Red Ink (8 page)

The upward pressure on costs is not just a result of more and pricier procedures. The way the government pays for health care is itself a patchwork of perverse incentives crafted for reasons historical and political. Among these costly legacies is a decades-old embrace of fee-for-service, an approach to paying for medical care that tends to encourage more, but not necessarily better, care. In dozens of ways, the cost problem is exacerbated by the way that the government goes about paying for health care.

Consider just one example. Before Congress expanded Medicare to cover prescription drugs in 2003, the most impoverished
of the elderly—about 16 percent of the aged—got drug coverage through Medicaid, the joint state and federal government health insurance program for the poor. By law, pharmaceutical companies must charge Medicaid the lower of “the best price” they charge anyone for a drug, or a price 15 percent below a benchmark. That saves Medicaid a lot of money.

In 2003, however, Congress ended that practice. It shifted those low-income elderly whose pharmacy bills have been covered by Medicaid coverage to the new Medicare pharmaceutical program. But, reflecting the enthusiasm for markets over government, the new program was somewhat different.
Under the new system, the elderly purchase drug insurance at government-subsidized prices from one of several competing private plans, and then the insurers—not the government—pay the drug tab. For low-income elderly, the change didn’t cost them much; the government still picks up nearly all the cost. They account for about 40 percent of the people in the drug program, but because they tend to have multiple chronic conditions, they account for 56 percent of the program’s current spending.

One aspect of this shift from one government drug plan to another turned out to be a boon for Big Pharma, as major drug companies are known, but expensive for taxpayers. The “best price” rule no longer applied. Drug insurers, the theory went, would negotiate with the drug companies and keep drug costs down. In general, this competition has worked better than naysayers expected. But for low-income elderly, the law put a lot of
restraints on the insurance companies. They had, for instance, to cover every available drug for certain conditions for these beneficiaries. That limited their negotiating power with the drug companies and, thus, boosted the cost of the insurance. The bottom line: the government ended up paying more for drugs for the elderly poor than it did under the old system. How much more? That’s confidential. A couple of Harvard economists dissected drug corporation financial statements and estimated that for one big drug company, this single feature of the Medicare drug insurance program increased revenues by 8 percent in 2006 over the previous year.
The White House budget office estimates that reimposing the “best price” rule on drugs used by low-income elderly would save the government $155 billion over ten years. An open question: Would that come out of drug-company profits or would the companies simply raise prices on other drugs to compensate or cut back on research?

Although retirement and health care are among the very biggest federal programs, about 17 cents of every federal tax dollar goes to a wide range of other benefits, from veterans’ benefits to farm subsidies. These diverse financial arrangements have one thing in common: at the end of the pipeline is some American who is getting a check or a promise. Most are convinced they deserve the money.

The federal government has been sending checks to farmers, in good times and bad, for eighty years. This began with a disastrous drop in farm prices in the late 1920s and the 1930s that prompted Herbert Hoover and Franklin Roosevelt to use government muscle and taxpayer money to boost farm prices—a supposedly temporary measure. The political appeal was obvious: more than 20 percent of the labor force at that time worked on farms and more than 40 percent of Americans lived in a rural area. Eighty years later, fewer than 2 percent of Americans make their living on the farm, and not even one in six lives in a rural area. Yet big farms have considerable clout and those “temporary” farm subsidies live on, accounting for about $15 billion in federal spending annually. About a third of the money comes in “direct payments,” no-strings-attached checks that the government sends farmers.

Like many other benefit programs, farm subsidies are hard to unravel—a maze of payments, loans, and insurance that bewilders everyone except those who benefit from them, those who attack them, and those in Congress who craft them. Farm bills also include a unique mechanism that forces Congress to act: if it doesn’t pass the bills that arise every four or five years on time, or extend the last one temporarily, the clock is turned back and government payments to farms are based on the unusually high crop prices of 1910 and 1914, adjusted for all the inflation that’s occurred since then. Not surprisingly, the farm bill is one that Congress
always
finishes on time, or at least extends temporarily.

Despite their political support, these subsidies have occasionally come under fire. “
When Republicans seized Congress in 1994, promising a revolutionary age of fiscal conservatism and free-market capitalism,”
Time
magazine’s Michael Grunwald wrote, “they vowed to gut command-and-coddle farm policies that they compared to Soviet communism. They wanted the government to treat agriculture like any other business, and they said they’d offer farmers a deal … farmers could plant what they wanted, but no more subsidies.”

To that end, the 1996 Freedom to Farm Act severed some long-standing links between the subsidies farmers receive, the crops they grow, and the prices they get for them. For what was supposed be a five-year transition, the bill offered farmers $5 billion a year in direct payments.

The revolution didn’t last but the new “temporary” payouts did. Sixteen years later, about $5 billion in direct-payment checks are still being written annually even as the farm economy booms. These payments are based on an arcane formula tied to what was grown on the land years ago, no matter what crops—if any—are grown on the land now. Because the payment rights transfer with these specific plots, real estate prices are boosted—even on land that has never been cultivated by the current owners. Journalist Dan Morgan calls the payments “
an entitlement tied to ownership of land—a construct that some would associate more with 19th-century Prussia than 21st-century America.”
Half of the direct payments go to farmers with incomes above $100,000.

An example:
the first congressional district in western Kansas has received more money in direct payments over the years than any other, $250 million in 2010, most of that to wheat, corn, and sorghum growers. As is true nationally, most of the money goes to a small set of big farmers:
half of the money went to 5,000 of the district’s 675,000 residents, according to a database cultivated by the Environmental Working Group. The top ten farms got more than $200,000 apiece. Obama’s latest budget proposes to eliminate direct payments altogether, describing them as “
no longer defensible.” Even Tim Huelskamp, a Tea Party Republican and fifth-generation farmer who represents the district, isn’t defending direct payments any longer. “
Everybody needs to share,” Huelskamp told a few dozen townsfolk gathered at the Graham County Courthouse recently. “If you’re a farmer like me, you’re going to expect less. Something’s going to go away. The direct payments are going to go away.”

But even if they do, the farmers in Huelskamp’s district aren’t worried about being cut off entirely. Many figure what they lose in direct payments they’ll make up in increased federal subsidies for crop insurance, which covers losses caused by drought, floods, pests, and low market prices or yields. The government pays private insurers to run the program and pays about 60 percent of premium cost. The annual
tab to the taxpayer: $10 billion, and growing.

At the other end of this subsidized-production tunnel are those who get government help to buy food. In one 2012 Republican
presidential debate, Newt Gingrich derided Barack Obama as “
the food-stamp president” and asserted, “More people have been put on food stamps by Barack Obama than any president in American history.” Echoing the charge, Mitt Romney said that Obama “
wants us to become an entitlement society where the people in this country feel they’re all entitled to something from government, and where government takes from some to give to others.”

Actually, even before Obama was elected, the government had expanded the program, offering food stamps to more people and making benefits more generous. Then the terrible economy pushed the income of additional Americans down to levels that qualified them for help. The 2009 Obama-backed stimulus made even more people eligible (more unemployed adults without kids, for instance), increased benefits, and gave states money to spread the word about the benefits. But what Gingrich didn’t mention was that
as of December 2011, fewer people had been added to the food stamp rolls in the first three years of Obama’s presidency (14.5 million) than in the expansion of the program during George W. Bush’s two terms (14.7 million).

Still, Gingrich was shining a spotlight on a big target. At the end of 2011, more than 46 million Americans were using food stamps, one in every seven people. (The stamps have now been replaced by a debit card good for an average of $285 a month per household for food, but not cigarettes or alcohol.)

Like so much of today’s federal safety net, the origins of the food stamp program date to the Great Depression, eight
decades ago. And like so many federal benefit programs, its longevity reflects the interests both of the people who benefit (the hungry) and of the industry (farming) that provides it. The administrator of the 1939 precursor to today’s food stamps, Milo Perkins, put it clearly: “
We got a picture of a gorge, with farm surpluses on one cliff and undernourished city folks with outstretched hands on the other. We set out to find a practical way to build a bridge across the chasm.”

When food surpluses evaporated during World War II, the program died. After several unsuccessful attempts, the program was revived in 1964, partly due to the efforts of farm-state legislators George McGovern, Democrat of South Dakota, and Bob Dole, Republican of Kansas. Since then, Congress has tweaked the program repeatedly. In 1973, it allowed Alaskans to use food stamps to buy hunting and fishing equipment, though not guns or ammunition. Since the 1960s, as the
New York Times
put it, “
the food stamp program has swung between seasons of bipartisan support and conservative attack.” The farm lobby generally embraced it, while Ronald Reagan derided it and Bill Clinton’s 1996 welfare reform bill tightened eligibility. A 2008 farm bill, which George Bush unsuccessfully vetoed for other reasons, made food stamps easier to get. As welfare recipients were pushed to go to work, the program was recast—at least until Gingrich’s diatribe—not as “welfare,” but as a way to aid those working at wages so low they’re below or not far above the official poverty line.

Advocates for the poor say the expanding program has
made severe hunger in America rare. Paul Ryan, the House Republican point man on budgets, sees the expansion as just another example of “
relentless and unsustainable growth” in federal benefits that should be reversed. The program cost the government $78 billion in 2011, about 40 percent more than the cost of the entire Department of Homeland Security, from the Coast Guard to antiterrorist intelligence agents stationed abroad.

As the economy heals and more people get jobs, the number of Americans on food stamps will fall, but the program is likely to remain a flash point as the need to reduce deficits puts benefits of all sorts under scrutiny. Ryan has proposed turning administration of the program over to the states, capping federal spending so that states aren’t encouraged to recruit beneficiaries for a program that Washington finances, and imposing time limits and work requirements on those who get food stamps, much like those attached to welfare. Farm-state Republicans are distinctly unenthusiastic, though. And cutting spending on a program used by so many to put food on the table will never be popular.

Social Security, about one-fifth of all federal spending, is perhaps the most popular part of the federal budget. In polls,
more than 80 percent of Americans say the seventy-five-year-old
program has been good for the country. Hardly anything else has such widespread support.
In contrast to the recent close, partisan votes on major legislation, the original Social Security bill was passed in 1935 with substantial and bipartisan majorities in the House (272–33) and the Senate (77–6).

But Social Security is also one of the most misunderstood parts of the federal budget. “
You cannot keep the status quo in place and call it anything other than a Ponzi scheme,” Texas governor Rick Perry said in one Republican presidential debate in 2011. Underneath the harsh words was this point: the system depended on a large pool of younger workers to pay the benefits of those who joined the Social Security system in earlier years. Although many Americans believe that they are
or will someday get back what they paid into Social Security, that’s not how the program really works. Rather, today’s payroll taxes go to pay benefits to today’s retirees, whose benefits are linked by a complex formula to the wages they earned as workers. For a long time, there was more money coming in than going out, and this surplus was turned over to the Treasury. The Treasury spent the money and gave the famous Social Security Trust Fund IOUs, in the form of U.S. Treasury bonds, that essentially represent the commitments of future taxpayers to come up with the money needed to pay benefits.