Dumping Retirees

How quickly do you think big Michigan companies like Ford and GM would jump at the chance to save $50 million each year — or $150 million?

If Congress passes its plan to add a prescription drug benefit to Medicare, which is just about ready to be reported out of a House-Senate conference committee, it will give all companies that provide prescription drug plans for their retirees the chance to save multi-millions of dollars, totaling into the tens of billions.

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How will the plan enable companies to achieve such savings? By offering the prescription drug benefit not just to those 10 million seniors on Medicare who don’t currently have one — but to all 40 million seniors on Medicare, regardless of whether they need it or not. This presents companies with an economically irresistible enticement: Dump retirees into the government plan, and save boatloads of money.

The $50 million and $150 million annual savings estimates for Ford and GM, respectively, were supplied by Goldman Sachs economist Gary Lapidus for the Detroit Free Press, and are almost certainly low.

Don’t even think companies will hesitate to take advantage of such savings by dumping retirees from their rolls. They’ll do it so fast that Congress is already figuring out how to offer them incentives not to — before the legislation has even been finalized. The amount of this incentive: reportedly around $80 billion per year, the same ballpark figure lawmakers are prepared to spend to rebuild Iraq, as was noted recently by Heritage Foundation researcher Derek Hunter. On top of that, Hunter says the incentive won’t work because dumping retirees or scaling back their coverage still works out better for companies.

What would you do if you were an executive at GM, operating on ever-thinner profit margins, and your company had a chance to cut down on spending $924 million annually on prescription drugs for retirees, an expense that is increasing at upwards of 13 percent per year? You would dump as many retirees as possible immediately, excepting those whose benefits are part of legally binding contracts, such as UAW workers. But union contracts run out. In three or four years, you could dump them too, and with the union’s approval. The UAW has been lobbying for such an across-the-board drug plan for seniors over age 65 for years.

The Congressional Budget Office estimates that if the drug benefit passes, between 32 and 37 percent of senior citizens with employer-provided drug plans will lose those plans, just as quickly as their former employers can dump them. That amounts to around 4 million seniors who will lose their private drug insurance and be dumped into the already overburdened Medicare bureaucracy outright, along with far greater numbers of people who will see their drug coverage significantly scaled back from what it is today.

Policy analysts have been warning for years that Medicare is like a train whose conductor knows it’s going to crash somewhere down the tracks, but who won’t put on the brakes, no matter how many times he is warned. The crash will occur when the Baby Boom generation begins retiring in large numbers. And that was true before the new prescription drug plan was factored in.

You simply won’t believe the new, unfunded liability some policy analysts project U.S. taxpayers will be taking on as a result of this plan. Medicare Trustee Tom Saving places it at $2.6 trillion, nearly a two-thirds increase in America’s $3.8 trillion federal debt. Heritage Foundation health policy expert Robert Moffit predicts that because the drug plan is virtually an unlimited entitlement, within a short period of time costs will skyrocket.

Although no price controls are included in the current legislation, Moffit believes they will be imposed. He says he and his colleagues have "shouted from the housetops" to lawmakers that "you can’t have an unlimited entitlement and control costs without price controls." And of course, since price controls decrease the supply of any good or service to a level below what the market demands, elderly Americans, like their counterparts in Canada and elsewhere, will be standing in line for prescription drugs, receiving them too late, or not receiving them at all.

Numerous policy outfits have advised lawmakers to focus any new prescription drug policy only on those 10 million senior citizens who don’t currently have coverage. This, rather than an open-ended benefit regardless of need, would make a lot more sense. But elderly Americans vote in higher percentages than any other interest group, and they’re angry about the high cost of prescription drugs.

In 1988, America’s senior citizens woke up to the economic disaster Congress had cobbled together for them in the Medicare Catastrophic Coverage Act, and forced lawmakers to scrap it. Hopefully, something similar will happen to the prescription drug bill — before U.S. companies dump 4 million senior citizens from their current drug plans.


Note: Samuel Walker is a communications specialist with the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich.