Early Warning on Medicare Drug Implementation

Report Health Care Reform

Early Warning on Medicare Drug Implementation

January 4, 2005 6 min read
Senior Fellow
Robert E. Moffit is a senior fellow in The Heritage Foundation's Center for Health Policy Studies.

Congress has designed a complex and increasingly expensive drug benefit scheduled to start in 2006. Worse, the Medicare bureaucracy, with little or no experience in drug benefits, is charged with administering it. Nonetheless, Medicare officials will soon unveil a massive regulatory regime governing more than half of the prescription drugs sold in the United States.[1]


Instead of saddling unwary American taxpayers with trillions of dollars in additional debt, Congress can delay implementation of the drug entitlement until it can explain how it intends to pay for it. Meanwhile, Congress can target more generous subsidies directly to the minority of seniors who are without drug coverage using the existing Medicare drug discount card. This would benefit the needy and taxpayers alike. It would also correct the stunningly irresponsible entitlement policy that Congress adopted in 2003.


The Challenge

The congressional drug program deepens the financial crisis threatening Medicare. It adds more than $8 trillion to Medicare's unfunded liabilities, bringing the total to $28 trillion. As the editors of The Washington Post recently observed, "The administration initially sought to link moves to constrain Medicare costs with the prescription drug benefit, but the legislation ended up with a super-sized new benefit and slimmed-down cost containment measures that mostly take effect-if they work-years down the road."[2]


In her April 8, 2004, testimony before the Senate Governmental Affairs Committee, former Medicare Administrator Gail Wilensky said that "The Medicare Prescription Drug Bill, known as the Medicare Modernization Act (MMA), represents the largest, most expensive and most complicated set of changes to the Medicare program since its inception."[3]


The clock is ticking: On October 1, 2005, Medicare's beneficiary education program begins; on November 1, 2005, the initial enrollment of Medicare beneficiaries begins; and on January 1, 2006, the Medicare drug program must be up and running. In the meantime, Medicare regulators must soon tackle big tasks in their final rules. To name just a few:


  • Get Medicare patients' drug spending right. After a Medicare beneficiary's initial payment of a monthly premium and a $250 deductible (both indexed to rising drug costs), Medicare provides a government contribution of 75 percent of all drug costs up to $2,250. Above that amount, the Medicare beneficiary pays 100 percent out of pocket for all drug costs: the "doughnut hole," amounting to $3,600. After this dollar threshold is reached, Medicare pays 95 percent of all catastrophic costs.

    In order to enforce the law, Medicare officials will have to keep track of premium payments, subsidies for low-income persons, the deductibles, and all "legitimate" out-of-pocket spending. Under the law, not all out-of-pocket spending will qualify toward the statutory catastrophic limits. As former Medicare Administrator Nancy-Anne DeParle told the Senate Governmental Affairs Committee in her April 8, 2004, testimony, "It can be done, but it is not simple. And if it's not done perfectly, millions of beneficiaries and pharmacists will be calling CMS [the Centers for Medicare and Medicaid Services] and Congress to complain."[4]
  • Get drug formulary rules right. The new Medicare law says that drug plans must include at least two drugs in each "therapeutic category and class" in their formularies, or lists of available drugs, and the Secretary of Health and Human Services is authorized to disapprove drug plans or formularies that discriminate against certain beneficiaries. What constitutes a category or class is not defined in the statute. Along with many other complex details, this is left to Medicare regulators.

    The question is whether the final rules will define categories or classes of drugs broadly or narrowly. For plans, the issue is whether the rules will enable them to secure significant price discounts. For retirees, the issue is whether the rules will protect them against overly restrictive lists or inappropriate drug substitution. While Medicare officials can doubtless administer formulary rules, it is unlikely they can do so without opening up new avenues for additional regulation, contentious litigation, and additional congressional micromanagement.
  • Get the drug subsidies to employers right. The new Medicare law provides for $71 billion worth of taxpayer subsidies over 10 years to employers to keep them from dropping retiree coverage. To get the taxpayer subsidies, corporate benefits managers must offer retiree drug coverage that is worth at least as much as the new congressional drug benefit. Federal regulators will have to determine that an employer's coverage is "actuarially equivalent," and this determination will be crucial in employers' decisions this year whether to retain, drop, or scale back their retirees' drug coverage.

    The Congressional Budget Office estimates that in 2006, 2.7 million retirees will lose their existing employer-based drug coverage; other estimates, based on government documents, are as high as 3.8 million.[5] While congressional leaders routinely describe the drug benefit as "voluntary," the level and quality of seniors' drug coverage will be determined not by seniors themselves, but by government officials and former employers.
  • Get federal-state coordination on Medicaid patients right. The Medicare law will provide Medicare drug coverage to more than 6 million seniors ("dual eligibles") who today get their coverage under state-run Medicaid programs. On January 1, 2006, Medicaid "matching funds" for dual eligibles' drug coverage will cease; they must, therefore, be enrolled in the new Medicare program.

    In the meantime, state officials must train their own staffs on the provisions of the new law and develop and implement their own plans to help dual eligibles make the transition into the new Medicare drug program. This includes educating these seniors and helping them to enroll in a new prescription drug plan so that they can secure income-related federal subsidies for their benefits. It also means that state officials must identify these persons and determine and confirm their eligibility, exchanging data and information with the Social Security Administration. Meanwhile, they must determine the future role for their own state pharmacy assistance programs: for example, whether to offer "wrap around" coverage for the new Medicare drug benefit. Altogether, these will be formidable tasks.


Medicare officials will soon finalize a mammoth regulatory regime for the implementation of Congress's drug program. This will reignite the bitter Medicare debate, increase the volume of complaints to Congress, increase the pressure for even more congressional micromanagement, and accelerate the imposition of price controls on prescription drugs.


None of this is necessary. Roughly three out of four seniors today have drug coverage. The new congressional drug benefit will crowd out existing drug coverage for millions of senior citizens.


Instead of disrupting the lives of millions of seniors, Congress can delay this process. And in the meantime, Congress can tell American taxpayers how precisely they will pay for the new drug entitlement, while still targeting generous federal subsidies to the minority of seniors without drug coverage, using the recently created Medicare discount drug card.


It's still not too late for a strong dose of common sense and fiscal responsibility.


Robert E. Moffit, Ph.D., is Director of the Center for Health Policy Studies at The Heritage Foundation.

[1] The Centers for Medicare and Medicaid Services(CMS) published the proposed drug rules on August 3, 2004.

[2] "The Bigger Problem," The Washington Post, December 27, 2004, p. A28.

[3] Gail Wilensky, "Does CMS Have the Right Prescription? Implementing the Medicare Prescription Drug Program," Statement to the Senate Committee on Governmental Affairs, April 8, 2004.

[4] Nancy DeParle, "Does CMS Have the Right Prescription? Implementing the Medicare Prescription Drug Program," Statement to the Senate Committee on Governmental Affairs, April 8, 2004.

[5] Robert Pear, "Medicare Law Is Seen Leading to Cuts in Drug Benefits for Retirees," The New York Times, July 14, 2004.


Robert Moffit

Senior Fellow