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Backgrounder #1423 on Health Care

March 27, 2001

Using the Breaux-Frist Medicare Proposals to Craft Solid MedicareReform

By

Senators John Breaux (D-LA) and Bill Frist (R-TN) have introduced two Medicare reform bills that are refreshing examples of bipartisanship on an important issue. Both bills are modified versions of legislation they introduced in the 106th Congress and promote reforms in the current system based on the work of the 1999 National Bipartisan Commission on the Future of Medicare and the popular Federal Employees Health Benefits Program (FEHBP) that covers federal employees and retirees.

President George W. Bush has endorsed these efforts, recently remarking that "The framework for reform has been developed by Senators Frist and Breaux and Congressman [William] Thomas, and now is the time to act."1 The President also is expected to submit his own proposal on reforming Medicare.2 By considering and building upon provisions in the Breaux-Frist bills, the President and Members of Congress have an opportunity to craft effective reforms of the overburdened, over-regulated, and financially troubled Medicare system.

The Medicare Preservation and Improvement Act of 2001 (S. 357), which is known as Breaux-Frist I, offers comprehensive reforms of the Medicare system based on the exhaustive work of the Bipartisan Commission. The bill would create a new Medicare Competitive Premium System, based on the FEHBP model, that would take effect in January 2004. The Medicare Prescription Drug and Modernization Act of 2001 (S. 358), or Breaux-Frist II, provides for a more incremental and modest reform of the system and guaranteed access for seniors to prescription drug coverage.3 This bill would establish universal but voluntary drug coverage.

Though the two bills differ in scope, both would establish a new agency to administer Medicare plans and benefits and limit the authority of the Health Care Financing Administration (HCFA), which runs the Medicare program. Both bills also are designed to foster market competition among providers; provide access to prescription drugs for seniors; fully subsidize the drug costs of low-income seniors and provide a sliding scale of subsidies or discounts for others; and change the way Congress and the Administration measure and monitor the solvency of the program.

Thus, the Breaux-Frist bills are designed to address serious problems in the current Medicare system, which will face huge financial pressures in the next decade when America's 77 million baby boomers start to retire. Moreover, there is a significant gap in today's medical coverage for seniors, particularly when it comes to prescription drug and catastrophic coverage. Senior citizens are being forced to rely on an outdated structure that pays only 53 percent of their health care costs and is over regulated, cumbersome, inflexible, and sluggish in responding to claims. These problems threaten the provision of up-to-date, high-quality medical care for an increasingly large number of seniors and Medicare patients.4

Stimulating a Productive Debate on Medicare
Senators Breaux and Frist reintroduced their reform bills to restart the national debate on Medicare reform because of growing support for their approach. They hope the bills will allow both houses of Congress "to use one, the other, or the best of both, to craft Medicare reform legislation."5

Together, the President and Congress should build on the best provisions of these bills, particularly Breaux-Frist I, which emulates the superior system of competing plans in the FEHBP, a consumer-driven program that currently is available only to Members of Congress, the White House, and other federal workers and retirees. A major key to the popularity and success of the FEHBP--which is the model for the recommended reforms put forth by the majority of the Bipartisan Commission as well as by the Bush Administration--is an acceptance of rapid change and innovation in benefits provisions, flexibility in pricing, and reliance on the free-market forces of consumer choice and competition.6 In no other health insurance system are policyholders given such a broad range of personal choices.

Breaux-Frist I specifically proposes a new Medicare system based on features of the FEHBP, such as competing plans and a generous system of government premium support. It offers seniors access to prescription drug coverage. And it would create a new administrative body, known as a Medicare Board, that would negotiate benefits and coverage with individual plans, approve benefit packages, provide comparative information to enrollees on the plans, and enforce consumer protection rules. The board in this way would mirror the activities of the Office of Personnel Management (OPM), the federal agency that administers the FEHBP and handles these tasks for federal workers and retirees in that program.

If the Administration and Congress are serious about replicating the success of the FEHBP in Medicare, careful legislative drafting will be needed to create a practical and improved version of that program for Medicare patients. Specifically, the President and Congress should:

  • Adopt safeguards to prevent regulatory creep, a back-door return to price controls, and central planning that characterize the approach of HCFA today;

  • Make the Medicare system more consumer friendly; and

  • Offer retirees access to medical savings accounts (MSAs).

The PRESSING NEED TO REFORM MEDICARE

The President and Members of Congress from both parties understand the strong fiscal reasons to reform Medicare and establish a sound footing for the future. Chief among these is the dramatic growth in the number of rapidly aging persons eligible for Medicare coverage, which will double over the next 30 years even as the ratio of workers to beneficiaries falls by almost half.7 Moreover, the beneficiaries are experiencing ever higher longevity, and advances in biomedical technology will increase the demographically driven upward pressure on services, and thus on spending. The infusion of market discipline into the system would serve to slow the growth in spending while increasing its efficiency and effectiveness in ways that centralized planning and price regulation could never achieve.

Although a bureaucratic system can control the supply of medical services, it can do so only imperfectly and cannot at all control consumer demand. Historically, the policy response to rising Medicare costs has been to try to control the supply or volume of medical services by reducing or slowing government payments for those services. This policy has had unintended and unproductive consequences. Former HCFA Actuary Guy King, now an actuarial specialist with the Washington-based office of Ernst and Young, explains it this way:

Reductions in payments to health care providers, or more accurately, reductions in the growth of such payments, have been used to no avail throughout Medicare's history. This unsuccessful policy has brought the system to the brink of bankruptcy, with no easy fix in sight. Health care providers defeat the intent of reducing the growth of payments by simply billing Medicare for more procedures and for more costly procedures. Moreover, the draconian cuts that are needed to keep Medicare afloat will inevitably result in reductions in the quality of care and in the rejection of more Medicare patients by health care providers.8

The key objective of Medicare reform is not simply to control costs or restrain spending, extend the life of Medicare's trust funds, or improve administration of the program. The key policy objective of reform should be to create a superior system of high-quality medical care for America's senior citizens that also respects their personal dignity, freedom, and privacy.

KEY COMPONENTS OF THE BREAUX-FRIST BILLS

Breaux-Frist I (S. 357), if enacted, would transform Medicare into a system that is similar in structure and dynamics to the successful FEHBP, which covers Members of Congress, White House personnel, and millions of federal employees, retirees, and their dependents. Breaux-Frist II (S. 358) proposes a universal prescription drug benefit that would be delivered through existing Medicare+Choice plans and administered by a new Competitive Medicare Agency similar to the Social Security Administration. Specific features of the Breaux-Frist bills are as follows.

Patient Choice

Breaux-Frist I: Seniors would enjoy personal choice of plans and benefits, just as federal employees in the FEHBP do today. Retirees would be able to enroll either in traditional Medicare or in a private health insurance plan of choice. They would be able to choose their benefit packages but also would be guaranteed a standard or core benefits package, which at a minimum would include the same benefits they now have as specified in current law. Participating plans would be required to offer both standard and high-option plans as well as drug and catastrophic coverage. Drug coverage would be adjusted annually and would be worth an "actuarially equivalent value" of $850 in 2004.9 The catastrophic "stop loss" limit for all plans would be $2,000 for the current benefits required in competing plans.10

Breaux-Frist II: This bill proposes making programmatic improvements in the ailing and restrictive Medicare+Choice program, which administers the Medicare HMOs.

Premium Support Financing

Breaux-Frist I: Retirees would receive generous government support for premium payments to the health plan of their choice, a feature FEHBP enrollees already enjoy. As in the FEHBP, the level of government support for the premiums would be based on a mathematical formula calculated to yield a national weighted average (NWA) premium for core benefits to be offered by all competing plans.11 Retirees who select plans whose premiums are less than 85 percent of the NWA would pay nothing. If the premium is more than 85 percent but less than 100 percent of the NWA premium, the government support would be 80 percent of the amount by which the premium exceeds 85 percent of the NWA premium. If the plan's premium is greater than 100 percent of the NWA premium, the beneficiary would pay the difference.12

The level of premium support proposed in Breaux-Frist I is significantly more generous than that currently allowed in the FEHBP, which contributes about 72 percent of the cost of a premium up to a fixed dollar amount. Under S. 357, government support for a retiree would not fall below the amount retirees need to buy the approved standard package of health care benefits. Moreover, as it is in the FEHBP (but not in today's troubled Medicare+Choice program), the government contribution would be tied directly to the ever-changing conditions of the health insurance market.13 In dollar terms, if health insurance costs increased, the government's premium support would also increase proportionately.

Breaux-Frist II: All seniors would receive a 25 percent subsidy for their premium costs of prescription drug coverage. Seniors below 135 percent of the poverty level would receive full subsidization of their prescription drug costs, and there would be a sliding scale of subsidies for seniors whose incomes are between 135 percent and 150 percent of poverty. The drug benefit would include a $250 deductible, $2,100 in initial coverage, and 50 percent cost-sharing between the government and the beneficiary. The proposal also includes "stop loss" catastrophic protection of $6,000 for drug costs.14

Integration of Prescription Drug Coverage

Breaux-Frist I: Prescription drug coverage in competing health plans would be included as an integral element of health insurance coverage, similar to the way coverage is included in the FEHBP. Most of the FEHBP plans, in fact, cover between 80 percent and 90 percent of prescription drug costs. By modeling that practice, the bill would universalize prescription drug coverage, lower prescription drug costs through intense private competition, and protect seniors against the costs of catastrophic prescription drug expenses.

As with Breaux-Frist II, subsidized comprehensive prescription drug coverage for low-income retirees would be guaranteed. Those under 135 percent of poverty would pay nothing; those with incomes between 135 percent and 150 percent of poverty would get premium discounts.15 Beneficiaries at or over 150 percent of poverty ($12,389 for individuals and $15,614 for couples) who choose a high-option health plan would get a premium discount of 25 percent.16 To ensure that the drug premium discount is income-related, Breaux-Frist I treats the value of the discount for premiums as taxable income.

Breaux-Frist II: The prescription drug benefit would be similar to the one proposed in Breaux-Frist I. However, for Medicare beneficiaries, the drug benefit would be delivered through existing Medicare+Choice plans and other private entities or, if they are enrolled in traditional Medicare, through a Medicare Prescription Plus plan. The bill requires a standard prescription drug benefit with a $250 deductible, $2,100 in initial coverage, and 50 percent cost-sharing between Medicare and the beneficiary. It also requires every drug plan to have a catastrophic "stop loss" limit of $6,000, meaning that no senior would ever be liable for any amount above that limit.17 Beyond these core benefit requirements, drug plans could vary their offerings.18

Like Breaux-Frist I, S. 358 would fully subsidize seniors with incomes below 135 percent of the poverty level ($11,150 for individuals and $14,052 for couples). Seniors with incomes between 135 percent and 150 percent of poverty would also be eligible for a sliding scale of subsidies and drug discounts.19

A Board or Agency to Set the Rules of the Game

Breaux-Frist I: A new Medicare Board, comprised of members appointed by the President and confirmed by the Senate, would be created within the executive branch. The board would set the ground rules of market competition among the private plans in the new system. It would negotiate premiums with private plans; approve the benefits packages; ensure consumer protection, fiscal solvency, and quality standards; establish a risk-adjustment mechanism to safeguard against adverse selection; and provide solid, clear, and comparative information to beneficiaries.20 HCFA would be confined to running the traditional Medicare program, but it would be given new authority to be flexible in administering that program to enable it to compete with other plans in the new system.

Breaux-Frist II: A new Competitive Medicare Agency would be created within the executive branch under an advisory board, similar to the current arrangement governing the Social Security Administration.21 The new agency would administer the Medicare+Choice program and the new Medicare prescription drug program. HCFA would be confined to running traditional Medicare, Medicaid, and the State Children's Health Insurance Program (S-CHIP).

Clearer Medicare Solvency Standards

Breaux-Frist I: The existing Medicare trust funds--the Hospitalization (HI) Trust Fund (Part A), which reimburses hospitals for medical services to seniors, and the Supplemental Medical Insurance Trust Fund (Part B), which pays doctors and outpatient medical facilities for services provided to seniors--would be combined into a single Medicare Trust Fund. All current funds, including existing HI payroll taxes, beneficiary premiums, and general revenue transfers, would go into this new trust fund.

Many Americans are unaware of the true character of Medicare's financial problems because the solvency of the system almost invariably is discussed only in terms of the financial condition of Part A, the HI trust fund.22 Often ignored is the growth in income transfers from the general fund to cover Medicare spending in Part B, and the impact of that growth on taxpayers and retirees. Under this legislation, the Medicare Board would be responsible for reporting to Congress on an annual basis, which would reveal the extent of the Medicare Trust Fund's dependence on transfers from general revenues to cover its costs. In any year in which general revenues exceed 40 percent of total Medicare spending, the trust fund would be deemed officially insolvent, which would require Congress to vote on additional general revenue transfers into the fund.23

Breaux-Frist II: The Medicare trust funds would remain as separate entities, and there would be no statutory requirements that Congress vote on additional transfers of monies from the general revenue fund to cover rising Medicare costs. The Medicare Board of Trustees would be required, however, to provide regular reports and evaluations to Congress on the level of general revenue spending in the Medicare program.24

HOW TO IMPROVE THE BREAUX-FRIST PROPOSALS

President Bush and Congress have an opportunity to fashion a comprehensive Medicare reform proposal that builds on the Breaux-Frist proposals, based on the excellent policy work of the 1999 National Bipartisan Commission on the Future of Medicare. The recommendations of the majority of members of that commission, like S. 357, are modeled on the FEHBP, with its solid record of providing quality health care options to federal employees and retirees for over four decades.

Policymakers can improve upon the Breaux-Frist proposals to target federal subsidies to those who need them and to expand private-sector options in order to maximize cost-effective delivery of prescription drug coverage and other medical benefits to retirees.25 For example, Congress and the executive branch should include provisions that:

  • Adopt safeguards to prevent HCFA-style regulatory creep. Any new agency created to administer a premium support system should behave like the OPM--as a flexible, fair-minded referee for competing private plans with minimal regulation--rather than like HCFA, an overly prescriptive regulatory agency that systematically sabotages patient choice and market competition. Clear and unambiguous statutory restrictions are essential to protect a new competitive system against government price controls or fee schedules, detailed determinations on the kind or duration of medical treatments or procedures covered beyond the categories of benefits statutorily required as core benefits, government restrictions on the kinds of medical services that private plans can offer, government practice guidelines for doctors, or government restrictions on how Medicare patients can exercise personal choice using their own money. President Bush and Congress should avoid repeating the Medicare+Choice debacle in which a nominal system of patient choice and competition was created only to be systematically strangled by red tape.

  • Give retirees access to medical savings accounts if they want them. President Bush and Congress could improve on the flexible payment approach by including premium support for MSAs, coupled with catastrophic coverage, for retirees who want it, particularly new retirees. Though it makes sense for many medical payments to be made through the administrative apparatus of third-party insurance arrangements, this approach does not make sense for routine medical expenses, such as office visits, or for predictable medical conditions unrelated to health risks. Covering risk is the function of insurance in the first place.

  • Make the new system more consumer-friendly. The proposals in Breaux-Frist I could be improved by making plan offerings even more flexible and consumer-friendly. First, Washington could ensure that new retirees can keep their employment-based coverage in retirement as their primary coverage (assuming their employer is agreeable to getting the government contribution to offset the cost of the plan).26 Second, the federal government could specify in legislation that competing plans offer an actuarial equivalent of the standardized benefits package in which medical coverage and procedures are spelled out under current Medicare law and regulation, as long as drug benefits and catastrophic coverage are included. After all, one of the key arguments for reform is that Medicare's benefits and delivery system are outdated; the use of actuarial equivalency would preserve the value of an entitlement with the dynamism and flexibility of modernized benefit offerings.

CONCLUSION

President Bush, in developing his own legislative reform proposal for Medicare, can build on the best of the Breaux-Frist proposals, which promise a good start to this year's debate on Medicare reform. Both Congress and the President should recognize and build on the hard work of the National Bipartisan Commission on the Future of Medicare, which inspired the Breaux-Frist proposals, in legislation that is crafted to create a new Medicare system.

Working closely with Congress, President Bush has the unique opportunity to change the terms of the debate on Medicare reform, which often has been mired in political demagoguery, competing financial forecasts or cost projections, and technical jargon that is bewildering to seniors and their families. The President should emphasize that the new system should be based on personal choice, high-quality care, and patient satisfaction. He should work closely and cooperatively with Congress but insist that every provision of comprehensive legislation be judged on the values that are fundamental to real reform: They must advance patient choice and market competition; respect the professional independence and integrity of doctors; and protect the dignity, personal liberty, and privacy of Medicare patients. Only legislative proposals that embody these values are worth debating.

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


Endnotes

1. President George W. Bush, Address to the Nation, February 27, 2001.

2. The President, in his proposed budget, has earmarked a total of $156 billion in additional Medicare spending over 10 years, beginning in 2001, to advance Medicare's modernization. See Office of Management and Budget, A Blueprint for New Beginnings: A Responsible Budget for America's Priorities, February 2001, p. 51.

3. Breaux-Frist I, the Medicare Preservation and Improvement Act (S. 1895), was first introduced in November 1999. Its proposals were based largely on the work of the National Bipartisan Commission. Breaux-Frist II, the Medicare Prescription Drug Modernization Act, was originally introduced in June 2000 as S. 2807, reflecting the growing congressional interest in providing a prescription drug benefit to Medicare patients who do not have access to drug coverage.

4. For an account of the program's emerging governance problems, see Grace-Marie Arnett and Robert E. Moffit, "Medicare: The Crisis in Governance," Heritage Foundation Backgrounder, forthcoming.

5. Senators John Breaux and Bill Frist, press statement, "Senators Breaux and Frist Unveil Bipartisan Medicare Reform Bills," February 15, 2001.

6. For a discussion of the FEHBP as a model for Medicare reform, see Stuart M. Butler and Robert E. Moffit, "The FEHBP as a Model for a New Medicare Program," Health Affairs, Vol. 14, No. 4 (Winter 1995), pp. 47-61; Harry P. Cain, "Moving Medicare to the FEHBP Model, or, How to Make an Elephant Fly," Health Affairs, Vol. 18, No. 4 (July/August 1999), pp. 25-39; and Walton Francis, "The FEHBP as a Model for Reform," in Robert B. Helms, ed., Medicare in the Twenty First Century: Seeking Fair and Efficient Reform (Washington, D.C.: AEI Press, 1999), pp. 147-168.

7. As the Administration's budget analysts note, "There is projected to be a permanent shift in the ratio of workers to Medicare beneficiaries, from 4.0 workers today to 2.3 in 2030 and 2.0 in 2070." See OMB, A Blueprint for New Beginnings, p. 51.

8. Guy King, "Medicare's Undiagnosed Woes," The Washington Times, October 11, 2000, p. A17.

9. Medicare Preservation and Improvement Act of 2001, Title I, Part A, "Medicare Plans; Combining Parts A and B," Section 2202.

10. Ibid., Title I, "Title XXII, The Establishment of Medicare Competitive Premium System," Section 2202(c).

11. In the proposed federal government formula for calculating the national weighted average premium for the core benefits package, the weight for each plan would be equal to the average number of beneficiaries enrolled in it.

12. Medicare Preservation and Improvement Act of 2001, Title I, "Part B," Section 2227(a).

13. This is a crucial point. Several critics of Medicare reform have suggested that the bad experience of the Medicare+Choice program is a reason why a system of competing plans cannot work well for Medicare beneficiaries. What they fail to acknowledge is that the payment systems for the FEHBP and the Breaux-Frist proposal are very different. As the Senators note, "Under a competitive premium system, managed care payment rates are set through competition among plans rather than through a complicated statutory formula as they are under Medicare+Choice today. In addition, payment rates are not tied to Medicare fee for service spending, but instead are based on the actual cost of delivering care. Thus, the competitive premium system replaces the complicated statutory payment system under current law and provides more appropriate payments to plans." See Senators John Breaux and Bill Frist, "The Breaux-Frist Medicare Competitive Premium Proposal" (Breaux-Frist I), Questions and Answers, February 2001.

14. Medicare Prescription Drug and Modernization Act of 2001, Title II, "Medicare Prescription Drug and Supplemental Program, Part B."

15. The Bush Administration's proposal has a similar structure. Seniors with incomes at or below 135 percent of the official poverty level would pay nothing for prescription drugs. However, the Bush proposal would expand the sliding scale of drug subsidies beyond 150 percent to 175 percent of the poverty level. See OMB, A Blueprint for New Beginnings, pp. 51-52.

16. Medicare Preservation and Improvement Act of 2001, Title I, "Part B, Competitive Premium System," Section 2227.

17. The bill thus links choice with catastrophic protection, for it "provides beneficiaries the choice of coverage that best suits their individual needs by allowing the offering of different drug benefit plans, while ensuring [that] the benefit value of standard coverage is maintained with all stop loss protections." See Senators John Breaux and Bill Frist, "Talking Points: The Medicare Prescription Drug and Modernization Act of 2001" (Breaux-Frist II), February 2000.

18. Medicare Prescription Drug and Modernization Act of 2001, Title II, "Part B, Medicare Prescription Drug and Supplemental Benefit Program."

19. Breaux and Frist, "Talking Points."

20. For a description of the duties, powers, and organization of the proposed Medicare Board, see Medicare Preservation and Improvement Act of 2001, Title I, "Part C, The Medicare Board Charter," Sections 2241-2246.

21. See Medicare Prescription Drug and Modernization Act of 2001, Title I, "Part A, Establishment of Medicare Competitive Agency," Sections 2201-2204.

22. The Bush Administration also views an "accurate measure" of Medicare solvency as an essential ingredient to any Medicare reform. See OMB, A Blueprint for New Beginnings, p. 51.

23. Medicare Preservation and Improvement Act of 2001, Title I, "Part D, Unified Medicare Trust Fund," Section 2262.

24. Medicare Prescription Drug and Modernization Act of 2001, Title I, "Part A, Subtitle B, Redefined Medicare Solvency Measures," Section 151.

25. For a series of suggestions on how the President and Congress could move a Medicare reform agenda forward, see Robert E. Moffit, Ph.D., "Improving and Preserving Medicare for Tomorrow's Seniors," in Stuart M. Butler and Kim R. Holmes, eds., Priorities for the President (Washington, D.C.: The Heritage Foundation, 2001), pp. 31-52.

26. The Administration has expressed concern over the lack of coordination between Medicare and retirees' employer-based health insurance. As noted by Administration budget analysts, this lack of coordination is "providing disincentives to continued work." OMB, A Blueprint for New Beginnings, p. 50.

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