Heritage Foundation Leadership for America

Millions of senior citizens who now have prescription-drug insurance through their former employers would lose their coverage or wind up paying significantly more for it under the Medicare bills Congress passed recently, says a new paper from The Heritage Foundation.

Edmund Haislmaier, a visiting fellow in Heritage’s Center for Health Policy Studies, examines both bills in considerable detail to show why, if they become law, almost all employers will do one of three things: Drop their coverage outright, scale back their plans’ benefits to the design of the new “standard plan” for Medicare, or replace their plans with “wrap-around” coverage that pays the initial deductible and cost-sharing for their retirees.

“Employers would love it, of course, because both bills would enable them to limit their liabilities and shift much of the risk and cost for prescription drugs onto the taxpayer,” Haislmaier says. “And the bills would leave those retirees with higher drug costs paying a large share of the tab.”

That a substantial number of seniors with private coverage will lose it is not even disputed by the bills’ backers. The Congressional Budget Office estimates that under the House bill, 32 percent of seniors (3.8 million) will be dropped from their employer-sponsored plans, and 37 percent (4.4 million) would take a comparable hit under the Senate bill. But as Haislmaier’s paper shows, the remainder of the estimated 12 million retirees with employer-provided drug plans likely will find their coverage reduced under the House and Senate bills.

Consider what would happen to a typical retiree under the Senate bill, the Heritage analyst says. He enrolls in one of the new Medicare drug plans and pays about $420 a year in premiums. His employer reimburses him for the premiums and pays a $275 deductible, as well as his initial cost-sharing (half of the next $4,225 in drug expenses). At that point, the retiree has consumed $4,500 in drugs and not paid a single penny; the employer and Medicare have shouldered it all.

But from that point on, Medicare pays nothing. If the employer caps its program at that level, then the retiree must pay 100 percent of the cost of the next $3,700 in drug expenses, after which Medicare starts paying 90 cents of each additional dollar.

The House bill would have a similar effect, Haislmaier says, but because it’s structured differently, it wouldn’t raise drug costs for seniors quite as drastically. “Either way, though, those with higher drug costs are going to wind up paying more,” he says.

The answer, according to Haislmaier, is not to overhaul the benefit but to overhaul the program. “Medicare, as a provider-centered, micro-managed program, is riddled with fundamental flaws,” he says. “Simply grafting a drug benefit onto it, as the bills now before Congress would do, will only make matters worse.”

What Congress should do, he says, is to make Medicare a true patient-centered program, using the blueprint provided by the 1999 Bipartisan Medicare Commission, which recommended giving Medicare beneficiaries a choice between the traditional Medicare program and new private plans offering comprehensive benefits, including full outpatient prescription-drug coverage.

 “Only by covering outpatient prescription drugs through an integrated, flexible package of privately delivered health care benefits can Medicare realize the tremendous potential of modern pharmaceuticals to both reduce other health-care costs and to improve the quality of health care for America’s current and future retirees,” Haislmaier says.

“If Medicare remains unchanged, the baby boomers -- the first of whom will join the program in just eight years -- will find fewer doctors willing to treat them and a declining standard of care,” he says. “If Congress fails to act, or insists on bad policy, this lack of leadership will engender a genuine crisis of health-care delivery for the nation’s seniors.”