October 15, 2003

October 15, 2003 | Commentary on Health Care

The Wrong Prescription for Medicare

The cost of Congress' Medicare drug proposals is rising -- and so is public frustration.

A little history: In June, both houses passed slightly different Medicare reform bills. Each would create a massive Medicare drug entitlement, instead of targeting help to poor seniors who need it. Anybody turning age 65 -- including a retiring Bill Gates or Donald Trump -- would be handed a taxpayer-financed drug benefit.

President Bush wants lawmakers to settle their numerous differences quickly and send him a Medicare bill. But we're still figuring out the ramifications of this complex entitlement expansion.

For instance, three out of four retirees now have some form of prescription-drug coverage, many through former employers. Most seniors like their existing coverage. The prospect of losing it frightens them. And while retiree drug coverage is often required under union contracts, if taxpayers are going to pick up drug bills, many companies will have a powerful incentive to save money by dumping retirees out of their private coverage, or at least significantly scaling it back.

This frightening scenario is very real. The Congressional Budget Office says that between 32 percent and 37 percent of seniors with coverage from their employers are going to get dumped out of that coverage. This estimate mirrors new independent research, conducted by Professor Kenneth Thorpe of Emory University. Thorpe, a former Clinton administration health policy adviser, estimates that 33 percent of seniors with employer provided drug coverage would lose it.

Of course, the size of the losses would vary state by state. According to Thorpe, nearly a third of the more than 4 million seniors at risk of losing their private coverage are concentrated in five states: Michigan (where 218,000 could lose coverage), New York (326,000), California (385,000), Ohio (243,000) and Florida (252,000).

Another problem is that under the congressional drug bills, seniors would pay a monthly premium of about $35 for the drug benefit, plus a deductible of $250 or $275. After that, the government will pay just half of all drug costs up to a certain amount, where coverage stops completely.

These are the now infamous "doughnut holes," or gaps in coverage where seniors would have to pay a large chunk of their drug costs until they reach a maximum out-of-pocket amount. In the Senate bill, seniors would pay $3,700; in the House version, it's $3,500. Catastrophic coverage would finally kick in at that point. But as many retirees with employer-based coverage are learning, the congressional drug bills are vastly inferior to what they already have. Millions would be paying more for less.

And that's just out-of-pocket expenses. Throughout their working lives, many seniors deferred pay, expecting that their companies would provide drug coverage after retirement. When those people are dumped into an inferior government drug program, they will have lost not only that deferred compensation, but also the full value of the promised future drug coverage. That's a big price to pay.

Over the August recess, many lawmakers heard from seniors who don't like the Medicare drug proposals. But working taxpayers should be even angrier.

After all, lawmakers once claimed the 10-year cost of their Medicare drug bills would be $400 billion. Predictably, that turned out to be low. Less than a month later, the Congressional Budget Office revised the costs to $425 billion for the House's drug bill and $432 billion for the Senate's.

It gets worse. Congress has suddenly realized that its Medicare "reform" would encourage companies to drop retiree drug coverage, so some lawmakers are now considering hitting the taxpayers a second time.

A recent New York Times report said lawmakers may offer more federal subsidies for firms in order to discourage them from dropping the drug coverage they promised their retirees. In plain English, this is corporate welfare.

The pattern is all too familiar. First, the government creates a complicated and costly mess. Second, it bills taxpayers for another costly solution to the mess it created in the first place.

But all is not lost. Congress has time to go back to the drawing board and refashion the Medicare drug provisions. Three simple rules should guide lawmakers:

· Don't disrupt the lives of millions of well-covered seniors by adopting a plan that encourages employers to dump them into an expensive, inferior government drug program.

· Help the poor seniors who really do need a hand with their drug bills.

· Refrain from adding insult to taxpayer injury by saddling them with the cost of a corporate-welfare package to cover the price of congressional miscalculation.

Congress needs to control entitlement spending, not bankrupt the next generation.

Robert Moffit is the director of the Center for Health Policy Studies at The Heritage Foundation where Derek Hunter is a researcher.

About the Author

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

Derek Hunter Research Assistant
Center for Health Policy Studies

Related Issues: Health Care

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