Consider This a Warning: Government Programs Wasting Your Money, Part III – Medicare

Thomas Warns*


Medicare, a government program signed into law in 1965, enjoys widespread bipartisan support. Supporters point to improving life expectancy and declining rates of disabled seniors as proof of the success of Medicare over the last forty years. The relative success or failures of the program aside however, one thing is clear: Medicare is wasting a lot of taxpayer money.

In a nutshell, Parts A thru D of Medicare provide health insurance and prescription drug coverage to Americans over 65 as well as those with disabilities. Beneficiaries share some of the costs of this coverage, while some of the funding is also collected via a 2.9% tax on wages (now 3.8% for high earners). Medicare appears firmly entrenched as it approaches 50 years of age, but battles over cuts persist due to projections that the Medicare Trust Fund will run out of funds at some point in the future. Medicare however remains popular enough that it has provided a rare opportunity for Congress to pass a bipartisan law aimed at fixing the reimbursement formula for the future.

That trust fund would last a lot longer if Medicare wasn’t being drained every year through wasteful payments. The biggest source of waste comes from overpayments to medical service providers. Due to fraud, waste, and errors, Medicare overpaid healthcare providers by $49 billion in the last fiscal year, an increase from $45 billion the previous fiscal year; this means that about 1 in every 10 dollars spent by Medicare is wasted. While fraud was a significant part of the problem, the majority of the waste was from payments for costs that should have been absorbed by healthcare providers and customers, not Medicare.

Another huge issue stems from the failure to curb excessive spending by doctors who consistently prescribe brand-name drugs instead of generic drugs, which are far cheaper. Just 913 doctors who consistently prescribed brand-name drugs over generics cost Medicare over $300 million in 2011; Dr. Hew Wah Quon of Los Angeles single-handedly cost Medicare an additional $27 million between 2009 and 2011. While many supporters hold up Medicare Part D as an overall success because spending on it has come in below budget estimates, this amount of waste is unconscionable.

A final sticking point is that Medicare pays above the sticker price for certain medical products. The most egregious example of this is penis pump purchases which have cost $172 million over the last six years. While penis pumps are a viable treatment option for men with erectile dysfunction, Medicare is paying for penis pumps at roughly twice the rate the average American consumer would pay at the retail level, resulting in an overpayment of roughly $14.4 million dollars every year for the last six years. Another example of wasteful overpayment for medical devices vis-à-vis the retail market is back brace purchases: Medicare pays over $900 on average for back braces that cost suppliers roughly $191.

How does classical liberalism provide the solution to these issues? Some question the wisdom and viability of Medicare in the long term because the trust fund that helps pay for it will run out in 2026 (will Medicare be there for Medicare when it turns 65 in 2030?). As America’s average age increase and people live longer, the economics supporting Medicare will become less and less sustainable. The reality however is that barring an unexpected change in the political winds blowing through Washington, Medicare is here to stay. Seniors are a well mobilized group of voters who will protect their entitlements no matter what the side effects are (not to mention insurers and the medical industry must love the government’s deep pockets). The most practical reforms will involve injecting free market principles into Medicare, rather than the other way around.

The $49 billion overpayments present the most glaring problem. Part of the reason that the waste calculation is higher for this year as opposed to next year may be because private auditors are in charge of detecting fraud and waste within Medicare, and receive a commission based on how much waste they uncover. The fact that private auditors have become so skilled at detecting waste speaks to the possibilities for the free market to improve Medicare, but it is only a partial victory; because the auditors are paid a commission based on their findings of waste or fraud, they are incentivized to detect waste but not to reduce it. Another private party needs to take the reins of the prevention aspect, independent of the current auditors, and train hospitals and doctors in proper methods to reduce overpayments.

Over-prescribing of brand name drugs is another issue that can be solved with free market incentives. Medicare Part D stipulates that low-income patients not be charged more than $7 per prescription for their drugs, meaning patients don’t care if they get name-brands or generics; doctors however may receive consulting or promotional fees from name-brand companies and would thus be incentivized to prescribe those drugs for patients. Instead, keep the $7 limit for generic drugs, while forcing patients to pony up half of the money for a name-brand drug if an equivalent generic drug is available. Patients will have good reason to select a generic cholesterol medication at $.20 per pill over Crestor, which costs $6 per pill. Another option would be to give small bonuses to doctors who prescribe a certain amount of generic drugs over name-brand drugs.

Finally, overpayments for certain medical devices can be avoided as well by introducing free market incentives. Rather than having doctors prescribe pricey back braces and penis pumps, cut patients a check for the market value of the device they are prescribed (not every medical device will be ripe for this treatment, but many relatively unsophisticated devices will be). Doctors can give advice on what products to buy, and patients will be incentivized to search for products that maximize quality at a reasonable price, since they can keep any money left over after their purchase. The internet provides no shortage of affordable back braces and penis pumps (Amazon sells those too). While politicians and pundits will argue over the wisdom of having Medicare in the first place, no one should doubt the capability for common-sense libertarian solutions to reduce the waste within Medicare and save taxpayers some of their hard earned money.


*Thomas Warns is a J.D. Candidate, class of 2015, at NYU School of law, Staff Editor on the NYU Journal of Law & Liberty , and author of the weekly column "Consider This a Warning."

Consider This a Warning: Government Programs Wasting Your Money: Part 1 Amtrak

Thomas Warns*

In 1970, Congress passed legislation which took over the intercity passenger rail service that had been formerly operated by private companies but were in decline due to America’s love of the automobile and expanded air travel. Amtrak began service in 1971, and continues operating to this day, serving over 500 communities. Amtrak trumpets that ridership is growing every year, and that during fiscal year 2012, 31.2 million people rode on Amtrak.


But the financial picture is not so rosy. Their finances are so messed up that Amtrak’s own website proudly boasts that they managed to pay 88% of their operating costs with the money they collected from passengers; in other words admitting that they still lose money (and apparently consider that to be a success). Of course, Amtrak also has other financing and investment expenses beyond mere operating costs (think buying new trains and improving the existing track), so they aren’t even close to paying off 88% of their total costs. In 2012, Amtrak received an appropriation of $1.4 billion from Congress in order to pay off their expected losses. The Northeast Corridor Route, running from Boston, through New York, to Washington, is the only route that turned a profit comparing revenues to operating costs (once more excluding other costs which might send that line into the red as well).

Amtrak of course would boast that their service helps to relieve congestion on the roadways and helps reduce greenhouse gas emissions, but their success in doing so is negligible. The 31.2 million riders figure computes to just 85,000 riders per day, nationwide, which fails to have a substantial or appreciable effect on travel. Compare this to the airline industry, which can pride itself on its annual domestic ridership of over 650 million, or 1.8 million fliers per day. And of course if energy efficiency were the ultimate goal, buses are much more efficient than Amtrak. The astute reader will object that these rival forms of transportation also receive government subsidies, however the amounts aren’t even close: Amtrak receives $46.33 per passenger, aviation $4.28 per passenger, and intercity buses a mere $0.10 per passenger.

Perhaps one of the most embarrassing examples of waste and mismanagement is the fact that Amtrak has lost $883 million over the last ten years just from food sales. Apparently even having a captive dining audience wasn’t enough for Amtrak to make money from their food sales, and rather than change up the menu they continued to sell hamburgers which cost $16.15 to make per hamburger for only $9.50 to the customers. Meanwhile, Amtrak asked for an additional $150 billion in order to provide faster trains on the Northeast Corridor, when they could serve the route faster at no additional cost by cutting unnecessary stops between the major cities.

Amtrak’s failures are to a large extent political. Rent-seeking politicians prevent Amtrak from achieving profitability by reducing or cutting out altogether service to out of the way stations that have no economic viability whatsoever. The fact that the Northeast Corridor makes money proves that there is the potential for railroads to serve some customers profitably with intra-regional, intercity train lines; operating lines national lines from Chicago to Los Angeles is unnecessary and wasteful. While a 43-hour, $169 train ride does sound nice, any one that hasn’t lost their marbles would opt for a four-hour, 25 minute flight from O’Hare to LAX starting at $109 on most of the major airlines.

So what is the solution? Ideally, the U.S. should sell off all the assets of Amtrak, and watch free market forces work. Amtrak is emphatically not a public service like water or electricity companies, which are operated by state-owned monopolies (in most cases). It is a federally chartered corporation, with the federal government as a majority stockholder, and operated as a for-profit (in theory) company, not a public authority. It has become a failing business which competes for customers with other private modes of transportation that are doing better but still struggling to squeeze out a profit (especially the airline industry, which has undergone numerous mergers and bankruptcies).

The Northeast Corridor would likely earn the United States a hefty sum at the chopping block from investors who want a piece of Amtrak’s only profitable operation. Other routes could be practically given away, since their continued operation only loses the United States money each year. Smaller state-run routes utilizing private contractors have operated with significantly reduced labor costs on shorter rail lines, forecasting possible successful for some of the privatized lines. Because intercity bus routes and airplanes connect the country, small towns with Amtrak stations would not be cut off from the rest of the country, as some have warned, if the lines cease service altogether.

Shifting some of Amtrak’s costs to the states, as Congress has mandated, is not much of a solution. The law makes the federal government’s books look a little better, but taxpayers are still paying for Amtrak – now through taxes at the state and federal level. You can bet that politicians will waste our time in the future arguing over which level of government will tax you in order to prop up Amtrak, instead of trying to get another liability of minimal value off the books.

Ultimately, rail service should be allowed to live or die in the United States based on the viability of its technology, the ingenuity of its managers and owners, and the desires of American travelers.  Perhaps the elimination of subsidies for other modes of transportation as well would help level the playing field for all players. Constant subsidies and bailouts driven by political motivations only block efforts at consolidation and rationalization within a market. It is madness to tax Americans in order to prop up a failing for-profit corporation (it’s almost like a once-a-year bailout) which does not provide an essential public service. Further funding for Amtrak will only derail efforts at reducing the deficit, and prevent more efficient private operation of the rail lines. And thankfully, privatization will mean no more taxpayer-funded hamburgers on the train.

*Thomas Warns is a J.D. Candidate, class of 2015, at NYU School of law, Staff Editor on the Journal of Law & Liberty , and author of the weekly column "Consider This a Warning."