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Lecture #647 on Health Care

November 3, 1999

A High Price Prescription: Clinton's Medicare Drug Proposal

By , and

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.

The 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 1988.1 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 Medicare.

In 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 With broad support, it was passed in 1988 and with equally broad support it was repealed in 1989.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 the bill.

Now, 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 catastrophic law.

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 insurance.

Over 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.

Be 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.

We have with us today three experts in the area of Medicare and health policy to examine this issue.

Our 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 welfare issues.

Dr. 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 Cosmetic Act.

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 Georgetown University.

Our 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 others.

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.

Robert 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.

In 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.

With 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.

My 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.

Even 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.

The 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 observations.

We 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 poverty line.

Targeted Assistance. 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 treatment.

In 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

So, 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.

The 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.

Our 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.

The 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 term.

I 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 1997.

As 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 Hope.

DR. HOWARD COHEN:

I'd 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 Medicaid.

The 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.

The 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 estimates.

We 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.

To 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 price controls.

It 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 price.

The 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.

The 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 it.

It 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.

In 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.

Then 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.

My 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 administering paper.

Look 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.

The 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.

The 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.

Go 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.

I 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.

DWIGHT BARTLETT:

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.

I 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.

One, 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.

The 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 in Medicaid.

Now, 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 benefit.

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.

The 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.

The 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.

I do 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.

Of 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.

Why 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 plan.

The $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.

The 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?

The 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 employer-sponsored plan.

Will 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?

If I 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 general revenues.

I 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.

This 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.


1. For a discussion of this controversy, see Robert E. Moffit, " The Last Time Congress Reformed Health Care: A Lawmaker's Guide to the Medicare Catastrophic Debacle," Heritage Foundation Backgrounder No. 996, August 4, 1994.

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