Congress is deciding the fate of Medicare. Following a report by Kwame Holman on the vote for passage pending in the House, Investment Banker Pete Peterson, chairman of the Blackstone Group, and president of the Concord Coalition, a bipartisan conservative campaign organization, debates Joseph Califano, president and chairman of the Center on Addiction and Substance Abuse at Columbia University. Mr. Peterson served as the Commerce Secretary under President Nixon. Mr. Califano was President Johnson's domestic policy adviser when Medicare was signed into law. He was Secretary of Health, Education, & Welfare in the Carter administration.

ROBIN MACNEIL: Joe Califano, if this House vote, as many are calling it, is historic, is it good history or bad history that's being made?

JOSEPH CALIFANO: Well, I think it's less historic than both parties are making it, and I think it's very bad history. All this vote--all this bill does is reduce the amount that's being paid to doctors and hospitals over the next seven years by $190 billion. The amount that beneficiaries have to pay into the program is increased by $70 billion, and there's a kind of wispy $7 billion that they think they'll save by moving people into health maintenance organizations. If, if the Feds continue with the sort of federal fetish with--dealing only with what we--how we pay for health care, they will not save the money they say they're saving. It's the same thing they've been doing for the last 30 years, delivering only health care payments for sick care. What they ought to do if they want to really save Medicare is look at where the research bucks are invested. We invest billions of dollars to keep people alive for a few more weeks, a few more days, and with expensive machinery, expensive surgical procedures, and do things that will help people encourage themselves to take better care. One example out of Medicare, Medicare pays for flu vaccinations and pneumonia vaccinations. 38 percent of Medicare beneficiaries take advantage of that. If all Medicare beneficiaries took advantage of it, they'd save $600 million. How do you make them do it? I would suggest they say, if you get the flu and you haven't gotten a flu shot and you're on Medicare, you pick up the tab for your health care.

ROBIN MACNEIL: Pete Peterson, the Republicans are saying that far from doing things as they've been doing it for 30 years, this is historic because they're really grappling with the, with the problem. What is your view?

PETER PETERSON: Half-right, half-wrong. They deserve to be congratulated for finally putting a middle class entitlement on the table. This is the first time that's been done. They're injecting some competition in the form of managed competition. I think that's a good idea. But to pick up on Joe's point what our political system doesn't seem to be able to come to grips with is why is this country consuming 14 percent of the GNP for health care and the rest of the world about, what, you know, 7, 8 percent, something of that sort?

MR. CALIFANO: Five or six.

MR. PETERSON: Five, six. That's four or five hundred billion dollars a year more. And it's easy to focus just on the providers and the doctors and so forth, but what we can't seem to do is focus on the, the consumer. Why are we using so much high-tech, high cost care? We've got eight times the MRI units. We've got four times the open heart surgery. We're spending billions of dollars in the last few months of life. And if we're going to attack that problem, which means the consumers are going to have to demand and consume less medical service, we're going to have to provide them with incentives to do that. But that requires telling the American people, hey, folks, if you want to solve the cost problem, you're going to have to consume less health care of this rather high cost, high-tech marginal type.

ROBIN MACNEIL: Let's come back at the end of this discussion to what you two think would be the best solution to attack this and just concentrate right on the bill that's being voted on tonight. Mr. Peterson says it's the first time that a middle class entitlement has been challenged, and that's a healthy thing.

MR. CALIFANO: Well, I think it is an unhealthy thing to turn this into a wealthier, means-tested program, because I think we see what happens under those circumstances. Medicaid--

ROBIN MACNEIL: The present principle is that anybody over the age of 65 is entitled to Medicare, no matter what his income or means.

MR. CALIFANO: No matter what is income or means is, and we should pay enough to cover that. And we can reduce the costs in other ways. Medicaid is a program that is basically a means-tested program, and what do we have under Medicaid? We have fewer and fewer doctors wanting to deal with it. We savage the poor because they have no constituency. We will move Medicare in the same direction. One of the points that somebody made, the quality of care will go down under this bill because fewer doctors will serve Medicare patients, and the program will lose its political clout. I Mean, the same political clout that, as Pete says, makes it hard to cut a middle class program is a political clout that I like that program to have.

ROBIN MACNEIL: You mean, once they've broken the dike on this, it will no longer be a universally-entitled program, and that it will lose its political clout that way?

MR. CALIFANO: It will, because the people that can buy out--I mean, there are doctors in New York City tonight that I'm sure both Pete and I know that will not treat Medicare patients. They will not treat Medicare patients, because under Medicare, you have to take something called assignment. You can't charge the patient more than what Medicare will pay.

ROBIN MACNEIL: And as we heard last night on this program, you only get 63 cents on the dollar of your costs.

MR. CALIFANO: That's right. The other--

ROBIN MACNEIL: According to the AMA.

MR. CALIFANO: Right. The other thing that's happening here, which I think is profound and which goes right to the heart of what makes America's health care system a premier system is the funds that come through Medicare to train doctors and train research, young research people, are being wiped out in this program, and they're not being replaced by any other appropriations that Congress is passing. That will have a very severe impact. When somebody says I care about my children and my grandchildren, they ought to care about our research. We are the premier country in the world on this.

ROBIN MACNEIL: Let's go--several points there to go back to Mr. Peterson on. First of all, the quality of care is going to go down under this Joe Califano says.

MR. PETERSON: Well, I think the only way we'll ever get costs under control is if we use less of this exotic, highly attractive high-tech medical care, MRI's all over the place, open heart surgeries, as Joe pointed out, tremendous amounts of high-tech being used in the last few weeks of life, so if by what you mean quality of care, are we going to use everything that every technologist--

ROBIN MACNEIL: What do you mean, the quality of care going down?

MR. CALIFANO: I, incidentally, agree with the point Pete is making. I think that it's important to note that. We spend--30 percent of Medicare is spent on people who have less than a year to live. And a lot of that is spent in the last few weeks of life on very expensive equipment that really provides a few more days of terminal misery. I think that should be changed. I think the culture of this country has changed, incidentally, not a law. What I mean by quality of care is that people get the best medical care, that they get the best health care, the best surgical care, but--

ROBIN MACNEIL: How will that go down under this bill?

MR. CALIFANO: Well, it will go down in several ways. One, I do believe that more doctors will refuse to provide for Medicare patients, so that if we can--someone that can buy out of Medicare, doesn't need it, can get a private plan, they'll get the best doctors. They will not--lots of them will not serve Medicare.

ROBIN MACNEIL: Do you disagree with that? Do you dispute that?

MR. PETERSON: A certain number, and I think that's right. That's right.

ROBIN MACNEIL: What is your next point?

MR. CALIFANO: The first point. The second point is that I--there's nothing in this bill to--that will close inefficient hospitals, for example, an even tougher bite, but a hospital operating at 30 percent of capacity, a business operating at 30 percent of capacity would go bankrupt, as Pete knows better than I do. A hospital operating at 30 percent of capacity makes money in the United States.

ROBIN MACNEIL: We've been told by Congressman Armey, the House Majority Leader, for example, they thought maybe up to 25 percent of the hospitals might close under this, and that would be a good thing.

MR. CALIFANO: I think it will be a good thing if hospitals close, but in the sort of political bazaar they've been running in order to get the votes to pass this bill they've made--they made certain that lots of rural hospitals will stay open, where--that shouldn't stay open, which really have a helicopter to take them to a better hospital, lousy care because doctors aren't performing procedures frequently enough.

ROBIN MACNEIL: I understand that argument. If you're going to have open heart surgery, you'll get better service by going to somebody who does open hearts all the time, rather than somebody who does one a month.

MR. CALIFANO: Right.

ROBIN MACNEIL: Yeah. Mr. Peterson, what about Mr. Califano's point that if the universality of this program is breached here, then it will lose its political clout and it will go the way of a welfare program like Medicaid?

MR. PETERSON: Well, I guess on this one Joe and I do disagree. The Concord Coalition has come up with something called an affluence test. And we're kind of shocked by the idea that about $400 billion a year of all kinds of benefits, not just Medicare, but Social Security and other entitlements, go to people above the median income. Now, if we're all on the wagon, I don't know who's going to pull it, so we have proposed that you have an affluence test where at some level above the median income you cut back the benefits progressively until the Pete Petersons of this world would have a significant cut in benefits. Now, incidentally, we have tested that in the Concord Coalition with people. And as long as people know that they're taken care of if they have a bad year in retirement, there is overwhelming support for that idea, but I would repeat that we're still--at the risk of sounding like Peter One-Note, that we really ought to focus on this cost issue that I was mentioning. We ought to have deductibles; we ought to have higher cost sharing. The deductibles are what they were many years ago. Medicare, we get ten to twenty times what we put in. Why isn't it taxable? We ought to do something about living wills. We ought to do something to cut back the demand for excessive care.

ROBIN MACNEIL: Let me go back--

MR. PETERSON: We're not really doing that in this bill, in my view.

ROBIN MACNEIL: Let me go back on that point to you. First I should say the bill has just passed in the House by 231 to 201, so it was healthily passed. How do you respond to his argument that the Concord Coalition has done this sort of means-testing thing and think that it should be--it should be applied to all these social programs as a way of saving the federal government money?

MR. CALIFANO: Well, I don't think that's the way to save the federal government money. I would much rather have people pay into Social Security what they need for Social Security, for example, to continue as a program that covers all people. I would much rather have people pay into Medicare what they need, and there are ways to make Medicare a lot more efficient than what they're doing, and have everybody pay the same thing. I think that Medicare is a social insurance program. That's how it was conceived. It was attached to the Social Security Act when we passed it in 1965. Medicaid was not conceived that way, and look at what a disaster the Medicaid program has come to be now. It provides inadequate coverage to poor people. It is being savaged in the proposals that are on the Hill in terms of the part that applies to poor people. I think one of the things government is about is taking care of people that can't take care of themselves. And when we start to abandon that fundamental principle, we are talking about a major change. That aspect of what's going on is historic.

ROBIN MACNEIL: So, Mr. Peterson, what you're talking about, your approach supposes this country never again wants to have advanced social services that are funded by the appropriate taxation.

MR. PETERSON: Well, the key words is funded. For a moment, let me talk a bit about the long-term. Beginning in the year 2010, 76 million baby boomers are going to turn into senior boomers. We have a, a wonderful oxymoron called the trust fund, and it is an oxymoron. It's a travesty on the word "trust." There is no money there; it's just a bunch of bonds. We're on a pay-as-you-go system. Let me give you two numbers that might get the audience's attention. If you look at the Medicare annual deficit, and that's what we ought to look at, when the boomers retire, it's going to reach hundreds of billions of dollars a year; so is Social Security. You cannot finance the unfinanceable. Now, some people say, well, let's raise taxes. You'd have to triple the payroll taxes in this country to sustain those programs. So those programs as they are now conceived are simply not sustainable.

ROBIN MACNEIL: So you would argue--I have only a minute left--you would argue that the Republican plan, which has just passed, is a serious down payment on that problem?

MR. PETERSON: It is only--and this will shock people--a modest first step. It's a short-term program for a much more serious long-term program when the baby boomers retire.

ROBIN MACNEIL: Mr. Califano.

MR. CALIFANO: I think just dealing with payments for sick care will not reduce costs anywhere like the Republicans say they will. You want a number to shock you? In the next 20 years, Medicare will spend a trillion dollars to treat people as a result of substance abuse, $800 billion of that because of diseases related to cigarette smoking. Why don't they put something in the bill that says if you smoke cigarettes, you pay a higher premium, and, and discourage people from pursuing conduct and encourage people to take responsibility for their own health. That's the long run secret of saving Medicare.

ROBIN MACNEIL: Okay, gentlemen both, I have to thank you.