May 12, 2000

May 12, 2000 | Commentary on Health Care

Not What the Doctor Ordered

The debate in Washington over how to give a prescription drug benefit to Medicare patients is like the dilemma faced by a homeowner facing a tough repair job: Should I take the time to really fix this, or will some quick, stop-gap effort suffice?

You can put President Clinton, who simply wants to add a prescription drug subsidy to the old Medicare program, in the second category. There are two flaws with his approach. For one, although "pharmacy benefit managers" would control the drug benefit (as they do in private insurance plans), these managers would become geographic monopolies controlled by the Health Care Financing Administration, the government agency that runs Medicare. This means that a single entity would control the prices and the supply of drugs for seniors.

In addition, the Clinton plan offers only "front-end" prescription drug subsidies, not a solid catastrophic stop-loss insurance program. This means it would actually do a better job covering routine medications than the expensive drug therapies many seniors need. Those facing high drug costs would have to rely on a special reserve fund that would not go into effect until 2006 to cover catastrophic expenses. And that fund, like the Medicare program itself, would be subject to the uncertain politics of the federal budget process.

A far better option would be to let seniors participate in a new Medicare program that resembles the Federal Employees Health Benefits Program (FEHBP), which covers members of Congress and other federal workers. Surely a program good enough for Congress is good enough for America's seniors. FEHBP was the model proposed last year by Congress' own Commission on the Future of Medicare, and it's not hard to see why: It delivers choice, competition and customer satisfaction. In short, everything Medicare doesn't.

In FEHBP, members choose from a variety of private plans, all of which offer prescription drug coverage. Most plans pay between 80 percent and 90 percent of drug costs, and members are not pressured to buy additional insurance policies to bridge huge gaps in coverage. A Medicare version would work the same way: Market forces would restrain drug prices and allow seniors the protection of private catastrophic coverage.

FEHBP insurers know, for example, that it makes sense to pay for an expensive drug therapy, since it is often less costly in the long run than surgery or institutionalization. Moreover, integrating drug coverage into an overall system of health insurance reduces "adverse selection" problems, where only those with high drug costs purchase the coverage.

But if Congress opts for a limited solution to the drug-coverage problem - GOP leaders have earmarked $40 billion in their five-year budget for an as-yet-undefined plan - then it should establish a framework for an FEHBP-style reform. Key elements would include:

Subsidies targeted to low-income seniors. Most seniors already have coverage from employers or other sources. Any new drug program should target those who cannot afford coverage.

Protection from high drug costs. Insurance is supposed to protect individuals from catastrophic financial losses. The threat to seniors today is expensive drug therapies that may cost thousands of dollars per year. A properly designed policy would include a deductible but cap the financial liability to prevent seniors from getting stuck with enormous bills.

Access to competing private plans. Seniors should be able to choose from competing private plans with access to discounted drugs.

A Medicare Board that approves the new benefit. A new Medicare Board could approve the level of drug benefits offered through private insurance, while enforcing consumer protection and solvency requirements - as the Office of Personnel Management does today in the FEHBP system.

Minimum contract lengths and waiting periods. For a drug benefit to work, seniors must not be able to buy coverage only for short periods or when they need it. A Medicare drug reform should include "high-risk pools," where private insurers cross-subsidize each other to keep each participating plan from getting a disproportionate share of bad risks.

Designing a high-quality drug benefit for low-income seniors will require close attention to detail, especially if the changes are expected to transfer to an FEHBP-style system of private coverage. In the meantime, though, Medicare beneficiaries should be spared an ill-designed drug plan that will eventually need to be fixed all over again.

James Frogue is a health care policy analyst at The Heritage Foundation (www.heritage.org). A version of this essay appeared in the Chicago Sun-Times.

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