What's Wrong with the Senate Medicare Drug Bill

Report Health Care Reform

What's Wrong with the Senate Medicare Drug Bill

June 18, 2003 11 min read
Senior Fellow
Robert E. Moffit is a senior fellow in The Heritage Foundation's Center for Health Policy Studies.

The Congressional Budget Office reports that 37 percent of all retirees with employer-based drug coverage would lose it under the Prescription Drug and Medicare Improvement Act of 2003, the Medicare bill recently adopted by the Senate Finance Committee.[1]


This remarkable, if unintended, consequence emphasizes that the expansion of bureaucratic control over the financing and delivery of health care services is not reform.


According to the Joint Economic Committee, 34 percent of all seniors today get drug coverage from employers.[2] With the continuation of the Senate debate, taxpayers are likely to find even more such surprises in the large and complex Senate Medicare drug legislation.


The President's Vision
President George Bush outlined a sound vision of comprehensive Medicare reform. The President said that he would like to see a system for current and future senior citizens similar to the Federal Employees Health Benefits Program (FEHBP), which covers federal workers and retirees. That genuinely pluralistic system offers a wide variety of benefit and plan choices, and all have prescription drug coverage fully integrated into competing health plans. More important, in the FEHBP, the relationship between the government and private plans is a business relationship, not a regulatory one. Program administration is decentralized, and market discipline controls costs.


The Senate's Version

The Senate bill is substantively very different from the President's vision. The major provisions of the massive Senate Medicare bill were first made available last week to members of the Senate, with a Senate Finance Committee mark-up of the legislation 48 hours later. As The Washington Post has noted, the bill resulted from a "rapid series of compromises" that has produced an incoherent "mish mash" of provisions that are probably unworkable.[3]


The 43-year-old FEHBP, whatever its faults, works. But the FEHBP, as a model for reform has little operational presence in the intricate provisions of the Senate bill. Indeed, the Senate bill creates a new entitlement structure in the form of a prescription drug benefit whose dynamics will rapidly expand direct federal control over the financing and delivery of prescription drugs, and thus an ever larger portion of the American health care economy.


A New Drug Entitlement

While the President originally proposed a limited drug benefit for seniors enrolled in traditional Medicare, the Senate bill has adopted a drug benefit as a new entitlement. CBO and other government estimates may fall well short of the true cost of this new entitlement.


Conservatives in Congress have been erroneously charged with trying to "privatize" the Medicare program. In fact, the model for reform among most Medicare reformers has been a government program, the FEHBP. Curiously, if the Senate bill was meant to be a vehicle for "privatization," many of those who have emerged among the most enthusiastic supporters of the legislation understand that it is exactly the opposite. As Nancy Ann DeParle, former Administrator of the Health Care Financing Administration (HCFA) during the Clinton Administration, has written, "In signing it, as he [Bush] will be forced to do, he will preside over the biggest expansion of government health benefits since the Great Society."[4] Once again, since Americans over the age of 65 purchase roughly half of all prescription drugs, this would amount to a massive expansion of direct government control over a large portion of the health care sector of the economy.


Filling "Doughnut" Holes

The Medicare debate is centered on profound differences over the structure of the policy and the future structure of Medicare itself. The structure of the policy determines the function of both the public and private entities affected by it. The structure will determine the dynamics of the system. The "gap"-toothed structure of the Senate proposal literally invites "remedial" action by congressional liberals, who now believe that$400 billion expenditure for prescription drugs over a decade is paltry stuff. Under the Senate bill, Medicare patients would pay a $35 per month premium and a $275 deductible. Between $276 and $4500, the government would pay 50 percent of the drug costs. At $4500, the Medicare beneficiaries would be responsible for 100 percent of the costs until their personal out of pocket expenses reached $3700, and then the government would pick up 90 percent of the drug costs. In other words, the Senate bill has the proverbial "doughnut hole."


Because this structure is not likely to remain popular among many of the bill's supporters in Congress and elsewhere, it is also likely that such "gaps" will be filled rather quickly by Members of Congress who have always supported a far more generous drug benefit, especially those in the House of Representatives who are already on record of supporting a giant prescription drug benefit in excess of $800 billion over the next 10 years. In her ringing support of the Senate Finance Committee bill, DeParle further urged members of Congress to fill the gaps immediately: "The Democrats should fight to improve the bill now--filling in the doughnut hole would be a good start."[5]



The Senate bill's drug provisions will have several consequences.


  1. It will displace existing private-sector drug coverage for millions of seniors. The Congressional Budget Office estimate that 37 percent of retired employees with employer-sponsored coverage would lose it under the bill may yet be a conservative projection. Congress has long been a fruitful source of unintended consequences in federal health policy. Currently, 78 percent of all seniors have drug coverage, mostly through private plans or retiree insurance coverage.[6] As the editorialists of The Washington Post have warned, "Private employers, for their part, might well be prompted to drop the drug coverage they currently offer their retirees."[7] For those seniors who find themselves with no other alternative but the government plan, the policy result might prove to be more than a mere personal inconvenience.


  1. In creating a new entitlement of unknown cost, it will guarantee that low-income working people pay the drug bills of rich retirees with six-figure incomes. Bill Gates, retired as president of Microsoft, will be subsidized by taxpayers along with the retired librarian. With universal entitlements, the wealthiest are, after all, entitled. In the face of relentlessly growing and massive costs, larger demands on general revenues and taxpayer's wallets to sustain the Medicare program, this is bad public policy.


  1. The new drug entitlements will dramatically increase the claims processing for the Medicare bureaucracy and its contractors. That will probably be dismissed as a minor administrative burden in a program that is already in managerial meltdown, but the explosion of utilization will engender soaring costs that can and will be controlled only through price controls and a direct or indirect rationing of drugs. It is only a matter of time. In Medicaid, we have a very clear example of what to expect with a government run prescription drug program. [8] What is happening in Medicaid today could very well be the future of drug coverage in Medicare.

A Weak Alternative

The Senate bill (Title II) repeals the "Medicare+Choice" program and replaces it with a new " Medicare Advantage" program. The residual law governing the new program, however, is the statutory foundation of the Medicare+Choice program, which is burdened by government payment rules and over-regulation. For example, the private-sector plans would be required to offer drug coverage that meets the statutory requirements of the new government drug program. This may be well intentioned, but it is not a prescription for flexibility in benefit design.


In effect, the Senate bill prescribes a standardization of the drug benefit for private health plans, something that does not exist in the FEHBP. Moreover, in a departure from the FEHBP model, every plan must also cover every benefit and service covered today in Medicare Parts A and B; this is not the FEHBP model, which specifies only categories of benefits and allows plans to offer different benefit packages and combinations of benefit packages. FEHBP enrollees can pick and choose a variety of benefit combinations, low cost to high cost. The Senate bill would unnecessarily sacrifice this flexibility in private sector benefit design, and the concomitant satisfaction of consumer demand. 


For private health plans, the Senate bill provides for payment on the basis of regional benchmarks, which, in turn, are based on Medicare's existing systems of administrative pricing. With continued pressures to control Medicare costs, now and well beyond the time the first wave of baby boomers start to retire, this payment system could discourage private plans from participating in the new system. Already insurance carriers have expressed some hesitancy, based on previous experience with the heavily regulated Medicare+Choice program. In the case of PPOs, only the three lowest-cost plans would be allowed to participate in any given region under the Senate bill, a direct restriction on consumer choice and competition.


The statutory provisions of Medicare advantage, as outlined in the Senate bill, could lay the groundwork for the tiresome replication of the kind of intrusive and stifling regulatory regime that severely damaged the Medicare+Choice program, As the editors of the Post remarked, "Plans to add another private option for Medicare recipients seemed doomed to failure, as Congress wants it regulated in such a way that it's hard to see why any profit-making company would want to get involved."[9]


The Cost Issue

The CBO has estimated that the Senate bill's drug provisions would cost $408 billion between 2004 and 2013.[10] The Senate bill provides some offsets in several areas to reduce the overall costs of the bill, including freezes in the area of durable medical equipment, lab coinsurance and deductible changes, an increase in the part B deductible, and changes in payment for "covered" outpatient prescription drugs. Taxpayers will find out soon enough whether the Congressional Budget Office estimate is correct. It is likely that the $400 billion figure is going to be a floor, not a ceiling on program expenditures.  


At the same time, many members of Congress apparently believe that Medicare, through its complicated fee schedules and price controls, provides a superior way to control health care costs. Contrary evidence is often ignored. In fact, a comparative analysis of Medicare and the FEHBP, recently conducted by the Joint Economic Committee (JEC), found that FEHBP is, in effect, superior to Medicare in cost control. According to the JEC report, the FEHBP has delivered cost control that is comparable to Medicare, even though it offers a richer benefits package. Over the last twenty years, according to the JEC, Medicare cost growth per average enrollee was 6.7 percent per year, while FEHBP costs grew at 6.5 percent per year. If FEHBP plans did not offer prescription drug coverage, the JEC found that FEHBP costs would have grown by only 5.8 percent per year.[11]  


Another Failed Experiment

Medicare reform should be a policy success, not another vehicle for the expansion of bureaucratic control over the financing and delivery of health care services.  


First, in order to solve the real problem of seniors without Medicare drug coverage, the Senate could design a benefit for low income seniors who do not qualify for Medicaid coverage and who do not have access to employer-based coverage or affordable supplemental coverage. It is not necessary to design a universal benefit under Title I of the Senate bill, when a targeted benefit would resolve the very real, but less than universal, prescription drug problem of those seniors without coverage.


Second, in designing a new "Medicare Advantage" program under Title II and Title III, the statutory model for participating private plans should be based on the best features of the FEHBP (Chapter 89 of Title V of the United States Code), which is targeted, light on both bureaucracy and regulation. This is not a "pie in the sky" option, but a very real, working model of a successful public-private partnership. The FEHBP model is far from perfect, as every Member of Congress and every staffer enrolled in it knows, but it is a good model, and a sound basis for renovating the Medicare program. The key objective is to create a similar structure, and provide for a smooth transition into such a structure, so that the Medicare program can absorb the demographic shock of the baby boom generation, which is set to retire in just eight years.


 America needs real Medicare reform, not another failed experiment.

[1] Robert Pear, "Some Senators Fear Employers Will Drop Retirees' Drug Plans," The New York Times, June 13, 2003.

[2] "Medicare Beneficiaries Links To Drug Coverage," Joint Economic Committee, April 10, 2003, p.1.

[3]Editorial, "The Medicare Muddle," The Washington Post, June 12, 2003, p. A38.

[4]Nancy-Ann DeParle, "Start Fixing Medicare Now," The Washington Post, June 12, 2003, p. A39.


[6]"Medicare Beneficiaries Links to Drug Coverage," a report prepared by the Joint Economic Committee, April 10, 2003, p.1.

[7]"The Medicare Muddle," op. cit.

[8] See Derek Hunter, " Government Controls on Access to Drugs: What Seniors Can Learn From Medicaid Drug Policies," Heritage Foundation Backgrounder, No. 1655, May 27, 2003;see also, Susan Horn Ph.D. et al., "What Seniors Should Know About Government Restrictions on Prescription Drugs," Heritage Foundation Backgrounder, No. 1611, November 6, 2002.

[9]"The Medicare Muddle," op. cit.

[10] Preliminary CBO Estimate of SFC Chairman's Mark, June 11, 2003, at 8:42 PM.

[11] See "Health Insurance Spending Growth-How Does Medicare Compare," Joint Economic Committee, June 10, 2003, p.1.


Robert Moffit

Senior Fellow