CATASTROPHIC HEALTH INSURANCE REFORM

The Medicare Catastrophic Coverage Act of 1988 has generated significant and unexpected costs for many AFT retirees. This law, which became effective on January 1, 1989, will be financed by a combination of flat premiums and a variable surtax on the incomes of Medicare enrollees.

The intent of Congress was to expand benefits and thereby cover gaps in the federal Medicare program. Unfortunately, the major gap in Medicare coverage, long-term care, remains uncovered. The Catastrophic Protection Act is, however, the most significant expansion of Medicare since the program was established in 1965. Under the new law, up to 365 days of hospital coverage will be allowed with no coinsurance and only one deductible. Medicare will also pay for all approved fees for physician services after a patient has paid a maximum of $1,370 per year. For this first time, Medicare will pay for a portion of outpatient prescription drugs.

The catastrophic insurance program represents a step forward, but the method of financing it should be changed in order to make the cost of the new benefit equitable for all who are covered.

Prior to the enactment of this law, our Union negotiated similar benefits for AFT retirees. Those Union members with a negotiated plan must now pay increased taxes without an increase in benefits. The AFT successfully lobbied for a provision to require that the cost of such collectively bargained insurance not be lost to the retiree. Unfortunately, this provision will only apply for the life of a current collective bargaining agreement and will only cover the basic cost of the federal catastrophic program ($4 per month).

The current financing mechanism will require that all persons enrolled in Medicare pay a basic premium of $4 per month in 1989, rising to $10.20 per month in 1993. This surtax will be capped at $800 per enrollee in 1989, but will rise to $1,050 per person by 1993. The impact upon retirees will vary significantly depending upon levels of income. Approximately 60 percent of all retirees will pay only the basic premium, with no surtax. Others, including many AFT retirees, will pay a surtax ranging from $50 to the maximum for catastrophic coverage. About 10 percent of all Medicare beneficiaries will have to pay the maximum amount.

On the surface this financing mechanism seems to be progressive, with the wealthier retirees paying more than the poorer retirees. AFT has not objected to this principle in the past. What is objectionable is that this program is financed entirely by those who receive the benefits. Congress went along with President Reagan's view that any new Medicare benefits would have to be financed entirely by the elderly. This was done for several reasons.

Massive increases in payroll taxes were enacted in 1977 and 1983 in order to put Social Security back on a sound financial base. Accordingly, few in the Congress were willing to vote for yet another increase in Social Security payroll taxes. In addition, Social Security taxes already fall more heavily on the poor. Although income taxes were cut twice, middle and lower income taxpayers experienced a tax increase during the Reagan years because of the sharp rise in Social Security taxes.

Another method of paying for the catastrophic insurance bill would be to use General Revenue rather than raising payroll taxes. However, because of the huge cuts in tax rates, especially for the wealthiest, who had their tax rate reduced from 70 to 28 percent, the federal budget is in deep deficit.  Medicare now receives much of its funding from General Revenue to cover the cost of catastrophic insurance.

These methods of financing catastrophic insurance were ruled out for various reasons, yet the existing arrangements are clearly unfair to the elderly. AFT calls for a new financing mechanisms from the following list of possible methods:

• Increase the payroll tax to pay for the cost of the new program. This would place the burden of financing the program on the active work force rather than retirees.

• Increase the basic premium for all recipients and reduce the surtax for higher income retirees.

• Uncap the Social Security wage base to tax the full amount paid in wages. Currently, Social Security taxes are paid on wages up to $45,000 per year. The wage base subject to social security will rise in later years. Under this method employees and employers would each pay a 7.51 percent tax on all of the employee's earnings. Uncapping the wage base for social security taxes has been advanced by Rep. Claude Pepper as a source of funds for a proposed long-term care bill.

• Seek a contribution from General Revenue that would allow a reduction of the surtax.

Some have reacted to the inequities of the catastrophic insurance financing mechanism by calling for repeal of the program or for a delay in its implementation. AFT does not endorse these efforts. We believe that the bill's financing should be revisited by Congress and changed to broaden out the population base that is taxed to pay for the benefits provided by this important expansion of the Medicare program.

AFT supports legislation which will require employers who currently provide similar benefits to pay the federal government the amount that this insurance currently costs on behalf of former employees. However, this by itself will not be adequate to pay the cost of the catastrophic insurance bill.

Catastrophic health insurance is an interim step to meet a growing national crisis. The cost of medical care continues to outstrip inflation by a wide margin. AFT local unions face this fact in negotiations as health costs absorb an even greater share of the dollars available for employee compensation.

In the long-run, a national plan is needed to deal with our health financing crisis. National health insurance which has been part of the national debate for more than 40 years has never been needed more than it is now. (Executive Council)