In the beginning, Medicare was a simple idea: The government would help pay the medical expenses of the old. Sign up at age 65 — get a Medicare card, and present the card when you go to the hospital or doctor. They bill Uncle Sam for most of the expense. You focus on getting better.

Set up in 1965, Medicare is a single-payer health insurance system — for senior citizens.

It’s funded by a small payroll tax paid by workers and employers, plus monthly premiums paid by those enrolled, plus a direct transfer from the government’s general revenues.

Medicare was an extension of President Franklin Delano Roosevelt’s New Deal, and was seen by its authors as a stepping stone to universal health care. It came about because of 10 years of advocacy by the AFL-CIO and a landslide victory for Democrats in the 1964 elections.

Because it’s a simple concept, with a uniform benefit and universal eligibility, it’s very efficient. Medicare’s administrative costs are 1.6 percent.

But in the reinvention of Medicare that is now under way, simplicity and efficiency have lost out to ideology and special interests.

The ideology is market ideology. The special interests are drug and insurance companies.

On Jan. 1, Medicare expanded into paying for prescription drugs.

Medicare could have issued a drug benefit card to all seniors, directed all pharmacies to send a bill to an address in Washington, D.C., and used the combined purchasing power of 42 million enrollees to bargain with drug companies for the best deal possible.

But the architects of the new drug program believe in market ideology.

So instead, the government created a completely artificial market, in which nearly every feature is defined by the law. In this “market,” new entities called “Prescription Drug Plans” compete with each other — with marketing and advertising — for participants. For every participant the plans sign up, the government pays the plans a certain amount. It’s called capitation. Just as decapitation is head subtraction, capitation is head addition — the plan counts heads, sends the bill to the government, and the government pays a per-head bounty.

So rather than bill the government, pharmacies bill the middlemen, and the middlemen bill the government. The formula by which the plans are reimbursed eludes easy explanation. But it’s enough to cover the plans’ administrative and marketing costs, and profit.

“Every time you see a mailing or piece of advertising for one of these plans, that’s a dollar that could have gone for lowering drug prices,” says Bill Vaughan, senior policy analyst for Consumers Union, the group that produces Consumer Reports magazine.

Humana, a Kentucky-based health benefits company, is reportedly spending $80 million on outreach efforts for its prescription drug plans. Aetna plans to spend about $50 million, and other companies are dedicating substantial amounts. Presumably they expect to get back every penny. In addition, Pharmaceutical Research and Manufacturers of America (PhRMA), the drug industry lobby group, is hiring public relations firms like Oregon-based Ulum Group to tout the merits of the new program at outreach, education and enrollment events. PhRMA didn’t respond to Northwest Labor Press requests for information on how much its outreach effort is costing. Medicare itself is spending $500 million on publicizing and explaining the new program, and has assigned over 9,000 employees to answer questions about the new benefit.

The new program’s administrative costs will be 12 to 13 percent the first year, according to Medicare estimates — more than six times the cost when Medicare doesn’t deal with a multitude of middlemen.

“There’s an ideology that private plans are more efficient and save money,” says Bob Berenson, senior fellow at the Urban Institute, a Washington, D.C. think tank. “But the facts on the ground are that adding private plans in Medicare costs extra money.”

Berenson points to Medicare’s earlier move toward privatization, called Medicare+Choice. Medicare+Choice allowed Medicare participants to enroll in private insurance plans in place of traditional Medicare, with Medicare picking up the tab. Medicare+Choice was created by the Balanced Budget Act of 1997, and it was supposed to save Medicare money through the miracle of private-sector efficiency exemplified by the new breeds of health insurance: HMOs and PPOs (Health Maintenance Organizations and Preferred Provider Organizations.)

Within three years, the government’s own budgetary watchdog agency was reporting that the new program was costing Medicare more, not less. In an August 2000 report to Congress, the General Accounting Office concluded that Medicare was spending 21 percent more per enrollee.

Did those facts cause a rethinking of market ideology? No, Berenson says. Ideologies are impervious to evidence.

In fact, the Medicare Modernization Act of 2003, which created the new Medicare Drug Benefit, rewrote the rules to favor private insurance plans even more. Medicare+Choice was renamed Medicare Advantage, with all the advantage going to the private plans. In a nutshell, Medicare is funding its own competition, and so generously that Medicare Advantage can afford to offer greater benefits to seniors than traditional Medicare is allowed to offer. By the end of 2005, about 500 managed care plans had contracted with Medicare, covering about 6 million enrollees.

“People are missing the point of the Medicare Modernization Act by focusing on the prescription drug benefit,” Berenson said. “The real thing is it’s an attempt to systematically do in traditional Medicare by making private plans more attractive.”

To get the new drug benefit, seniors who don’t have employer or union drug coverage have two options: join or stay in one of the Medicare subsidized HMOs, or sign up for a stand-alone Medicare-approved Prescription Drug Plan (PDP).

Market ideology says that by pooling the drug purchasing power of many enrollees, the Medicare Advantage plans or stand-alone PDPs can bargain down the price of drugs and thereby save money for taxpayers or enrollees.

To understand how preposterous that is, you have to know two things:

1) In bargaining for a better deal, size matters. Larger groups of buyers get a better deal than smaller groups of buyers.

2) The authors of the Medicare Modernization Act specifically forbade the government from forming the biggest purchasing pool of all — it forbade the government from bargaining on behalf of all 41 million Medicare recipients. That would have lowered prices, possibly to the Canadian level, and hurt the profit margins of drug companies.

Instead, seniors will be divided among a great many plans. No state has fewer than 11 plans. Oregonians have 71 plans to choose from. Washingtonians have 73.

And the ownership patterns of the new PDPs raise all kinds of questions about financial conflicts of interest. The newly hatched PDPs were formed by drug companies, HMOs, PPOs, pharmaceutical benefit managers, large private employers and even the AARP, a private non-profit. The only entities expressly forbidden by the law from forming PDPs were state and local governments. They might have run the plans too efficiently, drawing customers away from private-sector competitors, and that goes against market ideology.

Presumably, the PDPs are negotiating some discount on the drugs they buy, just nowhere near the discount the government could have gotten directly.

But again, when the sponsors of the Medicare Modernization Act of 2003 weighed the interests of drug and insurance companies against the interests of seniors, seniors lost out.

Not only did the law ban the U.S. government from trying to get a good deal from drug companies, it also prohibited reimportation from Canada, which does bargain a better deal for its citizens. All of the bill’s sponsors — 19 Republicans and one Democrat — were recipients of generous campaign contributions from PhRMA. And one of the bill’s sponsors, Louisiana Senator Billy Tauzin, left the following year to become president of PhRMA.

Medicare projects its new program will account for 28 percent of the total U.S. prescription drug market. Experts differ on whether the new Medicare drug benefit will cause drug prices to go up or down in the short run. Some think discounts negotiated by PDPs will temporarily reduce prices while others think drug companies will treat the new benefit like a blank check and raise prices.

After drug and insurance companies, there’s a third group the new drug program will subsidize: employers and unions that were previously providing retiree prescription drug benefits.

Critics of the Medicare Modernization Act argued that the new government benefit would cause employers to drop coverage. Why keep paying for a retiree drug benefit when the government offers other options?

To prevent that from happening, Medicare set up a subsidy program. Employers and unions that contribute an amount equivalent to Medicare’s contribution to drug plans will be partially reimbursed. The formula is complex, but basically rebates 28 percent of each qualifying retiree’s allowable prescription drug costs. The subsidy is projected to amount to $56 per retiree per month for the first year.

However, the subsidy program seems to favor employer-sponsored retiree drug plans over union-sponsored plans. That’s because the subsidy is a tax-free grant given directly to the “plan sponsor.” Union benefit trusts are already tax-exempt. But companies pay taxes on ordinary income. That means that all other things being equal, a large company would get a bigger rebate sponsoring its own plan than contributing to a union plan.

It’s not clear the subsidy will work in any case. In 2005 the Kaiser Family Foundation sponsored a survey of 300 large employers that provided retiree drug coverage. About 10 percent said they intended to drop coverage in the first year of the new program. An equal number planned to supplement government-sponsored plans with additional coverage. Expectations of remaining in the subsidy program dropped each year for the next few years.

Kathryn Bakich, head of National Health Compliance for Segal Company, the largest benefits consulting firm in the U.S., said it was impractical for unions and employers to change what they were doing in the first year, because details of the new plans weren’t announced until September 2005.

“Most of our clients are taking the subsidy,” Bakich said.

The Medicare Modernization Act leaves almost no private health care entity unhelped. After the employer subsidy, there is gravy for others lower on the food chain: rural hospitals, medical equipment manufacturers, auditors, actuaries, doctors. In every case, the vision is to use government regulation, and taxpayer dollars, to assist the private sector.

“There are certainly contexts where the private sector is markedly more efficient,” says Yale University political science professor Jacob Hacker. “But in this case. essentially what the government is providing is insurance, and when it comes to insurance, there’s a very strong rationale for the government to be the primary insurer because it’s so much better at spreading these risks and doing it in a more efficient way.”

HMOs and PPOs have lost credibility as efficient ways to finance health care, adds the Urban Institute’s Berenson.

“Health plans have failed in the private sector,” Berenson said. “They’re passing on all the cost increases mostly to workers in the form of increased copayments. And in the face of that record, Congress goes and says we now want them to solve Medicare’s problems.”

Last year, the Congressional Budget Office estimated that the new Medicare drug benefit will cost taxpayers $32.1 billion in 2006. That outlay is expected to triple in seven years.

But unlike original Medicare, which was largely self-funding, the drug benefit is a new expense without any plan for new revenue. There is no equivalent plan to raise taxes, on the rich or anyone else, to pay for the program. In fact, the Bush Administration has been dismantling old taxes and breaking all previous records for running up deficits. That means that the overpriced drugs it’s subsidizing for today’s seniors will be paid for, with interest, by tomorrow’s taxpayers.