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Capitol Comment 250 – Snowe-Wyden: No Fairy Tale for Seniors and Taxpayers

Senators Olympia Snowe (R-Maine) and Ron Wyden (D-Ore.) recently introduced the Seniors Prescription Insurance Coverage Equity (SPICE) Act, S.1480. The SPICE Act has seven shortcomings that dwarf any benefits for seniors.

Premium Coverage Under S. 1480

IF a Senior’s or Couple’s Income is…
…THEN Taxpayers Would Pay This Portion of Their Premiums

Up to 150% of the poverty level

150% to 175% of the poverty level
Between 100% and 25%

Over 175% of the poverty level

The SPICE Act is a tax-and-spend scheme that would pay a percentage of seniors’ insurance premiums for supplemental policies that cover government chosen prescription drugs (see chart). Seniors’ existing choices – group health plans offered by their former employer; Medicare+Choice plans; new group policies; and a new Medigap policy that would cover only outpatient prescriptions – would be forced to conform to government-set restrictions. The Snowe-Wyden approach has serious problems:

1. More government bureaucracy between seniors and their health care. The SPICE Act creates a new SPICE board to run the new SPICE office within the Department of Health and Human Services (HHS). It would create a model plan, develop enrollment procedures, approve plan and premium submissions, and review marketing materials. Under this scheme, health care providers would face an alphabet soup of regulatory bodies. For example, a Medicare+Choice plan now regulated by the Health Care Financing Agency would also have to follow SPICE regulations – regardless of whether the new regulations duplicate or contradict the old ones.

2. Government gatekeepers. In creating a model plan, the SPICE board would decide what expensive or experimental drugs must be covered. These unelected officials could force insurers to cover an ever-expanding list of medicines, whether or not this coverage would be affordable for seniors. It would also have the power to determine procedures for withdrawing from a plan that might make it hard – even impossible – for seniors to leave SPICE.

3. Higher taxes for all. The government subsidies for the SPICE program would come from two sources: tax dollars and new tobacco taxes. First, the SPICE Act would make a large, new claim on the federal budget, doing nothing to solve Medicare’s existing financial problems. Second, the SPICE Act would accelerate an already scheduled tax increase on tobacco (15 cents per pack of cigarettes) and add a new tax increase of 55 cents per pack. Tobacco taxes are paid by customers, a majority of whom have incomes below $30,000.1 In essence, then, the proposal would raise taxes on the poor so government can subsidize medicine for all retirees, including the wealthy.

4. Spiraling costs and premiums. Will doubling the federal tax on tobacco lower demand, and, in turn, government revenue? If so, the SPICE program would have to: (1) rely even more heavily on the projected surplus or (2) raise seniors’ portion of their premiums. Essentially, Congress would have to choose between making Snowe-Wyden an even bigger tax-and-spend program or a bait-and-switch for its beneficiaries.

5. S.1480 creates another big-government entitlement program. Under the guise of helping the needy, Snowe-Wyden would provide every senior citizen with a subsidy to buy insurance, regardless of their wealth or income. This would institute a broad new enterprise for transferring wealth from taxpayers to retirees.

6. A hefty pricetag. How much will this program cost? Though the Congressional Budget Office has not yet evaluated S. 1480, a useful point of comparison might be President Clinton’s Medicare reform package, a section of which is similar to Snowe-Wyden. When fully implemented in 2008, the prescription drug subsidy in the Clinton plan is projected to cost over $29 billion.2 One significant difference between these plans is that Clinton’s proposal pays for one-fourth of the cost of prescriptions up to a specified dollar amount, but the SPICE Act’s premiums would fund, on average, over one-fourth of premiums with no dollar limit. Thus, the cost of SPICE could exceed that of the Clinton proposal.

7. Fewer choices for seniors. In addition to pushing seniors into a standard, one-size-fits-all benefits package, S. 1480 allows the SPICE board to end a plan’s participation in the program if it finds that “the entity offering the SPICE prescription drug coverage is purposefully engaged in activities intended to result in favorable selection” of beneficiaries.3 The legislation does not define favorable selection or the criteria the SPICE board might use to divine a plan’s intentions. Faced with a potentially arbitrary regulatory regime, health plans will likely react conservatively. For example, Snowe-Wyden promises to allow plans to compete by having varying deductibles, co-payments, or even a limit on beneficiaries’ out-of-pocket expenses. But plans may feel compelled to avoid offering insurance products with features different from competing products for fear of engaging in “favorable selection” of their customers.

The SPICE Act is the same tired recipe of taxes and regulations that made Medicare what it is today: an entitlement program masked by the rhetoric of trust funds, individualized benefits, and private-sector competition. For both seniors and taxpayers, Snowe-Wyden is no fairytale.

1J. Scott Moody, “Federal Excise Taxes and the Distribution of Taxes Under Tax Reform,” Tax Foundation Background Paper No. 29, January 1999, p. 4.

2Testimony of Dan L. Crippen, Director, Congressional Budget Office, before the Committee on Finance, U.S. Senate, July 22, 1999, Table 4.

3S. 1480, Section 1860B (a) (2) (B).