Medicare Scare.

During one of the most flush periods in our nation's history, all the talk in Washington is about austerity. Cutting back health care and retirement benefits, removing the safety net for the poor, the elderly, and the disabled, and dismantling what's left of the New Deal and the Great Society--this is the order of the day.

Panels assembled by Congress to study Medicare and Social Security inform us that these programs face bankruptcy unless the government resorts to extreme measures. The Republicans are clamoring to privatize federal entitlements and throw the elderly and ailing on the mercy of the free market. The Democrats, meanwhile, are rubbing their chins, divided about whether to defend the programs from the privatizers or pursue a more "moderate" path of partial privatization.

But the real crisis facing the most vulnerable people in our society is not a financial shortfall. The real crisis is purely political.

"Can you imagine anyone arguing that the Pentagon is `going bankrupt'? Of course not," writes Kip Sullivan, research director for Minnesota COACT (Citizens Organized Acting Together), in his excellent analysis of the phony Medicare crisis for The Washington Monthly. "The Pentagon will `go bankrupt' only if Congress wants it to. The same is true of Medicare. Medicare will expire only if a Republican-controlled Congress says it should."

The reason we hear so much talk about austerity for Medicare is that politicians--and their friends in the insurance, pharmaceutical, and managed-care industries--are determined to undermine federally subsidized health care. "They know the only way to get Americans to support the privatization of Medicare is to convince us that our choice is between privatized Medicare and no Medicare at all," Sullivan writes. "Hence the `bankruptcy' rhetoric."

There is big money at stake. The $214 billion Medicare program covers some 15 percent of the U.S. population and represents about 20 percent of the nation's total medical expenditures. Instead of letting the government administer all that health care, the privatizers propose converting Medicare into a voucher program, which would force individuals to shop for insurance in the private market.

But for the elderly and disabled, this would be a disaster. Private insurance would be more expensive, and it would not cover many serious health problems.

Unlike the managed-care system, Medicare does not contain costs by rationing care to patients. And Medicare's per-capita costs are lower than the private insurers'.

"Over the last thirty years, the annual growth in spending per capita in Medicare has been about one-third of the growth in per-capita spending in the private health care sector," says Edie Rasell of the Economic Policy Institute. Last year, the total Medicare spending increase was a mere 1.5 percent, she adds. Part of the reason for this efficiency is that Medicare spends far less on bureaucracy than the health maintenance organizations (HMOs)--2 percent of Medicare revenues go to administrative costs, versus 15 percent for private insurers. Nor does Medicare spend millions on marketing, advertising, and lobbying Congress, as the HMOs do.

The absurdity of the privatizers' position comes into focus when you consider what the HMOs actually did when they got a piece of the Medicare pie.

In 1985, the Medicare administration began offering government subsidies to HMOs that provide prescription drug coverage and other services to Medicare patients. The HMOs lobbied for the subsidies, claiming that they could provide more efficient care. But last year, HMOs began dumping Medicare patients in droves. On January 1, 1999, more than 400,000 Medicare recipients lost their HMO coverage.

"HMOs' moves to drop the elderly represent a U-turn for the organizations, which had thought that accepting Medicare patients would be profitable, and rushed in recent years to sign up Medicare patients," The Wall Street Journal reports. "They promoted their services with glossy brochures and restaurant meetings, promising a broad choice of doctors at minimal cost."

But recently, HMOs announced that the government subsidies were too low. They could no longer afford to cover Medicare patients. The government disagreed. Research by Congress's Physician Payment Review Commission and the New England Journal of Medicine shows that if anything, the Medicare subsidy for HMOs is too high. HMOs cover the healthiest, least-expensive Medicare patients, and yet they bill the government for each patient at a rate that equals 93.7 percent of the cost of caring for the sickest patients in the Medicare program. The Physician Payment Review Commission found that the HMOs' real costs of care were closer to 55 percent of the traditional Medicare rate. The same studies found that the HMOs routinely deny patients medical care, and have been guilty in many cases of poor management and fraud. Yet they have sucked up hefty government subsidies while delivering inferior service.

When their lobbying campaign for fatter subsidies failed, the HMOs rebelled by dumping patients. The results for the elderly who suddenly lost their coverage have been dire, as they were cut loose in an expensive and confusing medical-insurance market.

The cost of prescription drugs is the biggest problem Medicare recipients currently face. Medicare does not cover prescriptions. Instead, these "Medigap" plans, designed to fill this hole in Medicare, are administered by HMOs. The massive patient-dumping by the HMOs forced many elderly to choose between buying food or paying for their medications. Many of those who still have Medigap plans--which cost an average of $1,000 a year, according to The Wall Street Journal--find them burdensomely expensive.

For about $20 billion, the government could cover Medicare patients' prescriptions. But pharmaceutical companies strongly oppose such coverage. They fear that if the government covers prescriptions, it would begin to demand price controls on drugs.

Under the headline IDEA OF HAVING MEDICARE PAY FOR ELDERLY'S DRUGS IS ROILING THE INDUSTRY, The Wall Street Journal details lobbying efforts by the industry to discourage drug coverage for Medicare patients. This push included sending "a letter to some black legislators warning that if some sort of government price controls were imposed, minority patients would suffer because drug companies wouldn't have enough spare cash to develop new drugs for ills that afflict them."

"We don't think bigger government programs are the answer," Henry McKinnell, executive vice president of Pfizer, told The Wall Street Journal.

If we want to provide good health care to the elderly as efficiently as possible, big government clearly is the answer. But whose interests do the politicians want to serve: those of the pharmaceutical and managed-care industries, or those of elderly patients?

The privatizers argue that as the baby boomers age, the government simply won't be able to afford to pay for Medicare anymore. This is pure sophistry.

It is true that Medicare, which relies on a 2.9 percent payroll tax for most of its funding (plus a $45.50 monthly premium deducted from beneficiaries' Social Security checks), will be affected by shifting demographics. Fewer workers will eventually be paying into a system that covers a growing elderly population. Somewhere between 2008 and 2012, expenditures are expected to exceed receipts.

The projected shortfall may not materialize as quickly, and rising wages could help cover it. But even if the shortfall arrives as projected, there are ways to solve that problem.

One way would be to use some of the budget surplus to cover it. The Office of Management and Budget is predicting a $400 billion budget surplus by 2009, and only a fraction of that would be needed to make Medicare whole.

Another way would be to take the money that could be saved by cutting the Pentagon's budget and allocate it for Medicare. By the year 2020, the Medicare gap is supposed to be $85 billion (in current dollars). As we discussed in these pages last month, critics of the Pentagon from the left and the right believe that at least $100 billion a year can be saved without jeopardizing the security of the United States.

The most common proposal being bandied about is to raise the payroll tax. But this is a regressive tax in the first place, and it doesn't take a nickel out of unearned income: the interest, dividends, royalties, and rent that the wealthy enjoy. If anything, we should be exempting the first $10,000 or $15,000 of wages from the payroll tax to help the people at the bottom and tax unearned income for Medicare. And while we're at it, we should raise general income taxes on the wealthy, whose effective tax rate (that is, the amount they pay in taxes divided by their total income) has fallen from 25.2 percent in 1977 to 22.8 percent in 1998.

Senator John Breaux, Democrat of Louisiana, is the head of the bipartisan commission that studied Medicare. His recommendations, endorsed by most of his fellow commissioners, include raising the age of eligibility for Medicare from sixty-five to sixty-seven and creating a voucher system under which people could choose to retain Medicare coverage or switch to a private HMO. Competition among different plans would help control costs, Breaux suggests.

Others are not so optimistic. "One-third of the thirty-nine million Medicare beneficiaries are unlikely to participate in a competitive market because they have major medical problems or are struggling with Alzheimer's disease or mental illness," Marilyn Moon, a public trustee of the Medicare trust fund, told The New York Times. "And they probably won't be sought out by health plans in their marketing campaigns."

There is an even bigger problem with the voucher idea. If the HMOs stick to their current practice of selecting the healthiest patients and rationing care, they could set their premiums competitively low, draw off patients, and ultimately kill off the traditional Medicare system.

Robert Kuttner, editor of The American Prospect, suggests that rather than raising the age of Medicare beneficiaries, the government ought to lower it to fifty-five to bring in revenue from a population that doesn't have as many expensive ailments.

The best alternative (which Kuttner also favors) would be to lower the age to zero--that is, to provide a single-payer, universal health-care system for all Americans. It would solve the moral crisis of having forty-three million Americans without health care. And "if we had a universal health-care system, we could do better cost containment," says Rasell of the Economic Policy Institute. She says the government would have more leverage with doctors and hospitals to keep prices down, and the government could control the wasteful use of expensive medical equipment. "Ultimately, single-payer is the only answer."

Democrats like Breaux and John Kerry of Massachusetts, who supports Breaux's plan, are siding with the Republicans. Other Democrats, like Senator Edward Kennedy of Massachusetts, John Dingell of Michigan, and Paul Wellstone of Minnesota have spoken out recently about elderly people's right to health care and the threat to Medicare from privatization.

With the massive power of the private sector weighing in on this issue, it is crucial for people at the grassroots to demand that our elected officials preserve and expand Medicare. Democrats should have nothing to fear, since the honest, decent, and popular position to take is to defend Medicare. If only they have the backbone to take it.