Heritage Foundation Leadership for America

What Happened in 2002

Largely ignoring the challenge of implementing serious Medicare reform, House and Senate Members of both parties focused instead on adding poorly designed prescription drug programs of unknown cost to the already structurally flawed program. Adding a drug benefit without serious structural reform would have been a profound mistake. In the end, the House of Representatives enacted the Medicare Modernization and Prescription Drug Act of 2002 (H.R. 4954), with only limited Medicare reform provisions. The Senate, however, failed to enact any of four complicated and competing Medicare prescription drug proposals.

What to Do in 2003

In 2003, the President and Congress should focus reform efforts on ensuring better coverage for new retirees. Such reform should include the following measures.

• Allow new retirees to take their health plans into retirement. At a certain date, Congress should allow new retirees who are 65 or older one of two options: enrolling in the conventional Medicare program or taking their private health plan with them into retirement, with a government contribution to offset its cost. This would not only allow for a seamless continuity of coverage and care for retirees, but would also change the fundamental dynamics of the program. Private plans would be under the jurisdiction of a new market-friendly agency created to administer the program, which would take on functions similar to those of the Office of Personnel Management (OPM) in the administration of the FEHBP. With a gradual phase-in of reform, Congress could monitor the new option's progress and allow for adjustments in its financing and administration.
• Issue a prescription drug security card linked to a generous prescription drug security account. Congress should efficiently target generous assistance to those low-income seniors who do not have access to drug coverage through their retirement plans or supplemental coverage. This could be done by giving these seniors prescription drug cards that would function as debit cards linked to retirees' federally subsidized prescription drug accounts. Such accounts for low-income retirees could receive initial deposits of funds between $600 and $800 per year and would include a catastrophic provision for high drug costs. Funds in these accounts could be rolled over, tax-free, from year to year. Higher-income Medicare patients and their spouses could also make tax-free contributions to their new prescription drug accounts. Such a structure would recognize the great diversity in drug utilization among the senior population, guarantee needy seniors quick access to coverage for chronic conditions, facilitate the growth of a competitive market, and maximize personal freedom.
• Allow new Medicare beneficiaries to take balances accumulated in health reimbursement arrangements, flexible spending accounts, and medical savings accounts with them into retirement. They should be allowed to maintain these as tax-free accounts to which both they and their employers could contribute if they wished to do so. Retirees could pay doctors and other health care professionals directly from these accounts without navigating complex Medicare payment or regulatory restrictions. Millions of employees today have health-related accounts. If new retirees could roll over hundreds of dollars a year tax-free in such accounts, they could freely use those funds for routine medical services or the services of specialists or alternative care--whether or not they are covered by Medicare--as well as for prescription drugs. Such accounts would allow new Medicare patients to maintain the direct relationship with doctors they enjoyed during their working lives. This would increase the economic efficiency of the Medicare program and promote direct patient payment for routine medical services. It would also give doctors the freedom to practice medicine without the costly paperwork and regulatory restrictions currently imposed by the Medicare bureaucracy and its contractors.

Robert E. Moffit, Ph.D. is Director of Domestic Policy Studies at The Heritage Foundation.

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