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BUSH, THE “BIG GOVERNMENT” CONSERVATIVE

FORECASTS & TRENDS E-LETTER
By Gary D. Halbert
November 25, 2003

IN THIS ISSUE:

1.  Republican Sponsored Medicare Bill Becomes Law.

2.  Recent Politics Made for Some Strange Bedfellows.

3.  Summary Of The $400+ Billion Medicare Program.

4.  Is The New Prescription Drug Program Good Or Bad?

5.  Why Bush Pushed Hard For More Big Government.

Introduction

This morning, the Senate voted into law the largest overhaul of the Medicare system since it was enacted in 1965.  The new Medicare reforms are wide-sweeping and include a new prescription drug program.  The new reforms are estimated to cost $400 billion over the next 10 years, but they will almost certainly cost much, much more.

President Bush pushed very hard to see this legislation become law, even though he campaigned on a platform of smaller government.  Clearly, this was a political move designed to woo seniors next year, and it may just work.  For sure, the Republicans have succeeded in co-opting a traditional Democratic crown jewel – entitlements.

This week, I’m going to discuss the basics of the new Medicare bill, including some of its pros and cons.  I’ll also try to delve into the political undercurrents that have driven this bill, and try to answer the question of how a supposedly conservative president and a Republican majority in Congress supported the largest expansion of an entitlement program since Medicare was originally introduced.

Before beginning, I’m sure that it will be impossible to write this without offending some of my audience.  The prescription drug bill is a politically charged issue, and passionate factions formed for and against the bill.  However, let me say up front that it is not my intent to disparage any group of individuals, whether they be young, old, or corporate America.

Politics – Strange Bedfellows

The Bush administration pulled out all the stops to pass its new Medicare bill which includes a new prescription drug benefit.  This came after a decade of Democrats pleading for just such a benefit and lambasting Republicans for blocking it.  Yet most Democrats opposed the new Medicare bill, and vehemently so.  Stranger yet, last week Newt Gingrich and the AARP, who battled each other over old-age entitlement spending in the 1990s, joined the White House in support of the new $400 billion Medicare bill.

Stranger still, the Wall Street Journal’s conservative editorial page opposed the bill, as did ultraliberal House leader Nancy Pelosi, Ted Kennedy and most of the Democrats running for President. This, in the same week that Tom Daschle and George Bush joined forces trying to pass the enormous new $31 billion energy bill (it failed, by the way).  Not to be overlooked, all this happened in the same week that Massachusetts moved toward legalizing gay marriage.  Can you say….. CONFUSING?  Actually, it’s simply politics being taken to disgusting new lows!

I will return to the political issues later on, but first, here is a brief summary of the underlying issues driving the latest Medicare debate, and highlights of the new prescription drug bill.

Background

There is little question about the importance of prescription drugs these days.  Many diseases can be held at bay by taking medicines that target specific illnesses or symptoms.  As life expectancy continues to increase, there are more and more elderly Americans whose well-being depends upon these miracle drugs.

It is not uncommon to find even those who are relatively young (60’s ) to be on a dozen or more prescriptions per month.  The cost of these drugs can easily be more than $1,000 per month, even with generic substitutions.  Why the big cost?

According to a 2001 news release by the Tufts Center for the Study of Drug Development, the average cost to develop a new prescription drug is $802 million (in 2000 dollars).  This compares to a 1991 Tufts study that showed a cost of only $231 million in 1987 dollars.  Had these costs increased only at the pace of inflation, the cost of developing a new drug would have been only $318 million in 2000 dollars, rather than $802 million.

The study goes on to peg the responsibility for these hefty increases on increases in the costs of clinical trials, and the increased costs of failed drugs (only 21.5% of drugs that begin Phase I human trials ever make it to the market).  To the extent these increased costs are related to requirements of the FDA, the study doesn’t say, but other Tufts press releases indicate that drug approvals are faster now than in the 1980’s.

Just What The Doctor Ordered?

From my own interaction with elderly friends and relatives, I am keenly aware of the importance of prescription drugs for health maintenance.  I am also aware that the cost of many prescription drugs has gone through the roof.  However, the extent to which senior citizens have to choose between buying medicine and buying food is hotly debated.  A survey in the Wall Street journal last Friday showed that almost 81% of seniors said they were “satisfied” with their medical insurance coverage for prescription drugs. Another survey I read said that 86% of Medicare beneficiaries reported they had “no problem” getting their prescription drugs.  

Of course, 14% of the elderly population having “some problem” getting the medicines they need still amounts to a lot of people.  The bottom line is that it shouldn’t be necessary for the elderly to have do without medicine or become impoverished buying the prescription drugs they need in a country as rich as the US.  Thus, in principle, I agree that it would be good to help needy seniors with medical expenses.  The question is how, and I’m NOT convinced that this new prescription drug bill is the answer.  

The way the bill was rushed through Congress makes it look like it was entirely politically driven to insure Bush’s re-election next year.  Seniors, after all, make up over 20% of likely voters.  Unfortunately, what is politically expedient is rarely the best answer, as I will discuss later.  Here is a basic summary of the new Medicare bill.

A Brief Look At The Prescription Drug Bill

The so-called Prescription Drug Bill is a combination of public and private participation.  Here are the basic provisions included in the final bill out of the House and Senate Conference Committee, which became law this morning:

1) Provides prescription drug card beginning in 2004 that will help beneficiaries save an average of 13% off the cost of prescription drugs, and even more for those with low incomes;

2)  Beginning in 2006, provides a direct prescription drug benefit with the following features:

-   $35 monthly premium (can be more for high-income individuals)
-   $250 annual deductible
-   Pays 75% of the first $2,250 of prescription costs after the deductible
-   Provides no coverage for costs between $2,250 and $5,100
-   Provides 95% coverage for costs exceeding $5,100 per year (this limits out-of-pocket expenditures to $3,600 plus 5% of costs over $5,100);

3)  The Bill also provides for special assistance to the poorest beneficiaries and those with the highest drug costs;

4)  Contains some measures to keep prescription drugs affordable, as well as subsidies of $88 billion to employers to give them an incentive to maintain employer-provided coverage, where available.

5)  Provides for an experimental program beginning in 2010 in which Medicare will compete with private insurance plans in six major metropolitan areas; and

6)  Establishes Health Savings Accounts (HSAs) to help pay out-of-pocket medical expenses.  Contributions to HSAs are tax-deductible, earnings grow tax-deferred, and withdrawals are not taxed as long as the funds are used for medical expenses.

There are many other provisions of the 1,100-page bill, but they are too numerous and tedious to cover in this short E-Letter.

Pros And Cons

As you might imagine, such historic legislation generated more than its fair share of arguments both in favor of and opposing the bill.  This E-Letter is too short to go into each and every argument for and against this legislation, but I will attempt to summarize both positions below in general terms. 

Those in favor of the bill, including the powerful AARP, point to the fact that, although not perfect by any means, this bill does provide a benefit that is at the top of the list of many senior citizens and their caregivers.   Under the bill, the annual out-of-pocket prescription drug costs can be easily determined and planned for.  Those who want to see part of Medicare privatized will get their wish (partially) with the experimental program in six metropolitan areas targeted to begin in 2010.  Those supporting the new Health Savings Accounts (HSAs) point out that, unlike an IRA, HSAs have a double tax benefit – deductible contributions plus tax-free withdrawals.

Many of those with concern about the poorest citizens applaud the bill’s provisions that help those with low incomes.  Many employers like the plan because it provides for assistance in maintaining expensive prescription drug plans for retirees.  Drug companies like the plan because they see it as a way to increase sales and have Medicare foot the bill.  Many drug companies have policies that already help the poor with free or greatly reduced medicines.  Now, it appears they may be paid by the government for medicines they were previously giving away.

Those against the Prescription Drug Bill fall into two camps.  First are those who are true conservative Republicans (and Libertarians) who believe that this is just another very expensive expansion of the federal government.  To be sure, this bill will inflate an already huge and troubled Medicare bureaucracy, not to mention the $400 billion price tag over the first 10 years.  In fact, many opponents of the bill say that the $400 billion price tag is far too low for the first 10 years.  What else is new?

The other camp against the bill includes those on the more liberal Democratic side of the fence, who complain that the bill doesn’t go far enough in providing prescription drug benefits.  They also point out that the cost containment feature in the bill does not give the government the power to negotiate lower prices on drugs, but limits costs regressively by providing for higher premiums in the future.

Other opponents point out that the provisions aimed at helping the poor could actually make them worse off in the future, requiring them to pay more for drugs than they do under the current Medicaid system.  And finally, those who favor class warfare point out that only the wealthy will be able to afford the new Health Savings Accounts, and that those who are healthy will opt-out of comprehensive coverage in favor of high-deductible plans that can be covered by tax-free withdrawals from the HSAs.  This will potentially leave the poorest and sickest in the comprehensive plans, and will thus lead to higher premiums in the future.

Finally, there are many Democrats who opposed the bill simply because they didn’t want the Republicans to get credit for it and use it to their advantage next year.

There are many more positives and negatives that have been published about this bill, but suffice it to say that neither party seems to own this issue.   While the Republican majority was in control of the bill, a significant number of Democrats also supported it.  On the other hand, there were those Republicans who opposed the bill, which resulted in lots of political arm-twisting by Bush and the Republican leadership.

What, A Republican Entitlement Bill?

While the Democrats had owned the Medicare issue for decades, the original prescription drug bills were introduced in June of this year by the REPUBLICANS.  In the Senate, S.R. 1 was introduced by Republican Sen. Bill Frist, and in the House, H.R. 1 was introduced by Republican Rep. Dennis Hastert, and was also endorsed by the Bush administration.   To the surprise of many, you had the Republicans promoting a $400+ billion expansion of the most expensive entitlement program ever created.

I guess the best question to ask is, “WHY?”  Remember when Republicans used to be known as the party of limited government?  What happened?  It is true that one of Bush’s campaign issues in 2000 was a prescription drug benefit; however, the plan he envisioned then would have been largely accomplished by private HSAs.  While there are some provisions for HSAs in the later years, the new bill is primarily just another big entitlement program.  Again, the question is, what changed?

I think the issue is simply that with Bush’s lower approval ratings, and the likelihood that Iraq will continue to be a negative issue in the press for some time to come, Karl Rove (Bush’s senior political advisor) is worried about next year’s election.  He has obviously convinced Bush that he must co-opt the Democrats’ traditional issue – Medicare and a prescription drug benefit – as an “insurance” policy to buy more votes.  It is estimated that at least 20% of the voters next year will be seniors.

The political implications are obvious. The President will be able to say the Democrats opposed prescription drugs for the elderly.  (Bush did the same thing when he campaigned in 2002, saying the Democrats blocked Homeland Security because they wanted labor-protection provisions in the bill.)  Never mind that the new Medicare bill may be fraught with problems and suspect assumptions, impossible to pay for and absolutely certain to make big government even bigger.

It’s as if the Bush administration has taken a card from the Clinton playbook and are in continuous campaign mode.  As long-time readers know, I routinely criticized Bill Clinton for this practice, and now Bush deserves no lesser treatment in my opinion.  You may also recall that I criticized Bush for the steel tariffs, which have now been clearly shown to have cost more jobs than they saved.  I also criticized Bush over the bloated farm bill he signed in 2002.  No doubt, both of those controversial moves were made to buy votes in the Midwest and the steel states, including a host of states where Bush either won or lost by a small margin in the 2000 election.

With passage of the Medicare bill, that should win the votes of many senior citizens.  From a political standpoint, it would seem a good move to make.  But from the standpoint of Bush’s conservative base, it is a slap in the face.  Bush deserves the label – the “Big Government Conservative.”

In closing, let me wish you a Happy Thanksgiving!  Despite all of our problems, we live in the greatest nation on Earth, and we all have much to be thankful for.

Wishing you well,

Gary D. Halbert

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Forecasts & Trends E-Letter is published by ProFutures, Inc. Gary D. Halbert is the president and CEO of ProFutures, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, ProFutures, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.

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