If market-based health-care reform were a Hollywood movie, it would be a horror flick called Mediscare in which heartless Republicans threaten senior citizens by attempting reform of the Medicare program. But Washington beats Hollywood to the punch by creating its own theatre. A sequel to Mediscare has now arrived, but whether seniors will buy tickets remains to be seen.

The original Mediscare campaign in 1995 prompted the Washington Post to write not one but two editorials taking Democrats to task for their shameless scare mongering. Some claim that Republicans suffered at the polls for seeking to reform Medicare, but in truth the Republicans gained two Senate seats in the 1996 election. They gave back some House seats, but that was following a 52-seat gain in the 1994 election.

If the 1996 election wasn't the disaster it's been made out to be, the environment for Medicare reform has improved significantly. While Americans usually favor Democrats to solve health-care problems, a recent Wall Street Journal Online/Harris Interactive poll found that 64 percent believe "major reforms are necessary." Furthermore, while respondents equally trusted both parties to make "good decisions about the Medicare program," senior citizens favored Republicans by 38 to 24 percent.

The Bush administration has so far held off on proposing a detailed Medicare reform plan, partly as a result of the new round of Mediscare tactics. The biggest inaccuracy so far has been that the administration wants to force seniors to join HMOs in order to obtain drug coverage. But the president stated otherwise in his State of the Union address.

"Instead of bureaucrats and trial lawyers and HMOs," he said, "we must put doctors and nurses and patients back in charge of American medicine." He went on to say: "And just like you - the members of Congress, and your staffs, and other federal employees - all seniors should have the choice of a health care plan that provides prescription drugs." Afterward, one commentator on National Public Radio went so far as to accuse the president of contradicting himself by first criticizing HMOs and then calling for seniors to join HMOs to get drug coverage.

Is President Bush really trying to force seniors into HMOs? Such misdirection is intended to convey the idea that the president's model for reforming Medicare is the much-maligned Medicare+Choice program. If there's one thing that everyone in the fractious world of health policy agrees on, it's that Medicare+Choice has been a failure.

Started in 1999, Medicare+Choice promised to expand private health plan options beyond the HMOs that many seniors were already enrolled in. It was not so much a new program as an attempt to broaden the successful "Medicare Risk" HMO program that preceded it. Throughout the 1990s, seniors had voluntarily signed up for Medicare Risk HMOs in dramatically increasing numbers. Enrollment doubled from four percent of beneficiaries in 1990 to eight percent in 1995, and it doubled again to 16 percent of beneficiaries in 1999.

Enter Medicare+Choice. Notwithstanding the claim that it would give seniors new fee-for-service options such as preferred provider organizations (PPOs) and medical savings accounts (MSAs), the program's architects were guided by a belief that payments to Medicare Risk HMOs had been too high. Medicare+Choice replaced the old formula for calculating government payments with a much stingier formula.

For good measure, plans were also hit with increased regulatory requirements. The results have been equally dramatic: Medicare+Choice has sharply reduced choice.

Private fee-for-service options saw the writing on the wall and stayed away from the program. Meanwhile, HMOs have seen their fortunes reversed.

Since 1999, plans have received an annual two percent increase from the government, while their expenses have increased about 10 percent annually. Some HMOs have been able to maintain a presence in the program by cutting back benefits and raising premiums to beneficiaries, but others have abandoned the system altogether. Enrollment in Medicare+Choice has fallen from 16 percent of Medicare beneficiaries to about 11 percent today. But it's not seniors who are leaving HMOs; it's the HMOs that are dropping seniors.

The central question of the Medicare debate is this: Are senior citizens better served by a government-run plan or by private insurance plans? Ironically, the Medicare+Choice debacle has helped to highlight the importance of private plans to seniors. Emory University professors Kenneth Thorpe and Adam Atherly recently examined Medicare+Choice and uncovered a number of interesting facts.

While only 11 percent of Medicare beneficiaries are enrolled in Medicare+Choice, that figure understates the importance of the program because Medicare HMOs don't operate in many areas of the country. When Thorpe and Atherly looked at major metropolitan areas - where HMOs operate - they discovered that between one-third and one-half of seniors are enrolled in Medicare HMOs.

Thorpe and Atherly estimated that in 2001 the average Medicare HMO provided supplemental benefits (above what Medicare covers) valued at $1,000, with nearly half of that used to provide prescription drug benefits. The additional premium charged by the plans averaged $250; so, on net, Medicare+Choice beneficiaries received an extra $750 in benefits.

Further evidence that HMOs do a better job than the government comes from a study published in the January 19, 2002 issue of the British Medical Journal. It compared the performance of Britain's National Health Service with that of California's largest HMO, Kaiser Permanente. For roughly the same level of per capita spending, Kaiser was able to offer its members much greater access to medical specialists, laboratory and radiology services, and prescription drugs.

As a result, Kaiser Permanente patients were far more likely to receive appropriate care for illnesses such as diabetes and heart disease. Doctors have fared a lot better, too. The study reports that Kaiser's primary care doctors have starting salaries that are 43 percent higher than the average salary in the NHS. And Kaiser specialists have starting salaries that are more than double those of their NHS counterparts.

Fraud has also been an intractable problem for the government. Malcolm Sparrow, a Harvard University health care fraud expert, has estimated that a staggering $50 billion to $75 billion a year is being defrauded from Medicare, despite continued efforts by the federal government to combat fraud.

Still, many Americans are dissatisfied with HMOs and their methods of rationing. HMOs should not be the only private option for seniors; nor can they be, since HMOs only operate in metropolitan areas. In contrast, the president's budget for fiscal year 2004 seeks to modernize Medicare by offering "better private options for all beneficiaries." [Emphasis added] Now take another look at the president's State of the Union comments: "And just like you - the members of Congress, and your staffs, and other federal employees."

These statements make clear that the president's model for Medicare reform is the Federal Employees Health Benefits Program. All federal employees and retirees covered by the FEHBP - even those in rural America - have a choice of at least 12 fee-for-service plans, most of which make use of PPO networks. Federal workers have complete freedom of choice to see any doctor. They save money, however, if they go to a doctor who is part of the plan's PPO network. Seventy percent of enrollees choose one of the fee-for-service plans. HMOs are available in metropolitan areas and are chosen by the remaining 30 percent of FEHBP enrollees. All of the plans cover prescription drugs.

With an average age of 62, the FEHBP's demographics are not terribly different from Medicare's. Indeed, there is significant overlap between the two populations, with FEHBP plans providing prescription drug coverage and other supplemental benefits that Medicare doesn't cover. But making the switch to a FEHBP-style system raises some transition issues. What about the 85-year-old grandmother who has spent 20 years in Medicare and doesn't want to change?

Current Medicare beneficiaries should be "grandfathered" and allowed to remain in the government-run Medicare program if they wish. About two-thirds of Medicare beneficiaries already have some source of supplemental drug benefits. The remaining seniors should be encouraged to seriously consider enrolling in a private plan that offers drug coverage.

If the Bush administration and Congress want to target a drug benefit for seniors without drug coverage, they should adopt the Prescription Drug Security Card program designed by the Galen Institute. This privately-administered benefit will provide seniors with coverage for large drug expenses combined with a prescription drug discount card and an account with up to $600 for low-income seniors. Additional details can be found at www.galen.org.

Like the rest of the health-care system, Medicare needs a strong dose of market discipline in order to provide the quality of care that Americans expect. A consumer choice model for Medicare, once up and running, should prove to be popular with many seniors. That being the case, one can hardly blame the Democrats for their tactics. They need to scare seniors while they still can.

Chris Middleton is the Senior Policy Analyst for Health Care Studies at the Pacific Research Institute in San Francisco. He can be reached via email at cmiddleton@pacificresearch.org.