one-sixth of AGI or claim the
                       standard deductiont whichever was larger,
                                                       National Tax Journal, Vol. 43, no. 3,
                                                       (September, 1990), pp. 371-81


374                            NATIONAL       TAX JOURNAL                            [Vol. XLIII

eatimate"f'th6     -edaif'bf the legislation. A   mental premium) would be assessed
mini-tempest stirred over the differences         against any beneficiary whose income tax
in the estimates of the drug benefit. Both        liability was at least $150. Beginning in
sides admitted that the data that had to          1989, such individuals would pay at the
be used were old and the estimates con-           rate of $22.50 per $150 in liability (effec-
sequently unreliable.        Nonetheless, the     tively a 15 percent surtax). The maxi-
CBO and OMB numbers, using essen-                 mum liability was set at $800 per enrol-
tially the same data sources, were dra-           lee; individuals with incomes of over about
matically different (CBO, 1988). CBO's            $40,000 would be subject to t hat maxi-
numbers were less than two-thirds those           mium. Couples with incomes in' excess of
of OMB ($927 million in estimated costs           about $70,000 would pay $1600. Esti-
as compared to $1,583 million in 1991). In        mates indicated that about 5 percent of
fact, these differences contributed to some       older persons would be subject to these
of the reluctance to adopt a drag benefit         maximum tax levels and about 40 percent
because of the potential for error and the        of all the elderly would pay at least some
fears of many analysts and Members of             supplemental premium. The surtax rate
Congress that dru costs could rise out of         would rise rapidly over time to a maxi-
control over time. F                              mum of 28 percent in 1993.
                                                      The Political      Winners     and Los-
                                                  'rs. Proponents of the passage of cata-
The Medicare Catastrophic         Coverage        strophic basked in the belief that they had
Act                                               achieved a major improvement in bene-
   When the Medicare Catastrophic       Cov-      fits. For example, AARP enjoyed the ac-
erage Act was passed in June of 1988, it          colades concerning the considerable role
was hailed as "the largest expansion of           the organization had played in working
Medicare since the program!s establish-           with the Congress on the legislation
ment in 1965" (Torres-Gil, 1989). A major         (Torres-Gil, 1989).
Rose Garden ceremony was held on July                 The biggest loser in the process, the drug
1, 1988 to celebrate its signing by Ronald        industry, had managed to influence the
Reagan. In private, the enthusiasm of the         drug benefit positions. For example, no
drafters was considerably lower-reflect-          reference was made in the legislation to
ing the long road of compromises neces-           any type of cost controls on drugs; instead
sary to enact such legislation. Candid as-        the bill called for beneficiaries to pay
sessments referred to the catastrophic act        higher premium over time if costs ex-
as the beat that could be done.                    ceeded expectations. Although a relative
  -The House and Senate bills contained            latecomer to -the process, the National
major differences that had to be ironed out        Committee to Protect Social Security and
in the spring of 1988. While the two bills         Medicare (NCPSSM) had attempted to
were not dramatically different, in part           derail the financing scheme of the final
because the Senate version of July 1987            bill. They were unsuccessful in influenc-
had moved closer to that of the House,             ing the passage of Catastrophic at least in
there were a number of remaining con-              part because their often deceptive mail
cems. In general, the Senate version was           campaigns were viewed more as a fund-
less generous than that of the House. The          raising ploy than as legitimate grass-roots
final legislation was a complex combina-           organizing. Opposition from other seniors
tion of fill-in and new benefits. 2                groups was only beginning to get orga
                                                             pub"wl@--Opawge           of tlxkg-
promise       i@en tift M=tO       -boiliggo
provii;ions. Greater reliance would be          The Distributional Impact on Beneficia-
placed on revenue from the supplemental      ries. Although the final package was in-
premium than under the Senate version,       tended to be cost neutral from the federal
but the structure of the tax would look government's            perspective, there were
more like the Senate's more gradual scale    clearly going to be individual winners and
of premium increases. The tax (supple-       losers among the beneficiaries from this
                                                            National Tax Journal, Vol. 43, no. 3,
                                                            (September, 1990), pp. 371-81
No. 31                              MARILYN MOON                                                    375

legislatioxl Indeed, a considerable amount        protection (or whether that protftbon was
of debate had centered on this issue.             provided free of charge to those whose for-
   Table 1 displays Congressional Budget          mer employers paid the costs). Such an
Ofrice's estimated insurance benefits and         adjustment would result in even greater
costs in terms of premiums paid by the in-        distinctions by level of income.
come status of enrollees (CBO, 1988). The            The campaign to discredit Catastrophic
bottom 70 percent of Medicare enrollees           had included claims that AIDS patients
as ranked by their incomes would expe-            would disproportionately    benefit from the
rience a net reduction in out-of-pocket           legislation, in pait because drugs for this
costs. On average, they would pay consid-         population are very expensive.' What was
erably less in premiums than their group          not mentioned in this rumor campaign was
would gain in increased protections from          the sad fact that most AIDS patients who
certain expenses. Higher income enrol-            are sick enough to qualify for Social Se-
lees, on the other hand, would face higher        curity as permanently and totally dis-
costs primarily because of the supplemen-         abled do not live long enough to also
tal premium. The table does not, how-             qualify for Medicare-which       has a wait-

groups    already   had private   insurance       Security beneficiaries.      AlDg-iWfiei@ts were



                                              Table 1
             Net Change in Enrollees'   out-of-Pocket   Costs by Income and
                     Poverty Status in Response to the Medicare
                              Catastrophic     Coverage Act

                                                                         Net Change in:a
                                              Percent of          - - - - - - - - - - - - - -
                                              Enrollees           Direct     Premium     Total
                                              in Group            Costs       Costs      Costs

By Per Capita Incom Percentiles
(Average Per Capita Incom)
     0 to 10    ($2,881)                        10.0%               -237            80          -158
     11 to 30   ($5,623)                        20.0                -221            81          -140
     31 to 50 ($8,575)                          20.0                -195            89          -106
     51 to 70 ($12,604)                         20.0                -189           157            -32
     71 to 90 ($19,579)                         20.0                -171           373            203
     91 to 100 ($52,291)                        10.0                -161           597            436
By Povery Status
     Poor                                       12.8%               -232            80          -152
     Near Poorb                                 19.4                -226            79          -147
     other                                      67.8                -178           268             90
           All Enrollees                      100.0%                -194           207               13

Source:     Congressional   Budget office     simulation.
a.   Direct costs are Medicare benefits under the act, assuming full
     iuplementation  in 1988. includes only Medicare charges.
b.   includes those with incomes above the poverty line but below 1.5 tines                         the
     line.
                                                          National Tax Journal, Vol. 43, no. 3,
                                                          (September, 1990), pp. 371-81


376                             NATIONAL       TAX JOURNAL                            (Vol. XLIII

very unlikely to be '%vinners" from this           funds for a roll-back of the supplemental
legislation.                                       premium, there would be a shortfall in the
   The Beginning of the End. Much of the           revenues needed. The PMA had new am-
criticism that had been leveled at the             munition for its campaign and Senator
Catastrophic legislation did not end with          Bentsen and others who had backed the
its passage in 1988. The opponents-in-             rollback in the supplemental premium
cluding the PMA, MCPSSM, and a num-                were left hanging.
ber of loosely organized coalitions of se-            Neither of these sets of data releases
nior citizens-kept     up a steady barrage of      were politically motivated. Nonetheless,
protest concerning the legislation and             the timing proved disastrous. It sug-
captured considerable media attention. The         gested that the costs might be out of con-
fitvorable press early in the debate seemed        trol and there could be no relief from the
to shift to focusing on the "losers" from          supplemental     premium. Thus the stage
the legislation-those    who would pay high        was set in the spring for repeal of the
taxes and presumably reap few benefits.            Catastrophic legislation.
   Ironically, two sets of information re-            The continued pressure of the mail
vising some of the estimates of the reve-          campaigns launched by NCPSSM and the
nues and costs of catastrophic fed into the        PMA, and the general negative tone of the
opposition to the legislation. First came          media began to take a toll. Mail poured
word that the Treasury expected tax col-           into Congressional offices and into the
lections from the supplemental premium             AARP. At one point the mail on the issue
on the elderly to be higher than antici-           in AARP was running 50,000 against and
pated, generating a considerable build-up          30 for the legislation. Congressional of-
in the Catastrophic trust fimd. Although           fices reported similar staggering num-
some build-up had been intended in the             bers.
legislation to provide a cushion for the              A major turning point in the process,
benefits that would come on board in later         heavily reported in the media, came in the
years and grow very rapidly, the amount            late summer of 1989. The discontent of at
indicated by the Treasury was consider-            least a vocal minority was played out in
ably higher. This provided fuel to the crit-       town meetingi held by members of Con-
ics for their claim that the new legisla-          gress in their home districts. The most
tion was aimed at reducing the deficit at          dramatic of these was a confrontation with
the expense of the elderly.                        Representative      Dan Rostenkowski that
    Senator Lloyd Bentsen (D-Tex), already         madi the national news. A number of el-
under some pressure from has constatu-             derly protestors followed Rostenkowski to
ents, announced on April 20 that be would          his car and blocked his departure. Cap-
seek a reduction in the supplemental pre-          tured on camera was an elderly woman
mium to counteract the unexpected sur-             pounding on the hood of the car while the
plus. Other members generally took a                driver attempted to move through the
more cautious approach, but recognized              crowd. Eventually Rostenkowski left the
the considerable pressure btnlchng on the           car and "fie&' from view of the camera.
supplemental      premium.                          For all the world to see, a catastrophic op-
    Shortly after this, a second set of num-        ponent had gotten the upper hand over the
bers was rel               esting that the costs    chairmM.2f the most                committee
                                          Wn*-      in-ik@41W                 mnumivei         Ao
 estimated. In particular,       the improve-       longer mattered if these protesters rep-
 ments in the SNF benefit were now pro-             resented only a minority of the elderly-
jected by CBO to result in costs more than          they were vocal, visible and seemed to be
 six times greater than the original esti-          growing stronger day by day.
 mates. In addition, the new estimates of
 the costs of the drug benefit-using      newly    The Repeal
 available data-were       about twice as high
 as originally estimated (CBO, 1989). Not            Even before the August recess, an ear-
 only would there be no surplus in the bmd         nest effort began to search for ways to
                                                     National Tax Journal, Vol. 43, no. 3,
                                                     (September, 1990), pp. 371-81

No. 31                              MARILYN MOON                                             377

modify the Catastroplue legislation. The           The House of Representatives    voted for
bravado of the proponents that this was a       a repeal of all but the Medicaid provisions
short-lived protest died away and the           on October 4, 1989. The Senate was not
committees began to search for a compro-        yet ready to give up, however. A Hurry of
mise to save at least part of the legisla-      proposals and amendments led to chaotic
tion. Most of the effort centered on what       debate on the floor of the Senate in the
benefits could be retained if the supple-       waning days of the session. The high po-
mental premium were eliminated. There           litical theatre of multiple votes on con-
was little serious discussion of adding ad-     fusing options culminated in the accep-
ditional revenue sources: the original          tance of the passage of the McCain
agreement to stick with a self financed         Amendment to retain some of the benefits
benefit package remained intact. The dif-       and repeal the dreaded supplemental pre-
ficulty lay in deciding which were the more     miilm. The proposal was quickly sent to
crucial benefits. Every one had its pro-        the House for consideration on the last
ponents, groups that had worked within          night of the session. Members of the House,
the legislative framework and who felt          who literally sat with their coats on their
                                  4
   .U-,hnfl  IV-02am-                                                               Aen re-
   That study pointecr out Me Wic@ity of                   e       ain    ibli ent. In tfi@
repackaging the program around the re-          early hours of November 22, the U.S.
peal of the supplemental premium. In            Congress took the nearly unprecedented
taking away the progressive part of the         step of repealing a major piece of social
financing, the package that was left needed     legislation that had been so highly touted
to be sensitive to who would benefit. But       only one year earlier.
benefits such as the Part B cap and the
drag benefit required a lot help. Low and
spending before offering of out'of-Pocket       What Lessons for Health and Social
                                                Policy Can Be Drawn from
moderate income persons might not be able       Catastrophic?
to "afford" to reach the Part B cap or the
drug deductible.                                   The issue of why this turn of events oc-
   Through this period many options were        curred and what it teaches us about the
proposed, but none seemed to catch the          future will be debated at considerable
imagination       of many legislators.   The    length foi many years to come. But even
original legislation reflected one and a half   at such close range, a few lessons are
years of careful negotiation; not surpris-      clear-albeit    sharpened by the virtue of
ingly, the hasty work on a revision re-         hindsight. Some of these represent con-
sulted in no one proposal that satisfied        clusions about why Catastrophic failed.
supporters and opponents of the Medicare        Others suggest what may be ahead in tax
Catastrophic Care Act. The debate also          and budget policy.
took on a bit of the surreal since repeal          1. A Rose by Any Other Name. The
would worsen the budget deficit in the          supplemental premium was offered as a
short ran. The controversial build-up in        means of meeting the Reagan adminis-
the reserves did play a role in the budget      tration!s requirement that there should be
deficit discussion after all; but a number      no new taxes and any financing should
of members commented on the irony that          come from the beneficiaries themselves.
eliminating a government programa would         In addition, Congress and elderly orga-
be scored as a worsening of the federal         nizations contributed to the effort to re-
deficit. Despite the lip service paid to sup-   tain that nomenclature.      For instance,
porting the Catastrophic Act by the Bush        Martin Corry, AARP's chief lobbyist, was
Administration,      the door to repeal was     quoted as saying that the fact that the M
opened when the Office of Management            was involved "is simply an administra-
 and Budget indicated that an exception         tive convenience. It just happens to be the
would be granted so that repeal would not       most efficient way of handling it" (Rich,
 count against the deficit. One of the last      1988). In fact the supplemental premium
 objections to repeal was thus eliminated.      was to be collected by the IRS through the
                                                       National Tax Journal, Vol. 43, no. 3,
                                                       (September, 1990), pp. 371-81

378                           NATIONAL      TAX JOURNAL                           [Vol. XLIHII

regular income tax structure and calcu-         being used to hold down the deficit-al-
lated on the basis of how much income tax       though that was true only in the short rtm.
a beneficiary owed. Not surprisingly, it was       S. The Unpopularity      of 'Pay as You
quickly perceived to be a tax. And calling      Go.' The linking of a financing mecha-
it by another name seemed to be disin-          nism to the new program in this highly
genuous. Indeed, by not facing up to the        visible way reflected the philosophy of
fact that the premium was a surtax, the         Congress and the administration      that no
backlash by seniors stemmed both from           new spending should make the deficit
the size of the premium and the feeling         worse. This approach, sometimes termed
that they had been deceived.                    @)ay as you go,' required that new spend-
   Moreover, since the litany of the Rea-       ing packages must carry their own fi-
gan adnumstration      was that no one should   nancmg. And as noted above, the cata-
have to pay more in taxes--and indeed the       strophic legislation went even further by
trend in the 1980s was to lower the per-        creating a reserve in a new trust fund so
sonal income tax-this          most glaring     that benefits would never exceed reve-
counterexample      singled out the elderly.    nues in the early years of the program.
Terming it the "seniors tax," opponents            While this approach may offer many
were able to portray the financing of the       political advantages in enacting legisla-
legislation in a very negative light. Why       tion, it clearly did not capture the imag-
should they be the only group to pay new        ination of the public. As mentioned above,
taxes? And perhaps even more critical, at       Medicare beneficiaries felt they had been
a time when running a deficit meant that        singled out for special tax penalties. Ob-
most programs were financed by paying           jections to the tax aild the subsequent de-
only 85 cents on the dollar, why should         bate over it swamped discussion of the
the elderly be asked to pay more than           benefits. Is this a specific reaction to the
$1.00 for a dollar's worth?                     catastrophic legislation itself, or does it
   2. A Simple Tax Story but Comp le-x          raise issues about this legislative       ap-
Benefit Story. The final legislation 'of-       proach in general? It is certainly too soon
fered a bewildering variety of benefits to      to judge the long-term consequences of re-
the elderly. Catastrophic made the al-          quiring such pairing of benefits and fi-
ready byzantine Medicare program even           nancmg, but this episode does suggest that
more complex (with the exception of hos-        the financing side may get disproportion-
pital benefits). Since most enrollees do not    ate attention and focus much of the de-
understand how benefits work under the          bate on the question of gainers and losers.
original program, how were they sup-            Any. social legislation that seeks to help
posed to interpret these changes? Addi-         one group while taxing another may face
tions or reforms occurred in at least seven     formidable obstacles in gaining accep-
identifiable areas: hospitals, skilled nurs-    tance.
ing facilities, home health care, a part B         Moreover, the political environment of
 limit on copayments, hospice, respite care,    the Reagan administration      was to stress
mammograms        and drugs. Each of the        that government could be financed with-
benefit areas was likely to seem small and      out raising taxes and that savings could
 often not likely to be relevant to any one     be obtained by cutting fat out of the sys-
beneficiary.                                    tem. The pay as you go financing of the
    On the other hand, the financing mech-      catastrophic legislation stands in stark
 anism was simple, straightforward,       and   contrast to that approach. Again, the
 un      ular t                                 zkwric       f
                                  @rfeiw-.      seems to have wotkod against its only
 The costs were immediately apparent. The       major piece of social legislation.
 comparison with the benefits also suf-            4. Medigap Was More Popular than
 fered from the additional disadvantage         Imagined. Although health policy ex-.
 that the premiums came on line before           perts often cntacize Medigap programs, the
 most of the benefits. Again, opponents          elderly seem quite satisfied. Indeed, by
 could truthfully say that Catas@ophic was       buying multiple policies they have voted
                                                     National Tax Journal, Vol. 43, no. 3,
                                                     (September, 1990), pp. 371-81

No. 31                              MARILYN MOON                                             379

with their wallets. A side effect of the        those who would be asked to pay the most
complexity of Medicare is that many older       under the government plan were those who
persons do not appreciate the share that        had the beat coverage and at the lowest
the public program vs. the private pro-         cost through their own private arrange-,
gram pays. Statements       about Medicare      ments.
payments are forwarded to beneficiaries            5. Momentum           Clouds       Judge-
via private insurance companies who pro-        ment. While the deliberative nature of the
cess the claims-and      who are often the      legislative history of the Catastrophic Act
same companies that offer Medigap cov-          meant there was ample opportunity for
erage. In addition, when medigap insur-         study and reflection, the process built up
ers handle some of the processing for el-       a momentum that made it dffficult to re-
derly clients, the clients are likely to        treat or change direction. The compro-
believe that the private insurer is paying      mises made early in the debate locked the
most of the bill.                               players into a set of constraints that, in
   A substantial minority of elderly ben-       hindsight, appear somewhat flawed. But
eficiaries have their medigap insurance         when agreement is reached at each stage
paid for @x a tbkd           usually an em-     of 4p rocess and the principals in the
                                                 -
Rqoy"'e"@ tormer- enimyer
          or'                   -ene            @499"Wllt                       I ffVMtftk         4
ready covered by medigap policies would         the whole structure or question anything
be worth little to such individuals. These      beyond marginal changes.
individuals are more likely to have rich           In the case of the catastrophic legisla-
benefit packages, including drug cover-         tion, there were no major setbacks along
age. At the same time they are the ones         the way to passage that caused anyone to
most likely to pay the $800 supplemental        question the basic structure of either the
premium. Not only would their tax bite          benefits or the financing. Much of the dis-
be high, but these persons could legiti-        cussion centered on the various pieces and
mately claim that they would benefit lit-       how they could be added to the package.
tle from the Catastrophic Act.                  Neither the attractiveness      of the entire
   During much of the debate on the leg-        bill, nor the logic of the benefit combi-
islation, proponents assumed that hene-         nations received major attention. There
ficia.ries would be happy to have new cov-      was more debate over the basic financing
erage even if medigap already paid, so long     approach, but it came to be viewed as a
as there would be reductions in private         necessary evil to fund the benefits within
premiums. Instead, many of those object-        the constraint of a self-financed system.
ing to the Catastrophic    coverage offered        With the benefit of hindsight, some of
claimed just the opposite-that      they were   the concerns listed above should have
happy with the private coverage they had.       raised warning signs. But earnest efforts
Part of this was undoubtedly a sense of         to mold a workable package are incom-
sticking with current coverage that seemed      patible with stepping back and reviewing
adequate. Part of the objection was to          the bill in an objective way. The analyses
subsidizing others. Mnally, many benefi-        provided by the Congressional Budget Of-
ciaries expressed the sentiment that their      fice probably came closest to such an
own plan was likely to be more efficient.       overview, but the CBO numbers seemed
While all the evidence on the efficiency of     to mostly help shape variations in the fi-
Medicare vs. Medigap runs in just the           nancing package. Even those long mem-
other direction, many, if not most, bene-       oranda did, not carefully consider how the
ficiaries remain unconvinced. The 1980s         package would look to the ultimate au-
rhetoric of government as fraught with          dience: the Medicare beneficiaries.
fraud, waste and abuse surely contrib-             The lack of serious objection to the
uted to this belief.                            framework adopted from the Bowen Com-
   Thus, the package of benefits was of-        mission and the gradual addition of nu-
fering improved security to beneficiaries       merous small benefits resulted in a piece
who believed they already had reasonable        of legislation with no clear central focus.
coverage against these circumstances. And       Even its name-Catastrophic-evoked
                                                            National Tax Journal, Vol. 43, no. 3,
                                                            (September, 1990), pp. 371-81

380                             NATIONAL TAX JOURNAL                                    [Vol. XLIII

 images of long-term care benefits which          no distinctions by economic status or other
 were not key elements. In a sense the            characteristics.
 Catastrophic Act was a Christmas tree bill          Catastrophic is likely the first salvo in
 to which ornaments had been added. The           a long and perhaps bitter debate over a
 problem was that there were more orna-           changing view of older persons. Perhaps
 ments than tree. A critical reassessment         one of the greatest twfical n-ti@es of the
 of the bill at a key moment might not have       legislation stemmed from how dramatic
 avoided problems with the legislation, but       the change in treatment of beneficiaries
 might have forced proponents to answer           would have been. It is one thing to grad-
 the basic question of "is it worth it?"          ually introduce income related pre *
    Significantly, the proposals considered       for Medicare and quite another to have the
 at the end of the debate were not offered        first step be an $800 maximum premium
 by the key committee leaders who had             tied to a benefit with an actuarial value
 been responsible for the original legisla-       of $250.
 tion. It was the careful working of the             7. The State of Policy Analysis in De-
 committee structure that crafted Cata-           cision-Making. As noted above, the Cat-
 strophic, and the general discontent of          astrophic legislation was subjected to a
 other members that led to its undoing.           great deal of analysis by researchers and
    When the pressure to repeal Cata-             policy analysts. No one can claim that the
 strophic began to mount, many of the             legislation was repealed because the Con-
 supporters of the legislation were hard-         gress moved with haste and without ex-
pressed to argue that this was a well-in-         pert advice. Why then weren't we more
 tegrated package. Momentum did, how-             prepared for the firestorm of criticism
ever, keep them from reevaluating           the   leveled at Catasitiophic? In part, the an-
situation for some time.                          swer reflects the fact that policy analysts
    6. A Changed         View of the El-          and policy makers worked together to
derly. Part of the significance of the Cat-       convince themselves that the legislation
astrophic Act stemmed from the new at-            made sense. It fit the needs that study
titude toward Amenas        elderly. No longer    demonstrated     were there. Unfortunately,
do members of Congress view persons over          the general public was not involved in the
65 as a homogenous group in need of pub-          debate and the perceptions of need did not
 hc support. Rather, the financing mech-          correspond to the analysis. Is the answer
anism represents a formal acknowledge-            then that catastrophic was good pohey but
ment of the disparities in economic status        bad politics?
of the elderly. The most affluent of the el-         To some extent a good case can be made
derly are viewed as taxpayers rather than         that the Catastrophic legislation provided
as deserving beneficiaries        of expanded     real benefits for a majority of older Amer-
programs. This major change in attitude           icans and filled important gaps in the
stands in stark contrast to the views ex-         Medicare program. The simplification of
pressed when Medicare was first passed            Part A hospital benefits, the introduction
in 1965. The issue of any means testing           of drug and respite benefits-even         if quite
of Medicare was finessed by arguments             limited, and the major-and          underesfi-
that nearly all the elderly needed the            mated-increase      in the skilled nursing
health benefits and were too poor to buy          benefit would have meant major improve-
them on their own (Marmor, 1972).                 ments in the health care coverage of older
    Not ready yet to subscribe to this view,      persons, even to many who already_.had
01                i - --           ha"ordft                                   TmL-rueanitae          f
would begin to differentiate among the            these benefits was not communicated well
elderly. Either because beneficiaries do not      to beneficiaries. As discussed above, the
believe such claims-or       perhaps because      benefits were complicated and various in-
of an understanding      about their implica-     terest groups helped distort the story.
tions-older      persons have sought to have         But it is also too easy to simply argue
Medicare remain a universal program with          that older persons were misinformed or
                                                                  National Tax Journal, Vol. 43, no. 3,
                                                                  (September, 1990), pp. 371-81

No. 31                                     NLARILYN MOON                                                         381

uninformed. In other areas, analysts and                  ments beneficiaries would pay for physician and other
                                                          gem ce-s and a - B was alsobenefit withto a s6oo initial
                                                                                    drug
policy makers ignored information that                    deductible. Part                 expanded      include mam-
should have signaled problems. For years,                 -ography screening, and a small respite benefit.
older persons have demonstrated      how                      qmnicauy, elderly beneficiaries would receive lower
much they like and are satisfied with the                 actuarial benefits from the legislation than the dis.
                                                          abled in general and end-stage remal disease (ESRD)
private     supplemental     policies that have           patients in particular. Such beneficiaries use more
grown up around           Medicare.     Displacing         health care semm and hence are more likely to hit
coverage that these policies now provide                   the Part B cap and to benefit from the elimination of
was not popular, and analysts           could have        hospital -Pam-ts          and extra deductibles. Groups like
                                                          the PMA could have more con-ectly cited such differ-
anticipated     that fact. In addition,      we have                to fuel Opposition to Catastrophic-although
long known that universal           programs       en-     ences groups lack the negative emotional reaction that
                                                           these
joy much greater popularity         in the United          people have to AIDS sufferers.
                                                               40ne  of the early compromise packages that seemed
States    than do means-tested           ones. The
                                                           politically promising kept only the original hospital
dramatic      shift in the financing        of Medi-       improvementa and the Part B cap-an approach dos-
care was meaningful          beyond the dollar             est to the original Bowen proposal_and          a few of the
 value of the burden of the supplemental                   other less costly add-ons. The package was originally
                                                 .
  ramill. rn-it                       h! rec@m a
                                        r:g le in                                  ig.iiipi Means Committee. But
                                                           supported by the_ Ways andNo
                                                           oWftt6Wb3nne'           "Wo
                   Yal*Mtfler angere           m-a'riy     .fit.                 -vumrw@"
                                                                       ld largely go to the higher income beneficia-
 senior citizens. Fair or not, this was re-                ries who would Ww be getting the tax relief from
 sented by many-even          by those older per-          eliminating the supplemental prennum helped sink
 sons who would have paid low prer ,aiUMS.                 that idea.

                                                                               REFERENCES
                    ENDNOTES                              Congressional Budget Office. 1987. "A Comparison of
                                                            Selected tatestrophic    Bills." Mmeo, July 30,
   'Other groups also added their own analysis and        Congressional     Budget Office. 1988. "The Medicare
polls to the debate. The Villers and Retirement Re-         Catastrophic Coverage Act of 1988." Staff Working
search Foundations funded a study of the impacts of         Paper, August 1.
various catastrophic caps (Feder, Moon, Scanlon, 1987).   Congressional Budget Office. 1989. "Background Ma-
AARP funded internal analyses Namer, 1987). The             tenal on the Catastrophic Drug Insurance Pro-
major opponents of catastrophic were the drug com-          gram." Mimeo, July
panies and their trade Association, the Pharmaceu-        Feder, Judith, Marilyn Moon and William Scanlon.
tical Manufacturers     Association. These groups en-        1987. '?Aedicam Reform: Nibbling at Catastrophic
gaged in an education" campaign that was largely             Costs." Health Affairs (Winter), pp. 5-19.
aimed at swaying public opinion and did not rely          Marmor, Theodore. 1972. The Politics of Medicare.
heavily on the facts. Reputedly, the PMA spent over          Chicago: Aldine Publishing Company.
$3 million dollars on its campaign (Rich, 1989). For      Office of Management and Budget. 1986. Budget of
example, PMA mailings to senior citizens urged them          the United States Governnwnt. F71987. Washing-
to protest the potential cost of the drug benefit for        ton: U.S.G.P.O.
AIDS patients (PMA, 1987).                                Opinion Research Corporation. 1987. "AmericanaAt-
   A number of groups also attempted to poll individ-        titudes Towards Catastrophic Health Costs." Mi-
 uals, particularly the elderly, to guage their support      meo.
 for the legislation. The AARP conducted a series of      Pharmaceutical      Manufacturers   Association. 1987.
 polls beginning in April of 1987 to help bolder sup-        Conwpondence.
 port for catastrophic and identify which benefits        Rich, Spencer. 1988. "Provisions of 'Catastrophie      In-
 seemed of most value (ORC, 1987) None of these early        suralnee Act." Washington Post. July 1, p. A21.
 polls concentrated on the fina ing options, however,     Torres-Gil, Fernando. 1989. "The Politics of Cata-
 and in general they had a hard time offering infor-         strophic and Long-Term Care Coverage." Journal
 mation on all the elements in the benefit packages          of Aging & Social Policy Vol. 1, pp. 61-86.
 under consideration.                                     Varner, Theresa. 1987. "Catastrophic Health Care
    'Only one of the benefits, Part A hospitalization,       Costs for Older Americans: The Issue and Its fin-
 did much to simplify the program. Beneficiaries were        plications for Policy Development." Public Policy
 to get 365 days of coverage and only be liable for one      Institute Papers, American Association of Retired
 deductible per year The skilled nurmng benefit (SNF)        Persons, June.
 was made much more generous and hospice benefits         Wyszewianaki, Leon. 1986.'Tlnancially      Catastrophic
 and home health care benefits were to be expanded           and High-Cost Cases: Definitions, Distinctions, and
 modestly. On the Part B side, the two major benefits        their hnplications for Policy Formation." Inquiry,
 were a limit on the amount of deductibles and copay-         23 (Winter), pp. 382-394.

								
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