An Analysis of the White House Position on Medicare Legislation

Report Health Care Reform

An Analysis of the White House Position on Medicare Legislation

June 26, 2003 27 min read

Authors: Nina Owcharenko, Robert Moffit, Edmund Haislmaier and Center for Health Policy Studies

The White House Office of Communications recently issued a series of "questions and answers" on the Medicare legislation before the House and the Senate. The President and the members of the White House staff have indicated support for the congressional Medicare legislation and have expressed strong support for the legislative process: "The question now is whether the Medicare legislation that is moving through Congress merits the support of the President and constitutes genuine reform of the program. The Administration strongly believes it does." The point of the issuance was to answer the critics of the Medicare legislation by responding to the main criticisms in a question-and-answer format.


According to the White House statement, "The bills now moving through Congress are broadly consistent with the President's Framework to Modernize and Improve Medicare and constitute major entitlement reform." The White House has added a crucial caveat, however, and notes:


There continue to be elements in these bills that the Administration opposes and will work to improve as the legislation moves forward. Overall, however, these reforms represent the best opportunity in decades to strengthen private health care markets and put patients and doctors in charge of health care decisions, not bureaucrats and lawyers. The real danger is that if we do not reform Medicare this year, in ways the President supports, there will be tremendous pressure to move toward centralized care and price controls, bureaucratic delays and setbacks in innovation.


This is a strong point of disagreement between many health policy analysts and the White House. Indeed, the real danger to Medicare reform is the adoption of key provisions and policies that are incompatible with the principles of reform and that would solidify the worst features of a financially troubled program by expanding it and importing the regulatory apparatus of the old into the operations of the new program. This danger is particularly acute with the flawed provisions of the Senate bill.


Heritage Foundation health policy analysts have examined the major provisions of both the House[1] and the Senate bills[2] and have a different perspective on the policy implications of the provisions of the House and Senate Medicare legislation.


The following are, word for word, the White House questions and answers on the policy issues in the congressional Medicare legislation. These are followed by Heritage Foundation analysts' commentary on these issues.


White House Question: Hasn't the private insurance aspect become watered down, stripped of meaningful reform, leaving only a weak provision for private health care in its place?


White House Answer: To the contrary, the private sector will play a major role under the new Medicare options being debated. Private health plans will provide a stand-alone drug benefit for seniors who choose to stay in traditional government-run Medicare. Private health plans will provide a drug benefit integrated into broader medical coverage for seniors who opt for Medicare Advantage, which will offer a variety of plans modeled after the Federal Employees Health Benefits Plan (FEHBP). Private managed care plans, now available in Medicare, will continue to be an option for seniors and be bolstered by the inclusion of a prescription drug benefit.


Private health plans will compete for seniors' business on quality and price. This will be a significant improvement and a fundamental shift over the way benefits are provided in Medicare today-where politicians and bureaucrats, rather than health care markets, dictate what is covered and what is paid.


Heritage Analysts' Comments: The Administration says that the congressional Medicare legislation creating the "Medicare Advantage" system will offer a variety of plans "modeled after" the Federal Employees Health Benefits Program.


Only in Section 241 of the House bill is there a provision to transition toward a system that broadly resembles the FEHBP. But that transition does not begin until the year 2010.


In the Senate bill, the situation is different. An examination of the Senate legislative language shows that the "Medicare Advantage" system looks very different from the FEHBP. There are several key differences.


First, one of the most outstanding characteristics of the FEHBP is the superiority of its governance. The 43-year-old program is a public-private partnership in the best sense of the term. The regulatory regime is light and targeted. Under Chapter 89, Title V, the Office of Personnel Management (OPM), the agency that runs the program, is authorized to establish "reasonable minimum standards" for participating plans. The language of the statute governing the FEHBP does give the OPM Director broad authority, but it is to carry out the responsibilities under the Chapter, which is the enforcement of basic benefit standards, consumer protection, and fiscal solvency. Not surprisingly, less than 100 pages in the Code of Federal Regulations govern the 43-year-old program.


The statutory language embodied in the Senate bill is very different, and it is highly prescriptive. It lays the groundwork for a massive regulatory regime governing private-sector plans. In broad outline, the Senate language lays the groundwork for a resurrection of the regulatory regime that severely damaged the Medicare+Choice program.


Second, the FEHBP has a system of national health plans, mostly fee-for-service or PPO plans, that compete for consumers' dollars in every area of the country. This number varies from year to year. In 1997, there were 26 such plans; in 2000, there were 27; this year, there are 12 such plans, and roughly 70 percent of all FEHBP enrollees are in those plans. In the Senate's "Medicare Advantage" program, there is no national plan competition; instead, the proposed Administrator of the proposed Center for Medicare Choice would divide the nation up into 10 or more geographical regions. In these regions, the PPO option is restricted to the three cheapest plans in any given region. In other words, the Senate bill (in this respect, the House bill is not much different) sets up a government-sponsored oligopoly in which Medicare beneficiaries would only be allowed to choose three plans. This is not a model based on normal market forces of consumer choice and competition; it is instead a dramatic deviation from the FEHBP model, where many plans compete for consumers' dollars.


Third, in the FEHBP, the payment for the competing private plans is based on a weighted average premium of the plans participating in the program: a real market price. In the case of the Medicare Advantage system as proposed in the Senate bill, the benchmark payment to private plans is based on Medicare's existing system of administered pricing, an arcane pricing process that is largely insulated from the normal conditions of supply and demand.


Fourth, the FEHBP historically has been deferential to consumer preferences and patient needs. The statutory language governing benefit qualifications in the FEHBP in Chapter 89 of Title V specifies that health plans competing in the program must cover only specified categories of health benefits, including hospitalization, physicians' services, surgical, and emergency care. The precise level of benefits, the kind and duration of medical treatments and procedures, and the accompanying co-payments and co-insurance and deductibles are left up to the health plans and the market. The result: The FEHBP has been a model of flexibility in benefit design, and rapid adoption of different benefits and medical procedures has been both routine and non-controversial. In the Senate's Medicare Advantage system, the language of the bill proposes instead a comprehensive standardized benefit package, the requirement that all private plans cover all Medicare services currently covered in Medicare Parts A and B, as well as the standardized requirements of the prescription drug program in the newly created Medicare Part D. This is a sharp break from the practice of the FEHBP and locks in statutory concrete the very inflexibility of benefit design that has been characteristic of the Medicare program, which is why there is a major national debate on prescription drug coverage in the first place.


The Level of Enrollment In Private Plans


White House Question: Won't only a tiny fraction of seniors enroll in the privately run plans; while the overwhelming majority will remain in traditional Medicare?


White House Answer: The Centers for Medicare & Medicaid Services (CMS) actuaries expect that over the program's first seven years, private plan participation would exceed 40 percent under the Senate bill and approach 50 percent under the House bill. Some seniors, especially those who have been in Medicare for a decade or more, are expected to be less likely to opt for private plans - and the federal government should not force them to. But data suggests that a significant number of seniors will switch to privately-run plans, and these numbers will only grow as Baby Boomers with private coverage retire.


Viable private plans will be attractive to new retirees for several reasons. Most active workers are now enrolled in PPOs. Once they enter retirement, they are very likely to choose coverage that is similar to what they are accustomed to. A recent poll by the Kaiser Family Foundation found that 6 in 10 people age 18-49 would prefer a private plan under Medicare.


The Administration also believes older seniors will gravitate to private plans because they will be able to get lower premiums and benefits not available in traditional Medicare, such as full coverage for preventive care, disease management and a cap on high out-of-pocket costs. Moreover, many seniors will like the simplicity of one integrated plan with one deductible and co-pay, as opposed to adding a drug only benefit on top of the current Medicare benefit structure.


Price Controls on Doctors and Hospitals


White House Question: Isn't it true that private providers would be reimbursed based on a traditional Medicare price benchmark-in other words, based on a price-control system that already is driving many doctors out of Medicare?


White House Answer: The assertion that doctors and hospitals would be reimbursed based on a traditional Medicare price benchmark is simply false. Providers would have to negotiate prices and other contractual provisions directly with plans. Costs would be controlled using market-place competition, not government price-setting.


Heritage Analysts' Comments: The White House answer is correct. One way to ensure that such a development does not take place in the future is to include statutory language that would positively forbid any Administrator of the new competitive system from imposing government fee schedules, price controls, caps on plan premiums, or government practice guidelines for doctors or other medical professionals participating in the new competitive program.


The Issue of Payments to Private Plans


White House Question: Isn't it true that private health plans participating in Medicare would be reimbursed based on a traditional Medicare price benchmark-building in or even increasing the costs of delivering Medicare?


White House Answer: While the legislation currently bases the government's share of the contribution on Fee for Service costs, the Administration will continue to work with Congress to amend this provision and base payments to private health plans on market principles. The government contribution to the Medicare Advantage plans, or "benchmark," must ensure their viability and represent a competitive bidding process.


Heritage Analysts' Comments: For a robust marketplace to exist, the government must not only provide payments that accurately reflect market-based prices, but also avoid establishing a massive regulatory matrix for plans to comply with. Unfortunately, the Senate bill does not heed the lessons learned from Medicare+Choice and creates a complex regulatory regime that will either result in highly bureaucratic, heavily managed private plan options or discourage plan participation and leave the government-run "fallback" as the only coverage option.


As for future costs, private plans are better managers of costs than the government. Recent analysis by the Joint Economic Committee shows that although Medicare does not offer a prescription drug benefit, its spending over the past two decades is similar to that of the market-based FEHBP: a program that is governed by less than 40 pages of statute and all plans have integrated a prescription drug benefit, not by mandate, but by satisfying the consumers enrolled in the program.


The Price Control Issue


White House Question: Don't these bills include price controls?


White House Answer: In fact, the Senate bill places no price controls on providers, and unlike traditional Medicare, providers would not be paid according to a government fee schedule when they treat beneficiaries. Prices would be set through negotiation between plans and providers, not through regulation.

Heritage Analysts' Comments: The Senate and House bills do not impose price controls on doctors and hospitals or other medical professionals. With respect to the prescription drug provisions, it is also correct to say that the Senate bill does not give Medicare the authority to directly set prices for drugs. However, there are a number of ways government can regulate prices in a program such as this. What the Senate bill does do can be described as a variant of a concept known as "reference pricing." The reference pricing mechanism is set up in the Senate bill as follows:


First, the new prescription drug plans are required, in Section 1860D-16(b)(1)(A)(ii), to report to Medicare their actual costs for providing drug coverage with, "a breakdown of - (I) each covered drug that constitutes a portion of such amount;(II) the negotiated price for the eligible entity for each such drug; (III) the number of prescriptions; and (IV) the average beneficiary co-insurance rate for a each covered drug that constitutes a portion of such amount." These provisions are repeated word for word in Section 1860D-20(b)(1)(B) except with the term "qualifying entity" substituted for the term "eligible entity." Section 1860D-20(e)(3) defines a "qualifying entity" as a drug-only plan, a Medicare Advantage plan, or the sponsor of a qualified employer-sponsored retiree prescription drug plan. Thus, all plans, including the new Medicare Advantage plans and "qualified" employer plans, must report to Medicare detailed price and volume data on each drug they buy for their covered beneficiaries.


Second, Section 1860D-16(b)(3)(B)(i) references the foregoing sections in instructing Medicare that "Utilizing the information obtained under paragraph (1)(A)(ii) and section 1860D-20(b)(1)(B), for each year (beginning with 2006), the Administrator shall establish an average negotiated price with respect to all Medicare Prescription Drug plans for each covered drug." Thus, Medicare is to establish a single, national average negotiated price for each drug.


Third, the very next section, Section 1860D-16(b)(3)(B)(ii), stipulates that in calculating payments to plans, Medicare must first "reduce the amount described in paragraph (1)(A)(i) for the plan for the year to the extent such amount is based on costs of specific covered drugs furnished under the plan in the year (as specified under paragraph (1)(A)(ii)) for which the negotiated prices are greater than the average negotiated price for the covered drug for the year (as determined under clause (i))."


In other words, for purposes of calculating payments to the plans, each plan's "allowable costs" are its actual costs, minus the amount (if any) that the plan paid above the national average negotiated price for each drug, times the volume of prescriptions purchased of each drug for which the plan paid a higher than national average price. There are no provisions in the bill to adjust payments in cases where a plan pays below the national average price for a specific drug.


The effective result of these provisions is to impose on plans, including qualified employer plans, a "price ceiling" for each covered drug. While the legislation specifies that these price ceilings are the product of averaging the prices negotiated between private plans and manufacturers, one can easily envision a later Congress, under pressure to contain program costs, converting these ceilings into formal government price setting. This is made all the more likely since, under the above provisions, Medicare will already have collected all the data needed to identify how much money each specific drug is costing Medicare.


Even absent such a step, these provisions will have two adverse effects. First, they will drive small plans to avoid or exit the market if they don't believe that they can get discounts as deep as their bigger competitors. This is because these provisions effectively make any given plan's competition all the plans nationally, not just the ones they compete against in their chosen area. The likely result will be that less than a handful of the very largest plans will participate in the program.

Second, these provisions will likely induce drug manufacturers to charge all plans the same price for each specific drug, a concept known as "unitary pricing." The fewer plans there are purchasing from the manufacturers, the more likely that manufacturers will adopt a single price policy. When differentiated pricing offers no advantage to either manufacturers or their customers, manufacturers eliminate price differences. In other words, no more discounts.


The Issue of Future Price Controls


White House Question: But won't these bills lead to price controls? When the government runs into high Medicare costs, it will reduce reimbursement for the medical services. When there are cost explosions in Medicare, the government will inevitably put price controls on drugs.


White House Answer: This is why it is important to introduce private sector competition and innovation into Medicare so the marketplace will control costs-not the government. The danger of price controls is most real in a government-run delivery system for prescription drugs, which could lead to government pricing of individual drugs and government regulation of the availability of certain prescription drugs. That is why the Administration believes it is essential that private entities bear the insurance risk for prescription drug coverage and will work to improve the bill so that so-called "fallback" provisions do not discourage private entities from bearing the risk. If the government steps in, takes over for private plans and bears the insurance risk, the danger of price controls would be real.


Heritage Analysts' Comments: In the case of drugs, the provisions in the Senate bill for setting an average national negotiated price for each drug, and then penalizing plans for each drug they buy at higher than the average price, could very quickly lead to price controls. While it is correct that delivering drug coverage through risk-bearing private insurance plans is an important safeguard against price controls, that step alone is not sufficient. It is also necessary that Medicare not adjust in any way payments to the plans based on price considerations, as it would under the Senate bill. The only effective way to limit government's inclination to impose price and access controls would be if the government did nothing more than certify plans and give beneficiaries set subsidies to apply toward buying the plan of their choice. Even that may not be enough, as can be seen from the example of the Clinton Administration's requiring plans in the FEHBP to pay doctors according to the Medicare fee schedule for services provided to retired federal workers who get coverage solely through FEHBP and do not participate in Medicare.


The Issue of Competitive Bidding


White House Question: The so-called competitive bidding in the Senate plan is a problem. The government would pick only three low bidders to offer the private Medicare option in each area, thereby limiting choice. Isn't this bound to result in unpopular plans heavy on rationing and light on innovation?


White House Answer: The number of PPO plans permitted to participate in each region contributes to cost savings. With a limited number of winning bidders, plans have a strong incentive to maximize their efficiency and to bid aggressively. This incentive would be greatly reduced if all plans can participate. In addition, with unlimited plan entry, it is possible that no plans would be able to capture enough market share to take advantage of economies of scale. This could also affect a plan's decision on whether or not it would be worthwhile to participate at all. As to the issue of rationing, PPOs achieve savings through innovation, not rationing. Unlike "closed panel" HMOs, PPOs do not limit choice of providers. Beneficiaries are free to receive care from any doctor or hospital, regardless of whether these providers participate in the plan's network. Beneficiaries receive discounts when they receive care from network providers and pay more when they get services outside the network. The choice, however, is theirs - not the government's and not the insurer's.


Heritage Analysts' Comments: Apparently, the White House is focused on limiting the supply of plans in the interests of the lucky low-cost plans, because by limiting their competition the Congress would enhance their incentives to participate. A deliberate restriction of the supply of health plans, or a restriction on the supply of any goods and services, is a deliberate distortion of the market. A better approach would be to use the FEHBP model: pay the plans based on market prices, apply only minimal regulation, and let enrollees freely choose high-cost plans as well as low-cost plans if they wish to do so.


The Issue of PPO Efficiency


White House Question: How can PPOs provide care more efficiently than traditional Medicare?


White House Answer: PPOs negotiate favorable rates with network providers, insisting that they meet certain standards of quality, and by coordinating care for beneficiaries with chronic medical conditions. Many PPOs, for example, review the practice patterns of physicians and advise them if they find an inappropriately high incidence of services, excessive hospitalizations, or unnecessary use of very expensive procedures. In extreme cases, physicians may be dropped from the plan's provider network. Medicare, by contrast, lacks measurable standards for provider performance and does not base payments to doctors or hospitals on the quality of services they provide.


Medicare also does nothing to coordinate care for elderly and disabled beneficiaries who may be seeking care from a number of providers. These beneficiaries account for the bulk of Medicare costs. According to CMS actuaries, 6 percent of Medicare beneficiaries account for half of the program's total spending. While traditional Medicare does little or nothing to coordinate care for these beneficiaries, PPOs seek to provide quality care more efficiently.


Heritage Analysts' Comments: The White House answer is correct. The PPO option can be more efficient than traditional Medicare and also deliver better benefit coverage in the process. Such plans dominate in the FEHBP; and, as the Joint Economic Committee has recently demonstrated, the FEHBP has outperformed Medicare when one controls for the richness of the drug benefit. But the effectiveness of private plans generally is based on their ability to secure adequate payment and make business decisions without being second-guessed by an aggressive regulatory regime.


The Impact on Private Drug Coverage


White House Question: What happens to private prescription drug coverage? Employers who still pay for retiree drug coverage will be only too happy to pass that burden onto taxpayers. An analyst's report estimates that General Motors alone would dump an un-funded liability of $1.4 billion onto the system.


White House Answer: Employers are already reducing or dropping their coverage of retiree health benefits. The Administration's goal is to ensure that Medicare legislation does not accelerate that trend. The creation of a prescription drug benefit in Medicare will shift some costs from private employers and from the states to the federal government. But employers will have an incentive to enroll their retirees in the Medicare drug benefit, just as they now do with medical benefits. The legislation provides financial incentives for employers to continue to offer coverage and the Administration will work with Congress to ensure that these incentives are as strong as possible.


Heritage Analysts' Comments: The Congressional Budget Office (CBO) estimates that 37 percent of retirees with employer-sponsored drug coverage, or about 4.4 million retirees, will lose that private coverage under the Senate bill. In addition, in order to claim the new subsidies offered in the Senate bill, employers would have to adopt much of the new Medicare standard drug benefit structure in their plans. This is because the provisions relating to employer's obtaining Medicare approval of an "actuarially equivalent" plan are overly restrictive. For example, Section 1860D-6(d)(2) of the Senate bill specifies that the deductible in an "actuarially equivalent" plan must be the same as the deductible in the standard plan. This will likely result in a reduction in coverage for some retirees whose employers continue to offer plans. In contrast, the House bill relies on a more appropriate definition of actuarial equivalence that permits a more reasonable range of variation in plan design. Thus, the House bill would make it easier for existing employer-sponsored drug plans to meet the "qualified coverage" requirement, and CBO estimates that fewer retirees with employer coverage (32 percent) will lose their coverage under the House bill.


Furthermore, while employer-sponsored plans now pay retiree cost sharing under Medicare Part A and Part B, if they did the same for the new drug benefit, those payments would not count toward the annual $3,700 beneficiary out-of-pocket limit for their retirees under either bill. Thus, if an employer paid the cost sharing for its retirees up to some maximum amount set in its plan, its retirees would still have to pay a total of $3,700 out-of-pocket on drugs before Medicare's catastrophic drug coverage kicked in. Obviously, only the sicker retirees would be effected, since those with low or moderate drug costs would not have drug spending that exceeded the employer's limit on paying the cost sharing, unless that limit was set fairly low.


Subsidizing the Drug Bills of the Wealthy


White House Question: Won't lower income taxpayers end up paying the drug bills of wealthy people like Bill Gates?


White House Answer: The existing Medicare program subsidizes every beneficiary's premium-regardless of wealth or income-at a rate of approximately 90 percent. By contrast, this legislation would provide richer premium subsidies and lower cost sharing to beneficiaries making $14,000 or less. Beneficiaries whose income exceeds this threshold would receive a 65 percent subsidy. This is a significantly smaller subsidy than under the existing program. Moreover, the new Medicare Advantage plans mark a departure from traditional Medicare's approach of charging everyone the same premium regardless of the real cost of providing them coverage. Under Medicare Advantage, beneficiaries will choose among competing plans, sharing in the savings of more efficient plans while paying more out their own pockets to buy more expensive coverage.


Heritage Analysts' Comments: The correct answer to the White House question is: "Yes. Both the House and Senate bills will result in Medicare's paying some of the prescription drug costs of wealthy seniors." While it is true that the new drug benefit will not pay as large a share of drug costs as Medicare currently pays for hospital and physician costs, that is more a result of the limited extent of the drug coverage provided in the bills than of the partial means testing of the premium subsidies and benefits.


The Future Cost of the Drug Benefit


White House Question: Will the drug benefit exacerbate costs beyond what we can afford?


White House Answer: The President's Budget proposed $400 billion over ten years for Medicare modernization, including a prescription drug benefit. Both the House and Senate budget resolutions included the same amount for Medicare. This is a substantial commitment-albeit half as much as the Democratic leadership proposed to pump into an unreformed, government-run system. Adding a long-promised drug benefit for seniors will expand an entitlement program for seniors, but allowing the private marketplace to provide this benefit will bring about the entitlement reform necessary to sustain the system financially.


Heritage Analysts' Comments: If the 37-year history of Medicare is any guide, the correct answer is, "Yes." In 1988, the CBO said the prescription drug benefit enacted in the ill-fated Medicare Catastrophic Coverage Act of 1988 would be $5.7 billion over five years. A year later, it more than doubled the estimate to $11.8 billion. In the face of exploding costs and intense public dissatisfaction with the provisions of the new law, Congress repealed the program.


Consider the rapid escalation of drug costs in the current debate. In March 1999, the Breaux-Thomas proposal, which was the first comprehensive proposal for a serious Medicare reform, included the addition of a prescription drug benefit at a projected cost of $60 billion over a period of ten years.


Medicare's Long-term Solvency


White House Question: Isn't it the case that these bills do nothing to address Medicare's long-term solvency?


White House Answer: These reforms do begin to address Medicare's long-term solvency. First, CMS actuaries project private plans will soon be able to provide Medicare benefits at a cost below current Medicare. The Administration will continue to work with Congress to ensure that government contributions to these plans are based on market principles that recognize the lower cost of private plans. Second, the Senate bill contains provisions that for the first time require a clear and transparent assessment of the un-funded obligations of the Medicare program. The Administration will continue to work with Congress to improve the information available to policy makers to help better assess Medicare's long-term financial status.


Heritage Analysts' Comments: The addition of a huge drug entitlement clearly worsens the financial condition of the already ailing Medicare program. Professor Tom Savings and Andrew Rettenmaier of Texas A&M University, both senior fellows at the National Center for Policy Analysis, have recently estimated that the Medicare legislation will add a 12 percent increase in projected spending by 2013. They further note:


Applying the 12 percent to annual projections of total Medicare expenses for all years beyond 2013, we calculate that the newly created unfounded liability of such a reform is $7.5 trillion. This means that the prescription drug bill that adds 12 percent to Medicare costs comes with a present cost of $7.5 trillion, or almost twice the current debt held by the public. Limiting the calculation to include only the benefits that will be paid to current beneficiaries and current workers results in costs of approximately $2.6 trillion.[3]


The Prospects of Private-Sector Plan Participation


White House Question: Isn't the private option for Medicare recipients doomed to failure for a simple reason: Congress wants it regulated in such a way that it's hard to see why any profit-making company would want to get involved?


White House Answer: It is important that the private sector be allowed to compete and be profitable in Medicare system. The Administration will work to improve the legislation to make sure that private plans will want to participate in Medicare. But while private providers have expressed the same concerns, they have also expressed a strong interest in participating in a reformed Medicare system.


Heritage Analysts' Comments: The Administration answer is correct. They must work to improve the legislation. On the basis of the statutory language, particularly in the Senate bill, neither the proposed payment system nor the potential regulatory regime provides the kind of warm and hospitable environment that one would expect for robust free market competition.


The Issue of Taxpayer Risk


White House Question: How does the Senate legislation promote true market competition when the government would financially buffer plans from the risk of unexpectedly expensive patients?


White House Answer: There is a substantial "financial buffer" for drug coverage in the Senate bill. This exists because the Committee chose to include stand-alone drug policies in this bill as a means of assuring that beneficiaries who remain in traditional Medicare have a drug benefit equivalent to that available through private Medicare plans. The Administration agrees that this is a substantial shortcoming in the bill and is working with Chairman Grassley and Senator Baucus to fix this methodology.

Heritage Analysts' Comments: The Senate and House bills both contain provisions that, while very different in their structure, would have the taxpayers assume an increasing share of the risk as a way to induce private plans to offer drug coverage. Both provisions are an open invitation to plans to delay applying to offer coverage until the government offers them better terms. The logical endpoint of this incentive structure is a situation in which the government bears all of the risk and the private plans are simply paid on a cost-plus basis to process claims, just as private plans are now paid for claims administration in Medicare Parts A and B. Of course, at that point the program is nothing more than a government-funded and -administered benefit with most of the paperwork outsourced to private companies, just like the rest of Medicare is today.


The Senate's "Fallback" Drug Program


White House Question: Wouldn't the impact of the Senate's plan to offer fallback drug coverage in areas where private companies fail to offer at least two drug insurance plans be equally hard to predict and could doom seniors to rotate annually from plan to plan?


White House Answer: The Administration agrees that the "fallback" provision in S.1 is a problem, and we will work with Congress to improve this bill so it does not discourage private entities from bearing the insurance risk for prescription drug coverage.


Heritage Analysts' Comments: The "fallback" provision in the Senate bill is not just "a problem." It is a major obstacle to sound Medicare reform policy. Such a provision must be eliminated from any final bill if there is to be even the slightest hope of drug coverage through private, risk-bearing plans. Otherwise, the "fallback" plans will crowd out the risk-bearing plans. A risk-bearing plan simply cannot compete with a non-risk-bearing plan. The premiums for the risk-bearing plans will be uncompetitive because those plans will have to build into their premiums a margin to account for the risks and will be required, both by prudent insurance practices and the legislation itself, to maintain reserve funds against unexpected claims costs.


The Groundwork for a European-Style Health Care System


White House Question: Isn't it true that a universal drug benefit as part of an unreformed Medicare system is a giant leap toward a European model of government-run care?


White House Answer: Actually, the leading Medicare bills in the House and Senate would move America away from the European model of government-run care and toward greater individual choice. More than ever before, we would begin applying the best practices of the private health care market to Medicare-taking it from a one-size-fits-all, government-run program to one in which beneficiaries select among competing private plans for the coverage that best meets their individual needs.


Heritage Analysts' Comments: The short answer to the question is, "Yes." It is unclear that the private drug-only plans will work in the Senate bill's complicated statutory environment and that millions of Americans will be progressively dumped out of private coverage. Since Americans over the age of 65 account for roughly 50 percent of all drug purchasing in the United States, the likely course of the entitlement would be to transfer the financing and delivery of prescription drugs over to federal government control. In other words, a major sector of the health care economy would come under direct government supervision, constituting a major step toward a European-style, government-run health care system. In fact, the only provision in either the House or Senate bills that would shift Medicare from a government-managed, provider-centric model to a true patient-centric, individual-choice model is Section 241 of the House bill. That section would establish, starting in 2010, the kind of individual choice system with market premiums that was recommended by the Bipartisan Medicare Commission and has been endorsed and advocated by President Bush. Whether or not Medicare even begins to move to a patient-centric model depends entirely on whether or not that section is in the final legislation.

[1]See Lanhee Chen et al., "An Analysis of the House Medicare Legislation," Heritage Foundation Web Memo No. 302, June 25, 2003.

[2]See Edmund F. Haislmaier and Robert E. Moffit, "Analysis of the Evolving Senate Medicare Bill," Heritage Foundation Web Memo No. 296, June 17, 2003.

[3]Andrew J. Rettenmaier and Thomas R. Saving, "Another Medicare Monster," The Wall Street Journal, June 24, 2003, p. A16.


Nina Owcharenko

Former Director, Center for Health Policy Studies

Robert Moffit

Senior Fellow

Edmund Haislmaier
Edmund Haislmaier

Senior Research Fellow

Center for Health Policy Studies