June 25, 2003

June 25, 2003 | Commentary on Health Care

A New Prescription for Medicare

The Medicare bills now brewing on Capitol Hill are full of nasty surprises.

 

Take this one: The Congressional Budget Office (CBO) warns that the Senate's plan to add a prescription-drug benefit to the government program would cause more than 4 million retirees -- 37 percent of all seniors with employer-sponsored health plans -- to lose the drug coverage they now enjoy. Some reform.

 

The Senate bill creates a new entitlement for all seniors, regardless of their wealth: In 20 years, janitors would be paying taxes to ensure Bill Gates won't have to pay much for his prescriptions. The CBO says this entitlement will cost $400 billion over the next 10 years. But no one can say what it will cost.

 

The best CBO Director Douglas Holtz-Eakin could say of his office's estimate was: "This is a really careful, good-faith effort to try to anticipate the creation and micro-engineering of a market structure."

 

Fact is, no cost estimate is very instructive when it comes to entitlements. If it's an entitlement, the price will be whatever it costs to pay every claim. That's the worst kind of government program.

 

And with the Baby Boom starting to retire in 2011, that $400 billion will wind up as a floor, not a ceiling.

 

The estimate seems especially irresponsible when you look at the Senate plan. This is no free benefit: Medicare patients would pay $35 a month for drug coverage with a $275 deductible. From $276 to $4,500, the government would pay half the costs. But patients would have to pay all their drug costs beyond that, until they had spent $3,700 for the year, when government would pick up 90 percent of the remaining costs.

 

So, seniors with $2,000 per year in prescription drug costs would have about half that paid for by their government-provided insurance -- but seniors who spent $6,000 per year would have to come up with nearly two-thirds.

 

No private insurance company would dare offer a policy that works like this. As Dr. Jacob S. Hacker wrote in a recent article for the liberal New Republic, "This Rube Goldberg design, with its large 'donut hole,' has no rational policy basis other than the need to stay within the agreed-upon $400 billion, 10-year price tag. After all, a good insurance policy should offer gradually more coverage as expenses go up."

 

Of course, history demonstrates that new entitlements always wind up costing far, far more than initial estimates. Inevitably, Medicare will have to find ways to limit its drug benefit payouts. Doubtless it will follow the lead of its sister program, Medicaid.

 

To hold down costs, Medicaid has resorted to price regulation -- forcing manufacturers to sell their drugs at below-market prices. It also simply excludes many expensive -- and effective -- drugs, because they cost too much. And Medicaid forces doctors to get permission from bureaucrats before they can prescribe the latest drugs, forces doctors to choose generic drug substitutes and limits the dosages doctors can prescribe.

 

Congress will be under enormous pressure from seniors to remove existing gaps in coverage. But that would only drive the cost of the program even higher, and make drug rationing even more likely.

 

The plan President Bush originally advanced - a program modeled on the highly successful, highly popular Federal Employees Health Benefits Program, which covers 9 million federal workers and retirees and their families -- does represent real reform.

 

The federal-employees program lets workers choose from a variety of plans -- all with prescription-drug benefits included. More importantly, this program is based on a business relationship between the government and the plans, not a regulatory relationship like the rest of Medicare.

 

Administration of the federal employee program is decentralized, not managed, claim-by-claim, by a cumbersome central bureaucracy. Market pressures control costs.

 

The president's original proposal has been characterized as an attempt to privatize Medicare. Nonsense. That plan was modeled after the federal workers program - which is run by the government, for government workers and retirees, and represents the best in public-private partnerships.

 

The federal employees' model works because it focuses on customer need and uses market forces -- rather than government regulation -- to control costs. It's not perfect. But instead of handing billions to a rickety bureaucracy, it encourages a move in the direction most experts agree Medicare must go.

 

So back up, Senate. Forget the July 4 deadline imposed by Majority Leader Bill Frist. Take another look at the plan Sen. Frist (R-Tenn.), along with Sen. John Breaux (D-La.), was pushing before he became majority leader.  When you discover how much better this could work, you might be surprised -- pleasantly for once.

 

Robert Moffit is director of the Center for Health Policy Studies at The Heritage Foundation.

About the Author

Robert E. Moffit, Ph.D. Senior Fellow
Center for Health Policy Studies

Related Issues: Health Care

Originally appeared in the New York Post