Dr. Robert E. Moffit:
Good afternoon, ladies and gentlemen. My name is
Robert Moffit. I'm the director of Domestic Policy Studies here at
The Heritage Foundation. Welcome to The Heritage Foundation for a
panel discussion on the Clinton Administration's Medicare
prescription drug initiative.
subject of this discussion could be, "Been there, done that." Let
me share with you a little history. Congress enacted a Medicare
prescription drug benefit in 1988, as part of the Medicare
Catastrophic Coverage Act of 1988.
President Ronald Reagan, seeking to give senior citizens peace of
mind and protection from the financial devastation of catastrophic
illness, proposed a modest expansion of the Medicare program. The
President's proposal, developed at the Department of Health and
Human Services (HHS) in the late 1980s by my former boss, HHS
Secretary Otis Bowen, was the product of extensive in-house
deliberations lasting 18 months; and the elements of the proposal,
including its financing, were presented in open forums around the
country by Reagan Administration officials. After it was introduced
in the House and Senate, with broad support from Republicans and
Democrats, liberals in Congress seized upon the bill as a vehicle
to create the largest expansion of Medicare since its inception.
Elementary to that expansion was the addition of a Medicare
prescription drug benefit, the addition of millions of extra claims
and new administrative responsibilities for the Health Care
Financing Administration (HCFA), the powerful agency that runs
spite of Reagan Administration veto threats, House and Senate
liberals--from both political parties--loaded up the Medicare
catastrophic bill. With broad support, it was passed in 1988 and
with equally broad support it was repealed in 1989. The reason: The
costs were far in excess of what seniors were willing to pay for
the new benefits. Concerning the prescription drug estimates, they
were wildly off the mark. For example, the Congressional Budget
Office estimate for the new prescription drug benefit jumped from
$5.7 billion to $11.8 billion within one year of the enactment of
with the Clinton Administration proposal, we are already seeing
sharp disparities in cost estimates, and chances are that the real
costs of such a benefit are going to be in excess of these early
official projections. So, it is worth exploring some of the
similarities and differences between the Clinton Administration's
Medicare drug initiative and the unsuccessful 1988 Medicare
President Bill Clinton is proposing major
changes in the Medicare program, though he is maintaining its basic
structure. The centerpiece of the Clinton Medicare proposal is the
addition of a prescription drug benefit. Today, about 65 percent of
all senior citizens--including upper income senior
citizens--already have a prescription drug benefit, largely from
private sources, including Medigap and employer-based health
the next few weeks, look for policy analysts to undertake a
detailed study of the structure and design of the Clinton drug
benefit for Medicare and its likely consequences. Writing in the
June 29th edition of The New York Times, health care
reporter Robert Pear observed, "Administration officials said the
design of the President's prescription drug proposal had been
heavily influenced by politics. Mr. Clinton, they said, wanted to
provide some tangible benefit to a large number of people, rather
than helping a small number with high drug expenses." Like Claude
Raines, in his memorable portrayal of a corrupt police official
collecting his winnings in the classic film Casablanca, I
am sure that you, too, are all "shocked, just shocked," that there
is gambling in Washington's casino.
Prescription drug costs are high, and they
can be huge. Right now, the Medicaid program, the government
program that provides health care to the poor and the indigent,
pays more for prescription drugs then it does for doctors. And
consider the fact that doctors' reimbursements in Medicare Part B
have been increasing rapidly, rising about 20 percent faster than
the general economy over the past five years.
aware that the Clinton Administration's cost estimates on
prescription drugs have been evolving. In fact, up until they
announced it, they were changing their estimates of this "benefit"
every few days. In any case, the estimates are likely to be wrong,
and if experience is any guide, the benefit will prove far more
costly than the official governmental projections predict.
have with us today three experts in the area of Medicare and health
policy to examine this issue.
first speaker this afternoon will be Gail Wilensky. Gail chairs the
Medicare Payment Advisory Commission and serves as the John Olin
Senior Fellow at Project Hope. Gail analyzes policies relating to
health care reform and ongoing changes in Medicare and the medical
marketplace. She testifies frequently before congressional
committees and acts as an advisor to Members of Congress and other
elected officials. She also served as deputy assistant to President
George Bush for policy development, advising him on health and
Wilensky received her bachelor's degree in psychology and her
doctorate in economics at the University of Michigan. She has
emerged as one of the most prominent of the former administrators
of the Health Care Financing Administration.
Howard Cohen, is a consultant with the law
firm of Greenberg Traurig. Howard worked as chief health counsel
for the Committee on Commerce of the United States House of
Representatives. He served as an advisor and counsel for House
members on health and related issues in the Commerce Committee's
jurisdiction. Howard's primary responsibilities included major
governmental health insurance programs, federal regulation of
health insurance and managed care, as well as federal regulation of
pharmaceuticals, and medical devices under the Food, Drug and
Howard received his bachelor's degree from
Illinois University and his doctorate in psychology from the
University of Massachusetts. He received his law degree from
final presenter is Dwight K. Bartlett. Dwight is the senior health
fellow at the American Academy of Actuaries. He provides actuarial
expertise to federal and state officials on health care and is the
Academy's chief spokesman on health issues to the news media and
Dwight has had a distinguished career. He
served as Commissioner of the Maryland State Insurance
Administration and was a visiting professor at the Wharton School
of Business at the University of Pennsylvania, as well as a
director of the Mutual of America Life Insurance Company. Dwight
was also the Social Security Administration's chief actuary.
Dwight received his bachelor's degree from
Harvard University, graduating with honors, and his master's degree
from Johns Hopkins University.
E. Moffit, Ph.D., is Director of Domestic Policy Studies
at The Heritage Foundation.
DR. GAIL WILENSKY:
Thank you. It's a pleasure to be here.
First, I want to state my position on
Medicare coverage of prescription drugs in the context of a
reformed Medicare program. I think it's inappropriate for us to
have discussions about specific concerns without indicating the
preferred final outcome.
my view, when we reform Medicare for the 21st century, we will
include outpatient prescription drugs, assuming that we have some
type of defined benefit package, which I think is likely. So my
comments and concerns do not relate to the intermediate or
long-term policies, depending on how long it takes us to reform
Medicare for the 21st century, but rather focus on issues that I
think are appropriate for 1999.
a reformed Medicare program, it would be possible to rearrange the
benefits, deductibles, and co-insurance so that the additional
costs to the U.S. Treasury, or to all of us as a society, would be
very different from what they would be if the prescription drug
component were just an add-on benefit. The reason I make this
distinction between where we are now and what I regard as an
intermediate or long-term fix for Medicare is that a whole series
of changes needs to occur between now and then.
own preference for Medicare reform is that we would adopt something
like the Federal Employees Health Benefits Plan, the plan that your
Members of Congress and the people who work for the federal
government have; sometimes it is called a "premium support" type of
program. Among a wide variety of completely private plans, people
would choose the plan that best suits their needs.
in a defined-benefit package--if we continue that, as I believe we
will--I would expect outpatient prescription benefits to be
included because of the importance of prescription drugs in meeting
the health needs of seniors.
real issue is what makes sense for us to do now, and what it is we
should be cautious about doing. I'd like to make a few
have, as Bob Moffit referenced, a substantial number of seniors who
at the moment are without prescription drug coverage--around a
third, or 13 million, of American seniors today. We have heard
about people who are being forced to chose between paying for their
prescription drugs and buying food, or paying for prescription
drugs and paying for rent. We ought to be very concerned that we
have some seniors--not the poorest; they're covered by
Medicaid--whose incomes are quite low and who may find themselves
in that position.
That's why the obvious strategy in the
short term, until we're ready to make the rest of the reforms that
we need in order to have Medicare for the 21st century, is to
target that particular group. It's a rather limited group. You can
debate whether this group is at 135 or 150 percent of the official
Actually, we already target these individuals for special
consideration in the Medicare program. They are, in a typical use
of Washington acronyms, known as QMBs for Qualified Medicare
Beneficiaries, and SLIMBs for Specified Low-Income Beneficiaries.
Under current law, the federal government pays their Medicare
premium and sometimes their deductible and co-insurance as well.
So, we've already singled out these low-income groups for special
the short term, a reasonable strategy is to target people who we
know are, for the most part, in this low-income group without
prescription drugs. Again, we should focus on the long-term
strategy, not because we do not think other changes might be
appropriate, but it would resolve some of the biggest pressures
facing us now.
The Future Challenge
why am I so skittish about jumping into a full-fledged Medicare
prescription drug program? Well, for several reasons, and none of
them are very hard to explain.
first is the basic challenge to the program. We keep hearing about
the fiscal pressure that Medicare will face when the 78 million
baby boomers, many of whom I see out in this audience, start to
retire. What we don't want to do is use up available money--money
that we hope will be around if the economy stays strong and we see
surpluses--before we've actually achieved those budget surpluses.
Incurring such in a major new expense now, starting in the next
year or two, is a very risky venture.
The Medicare Catastrophic
Experience. There is another issue. As noted, for some of
us who have been around long enough to remember ten or eleven years
ago, this is not the first time we have proposed prescription drug
coverage in the Medicare program. We have a history. It is the
story of our ability--or better, our inability--to predict the cost
of a Medicare prescription drug program.
Before going into the Bush Administration,
I was at Project Hope. I was asked to look at the varying
prescription drug coverage cost estimates and see whether they made
sense. What I recall, very dramatically--aside from disagreeing
with some of the early official estimates of the Medicare
Catastrophic program--was that from the time the Congressional
Budget Office made its first projection, before Congress had
actually voted and implemented this program, until the time the
program was repealed in 1989 following a very strong and angry
response by seniors, the cost estimates increased threefold. That
projected cost explosion occurred, of course, before we actually
had the program on the ground.
ability to understand what we're getting into is certainly enough
to give us pause.
A More Focused Approach.
So, why not start in a much more focused way? Go after the people
who need help now; those who can't wait a year or two or three, or
however long it will take to do these long-term reforms of
Medicare. Provide them with some assistance. Then, when we're ready
to undertake long-term reforms of Medicare, we can do it and
recognize that prescription drug coverage is likely to be a part of
that package. There will be a lot of decisions to make.
Administration has assumed that some of the cost of this new
prescription drug benefit can be offset by a series of attempts to
modernize the traditional Medicare Program. It would be a good idea
to modernize the traditional program, since most seniors are in the
traditional program and probably will be for at least the near
support the idea of modernizing the traditional program even though
I'm dubious that HCFA will be able to pull this off. The likelihood
that HCFA will be sufficiently "fleet of foot" to include
modernization strategies such as disease management, selective
contracting, or preferential contracting with high-quality
physicians and institutions, is not evident from what we have seen
of HCFA's managerial performance in these last several years.
Indeed, HCFA has struggled mightily to do what the Congress has
already assigned it to do as part of the Balanced Budget Act of
someone who has served at HCFA, who has a lot of respect for the
hard work and good will of many of the senior officials I dealt
with at HCFA, I think the magnitude of savings that the
Administration is projecting from modernization is very unlikely to
occur. But I certainly do not want to spend the money first for
prescription drugs and then rely on an unrealized budget surplus or
projected savings from modernization. After all, Medicare is
already in very fragile fiscal health.
Seniors feel very strongly about the
Medicare program. I hope it is a program that the 50-year-olds and
the rest of the baby boomers start to feel strongly about. We
sometimes think about Medicare as being only a program for seniors.
The fact is, it's all of ours, because we continue to pay for it
and because we are expecting to have the program there when we each
get to retirement. The Administration's proposal is just the wrong
way to resolve what is a legitimate issue.
Dr. Gail Wilensky is Senior Fellow at Project
DR. HOWARD COHEN:
like to provide you with a brief conceptual road map. It will be
useful as these proposals start coming from the Administration or
from Congress. I want to concentrate on just one, which is the
administration of the Medicare program's delivery system.
Clearly, a lot of the attention is always
given to the subsidization of people in a plan. We know that the
President's plan for prescription drug coverage provides a full
subsidization for people at 135 percent of the official poverty
line and below, a partial subsidy up to 150 percent, and then a 50
percent subsidy for everyone above 150 percent of the official
poverty line. It's a voluntary program. You get into complicated
interactions with Medicare, because there are several million
people that currently get a prescription drug benefit who are
dually eligible right now for services from Medicare and
second issue is benefit design. The President probably picked a
benefit design that is sui generis--it's unique. No one really ever
thought of one that had no deductible at 50 percent co-pay and a
$2,000 cap. It's a very interesting design.
third issue is the cost, and Gail has already touched on it. I
developed a chart showing the re-estimates of the Medicare
Catastrophic Coverage Act and its repeal in 1989. That bill was
passed in 1988, and one can chart the significant jump in CBO cost
know already that the President's cost estimate for this was $118
billion. Dan Crippen, the head of CBO, testified already that it's
$168 billion. Usually, as these things get re-estimated, you start
seeing the cost go up. These were ten-year estimates.
me, however, the most critical part of this is the architecture of
the President's prescription drug plan. We're in a unique
situation. The Kennedy/Stark/Waxman/Dingle legislation, which was
introduced first, and the President's proposal, are not, on the
surface anyway, taking the traditional approach; that is, put the
price controls on the benefit right in the underlying statute, and
have HCFA administer it directly, just as HCFA administers other
reminds me of an old television show, To Tell the Truth.
You would have three personalities up at a podium, and they would
all have the same nametag. Basically, the contestants had to
determine which one was really telling the truth.
Right now, if we had the Clinton
Administration and Senator Ted Kennedy's staff here, they'd all
say, "We want to offer a `private' insurance option that's
`market-driven.'" Everyone is characterizing their prescription
drug plan that way.
HCFA Controls. The
Kennedy/Stark proposal was first out in statutory language. The
initial analysis of it is clear; it is right out of HCFA and
clearly has price controls. Kennedy and Stark basically used the
method of "benchmark" pricing-- you could not pay a pharmaceutical
benefit manager (PBM) more than whatever the most efficiently run
private PBM was paid in a given region. You were stuck with that
President's prescription drug plan does not have statutory
language. It's just a narrative description of his proposal, with
questions and answers. So it's difficult to pin down. But clearly,
the President's proposal is not private insurance. Look
closely; it's the same old HCFA-run system. HCFA assumes the risk.
Private insurers or pharmaceutical benefit managers or--believe it
or not, and this was an interesting slip in their proposal--only
"private entities" could participate. But then they listed the
Medicare State Agency as one of the "private entities" that could
participate in running this thing. It gives you an idea of what
they probably had in mind.
function of the insurance entity here is no different than the
function of Blue Cross/Blue Shield or any other contractor that has
participated in the old Medicare fee-for-service system for the
past 30 years. It's a fiscal intermediary; it's a claims processing
organization. That's all it's doing. It's getting paid on a
per-claim basis, but it's a fiscal agent of HCFA. HCFA regulates
the program, insures the program, runs the program. HCFA controls
couldn't be clearer--even in their language--that this is what the
Clinton Administration had in mind here. They're explicit: an
insurance agent here could not assume risk. It could only basically
be paid on a per fee, per-claim basis.
There is some language in the Clinton
proposal saying that HCFA would gladly do demonstrations in the
future--the famous HCFA demonstration projects, which never get off
the ground. They would look at "partial" risk bearing.
the whole Medicare system, there are only two models that look like
the private sector. One is close to the private sector and one is
the private sector.
First, there is the Medicare+Choice
program, the new program that enabled seniors to buy private,
mostly managed care plans. Medicare+Choice health plans get paid an
administered price. The price is set through a complicated
methodology and statute, but to participate in their program, you
need something called a "private entity" that has to be state
licensed. It has to be insured. It has to bear 100 percent of the
risk. It is paid a monthly premium, and then it manages a program.
That's sort of like a "private market system," where you have
private insurance companies.
there is Medigap insurance. Medigap is not subsidized at all.
Medigap is a state licensed, private insurance product that senior
citizens purchase. The state insurance regulators control it. That
could be differentiated from HCFA and the fee-for-service program,
which is regulated, priced, administered out of HCFA. Yes, in some
instances, HCFA uses private entities to process paper, and that's
what this has in mind.
strong feeling is that if the architecture of the administrative
apparatus is wrong, then the whole thing progresses in the wrong
direction from the start. If policymakers really want to do private
insurance, with market-driven plans, then there's a way to do it.
Basically, you have to have private insurance plans bid on business
and accept premiums and provide a benefit, as opposed to just
at the architecture in this Clinton Administration proposal. How
does it react with other entities? Consider, three critical
variables. Do Medicare+Choice plans participate? How do they
participate? And do they survive?
Consider these first issues in detail. If
we create a Medicare fee-for-service pharmaceutical benefit (a
number of you are aware of some of the problems in enforcing the
Balanced Budget Act of 1997, particularly in the Medicare+Choice
system, and the attempts to resolve them), this Medicare+Choice
system could wither. The only part of Medicare actually based on
private plans could wither if this is not done right.
second issue is that we know a number of seniors get
employer-provided benefits, and retiree benefits. What happens to
these benefits? The Clinton plan tried to address that and deal
with the substitution effect.
third issue is how this program interacts with traditional Medigap
insurance. Do we know? The President has clearly made the decision
here that Medigap insurance for seniors stays as a "wrap-around"
insurance product. But now we've got this new Part D supplemental
pharmaceutical coverage on top of it. So the entire complicated
Medicare system, with this proposal, gets even more convoluted.
Now, you're going to be paying a Part B premium and a Part
D premium, if you're in Medicare fee-for-service. You try to keep
all of this paperwork straight.
back to the structural issue. Is it a private insurance option? Is
it a market-driven option? I think the President doesn't get a
passing grade on that score. To me, that's the most critical issue.
It should also be looked at, probably, as the most costly.
know a lot of policy people in Washington love to play with benefit
design, because you can turn the dial up and turn it down and play
with the deductible.
Policy people love to play with subsidies.
We'll do it through the tax code. We'll do it through Medicare.
We'll do it like some sort of "Kid-Care" block grant approach.
Those are critical issues, too. But if you don't get the overall
structure right, it doesn't really matter how you subsidize it. You
can use the tax code to subsidize a HCFA-administered product, and
that doesn't get anybody anyplace. Or you could use the code to
subsidize a private health insurance option offered by private
insurance companies, which are regulated and licensed at the state
level and not regulated by HCFA.
Those are the variables, the elements, I
would ask you to look at as various proposals start popping up.
They will probably start coming fast, especially this fall.
Dr. Howard Cohen is a health policy specialist
at Greenberg Traurig.
Inevitably, when you address an audience
as the last speaker on a subject like this, you find that the
proceeding speakers have already touched on a number of the things
you intended to say. So I'm just going to reinforce, to some
extent, what they've said.
First, I very much buy into the cost
uncertainties of the proposed program. The Administration,
primarily through the Office of the Actuary at HCFA, has estimated
that the cost of the proposed program through the year 2009 is $118
billion. The Congressional Budget Office has responded with a cost
estimate of $168 billion.
did talk to the Chief Actuary at HCFA to see if he was familiar
with the differences in the two estimates. He told me that there
are a number of small differences that tended to be offsetting, but
there were two principal differences.
the CBO assumed a substantially more rapid increase in the unit
prescription drug cost then his office had assumed. That was about
half the difference.
other half of the difference was that CBO assumed a substantial
induced cost for Medicaid. Apparently, they feel that in the
process of signing up for the prescription drug benefit, many
people who are eligible for Medicaid, but not presently enrolled in
Medicaid, would take advantage of this process to become enrolled
why they feel justified in that assumption, I'm not familiar enough
with the enrolling process, either for Medicaid or the proposed
enrollment process for the prescription drug benefit, to say. So I
am not really able to comment as to whether that's a reasonable
assumption or not. The HCFA cost estimate was based on the
assumption that virtually no one would sign up for Medicaid, simply
because they were eligible to sign up for the prescription drug
Well, which is right? The $118 billion or
the $168 billion? I think both parties, the HCFA actuaries and the
CBO economists, would admit that they don't know whether they're
right or not. Really, the range of possible cost outcomes for this
program is enormous. It could be worse than the $168 billion, or it
may be better than the $118 billion. There are substantial risks
from a cost point of view.
Consider the plan design. It's really not
what I would consider the most desirable form of an insurance
benefit. As you know, the program is proposed to start out in 2002
with a premium of $24 a month. For rounding purposes, let's say
that's $300 a year. You would be reimbursed for 50 percent of the
cost of your drug benefits, capped at a total reimbursement of
$1,000 a year.
National Academy of Social Insurance estimates that 13 percent of
all Medicare beneficiaries currently have prescription drug costs
exceeding $2,000. Those would be the ones that would get the
maximum benefit, presumably. There are 50 percent who have annual
prescription drug costs of less than $500.
net benefit is what you get reimbursed for, less the $300 annual
cost that you have to pay. Anyone who expects that the prescription
drug costs are going to be less than $300 a year is likely not to
sign up for the program, since he will wind up paying more in
premiums then he is going to recover in costs.
think there's a strong argument for having a catastrophic-type of
program, so that the 13 percent of Medicare beneficiaries who have
prescription drug costs in excess of $2,000, and who are most
vulnerable, could be protected against those catastrophic costs.
This is quite different from providing first-dollar coverage to a
large number of people.
Adverse Selection. I
think the plan design will encourage, frankly, a high degree of
anti-selection. By anti-selection, I mean that people who expect to
have a high drug cost will likely sign up for the program; whereas
people who expect to have low drug costs are unlikely to sign up
for the program.
the 35 percent of Medicare beneficiaries who do not now have
prescription drug coverage, a relatively modest portion will
actually opt into the program. Those will be the people with higher
expectations of prescription drug coverage.
did I come to this conclusion? All I have to do is look at the
Medigap policy experience. Medigap policies are private insurance
company policies issued to seniors to supplement their Medicare
coverage. They have a choice of a series of ten policies, some with
prescription drug coverage and some without prescription coverage.
Considering the difference in premium between otherwise similar
policies--ones that offer prescription drug coverage and comparable
policies without prescription drug coverage. The differences in
premiums average more than a $1,000 to get coverage, which is
somewhat similar to the coverage proposed in the Administration's
$300 annual premium, or the $24 monthly premium, to be more exact,
is intended to pay for half the cost of this program. The other
half is to come from federal government's general revenue. The HCFA
actuaries, in effect, are estimating that the cost of this program
per person would be $600 to get $1,000 maximum reimbursement.
HCFA actuaries are already pricing this program on the assumption
that there will be a high degree of anti-selection in the process.
But whether it should be an even higher level of anti-selection in
their assumptions is a good question.
Loss of Private Coverage.
Consider another question. Will this program, if it's enacted,
induce private plan sponsors--primarily employers that presently
provide prescription drug coverage to their retirees--to drop that
coverage and let the retirees and the general taxpayers pay for
this coverage for their retirees?
proposal is intended to discourage that by offering to subsidize
the prescription drug coverage provided by employers to their
employees. The subsidy is up to the level of one-third of the cost
of the Clinton plan proposal for everyone who is enrolled in an
that be sufficient to induce employers to keep their prescription
drug coverage for their retirees in place? I think that's
questionable. Frankly, wouldn't you rather have the government pay
100 percent of the cost than one-third of the cost if you keep the
coverage in place?
were an employer, I would think about dropping my first-dollar
prescription drug coverage, and then developing a wrap-around
program, which would provide, in fact, the catastrophic coverage.
It would let the government provide the first-dollar coverage.
Funding. Consider yet
another issue that hasn't had much discussion up to this point.
Unlike Social Security, which is funded almost entirely through the
FICA payroll tax plus the investment income on the assets held in
the trust funds, the Medicare program is financed substantially by
think, frankly, too many people don't recognize that. All they hear
about is that the Hospital Insurance part of Medicare is going to
go broke because there is not a substantial level of general
revenue financing for that program. But Part B, the supplemental
medical insurance part, is primarily financed by general revenues.
If you combine those programs, about 30 percent of the financing of
the Medicare program today comes from general revenues.
program would, if enacted, introduce another layer of general
revenue financing and perhaps raise that 30 percent to something
like 35 or 40 percent. Does this represent a further erosion of the
financial discipline which payroll tax financing may represent? I
think there will be arguments on both sides of that question. But
it's something that certainly is worth considering.
Dwight Bartlett is Senior Health Fellow at the
American Academy of Actuaries.