June 15, 1999

June 15, 1999 | News Releases on Health Care

Adding Drug Coverage to Medicare Could Bring Unexpected Costs, Analyst Says

WASHINGTON, JUNE 15, 1999-Changing Medicare to cover prescription drugs may have the support of President Clinton and many lawmakers in Congress, but it would saddle the financially troubled program with a costly new benefit that could threaten the quality and availability of drugs for senior citizens, a new paper from The Heritage Foundation says.

Before adding drug coverage to Medicare, which provides health care to more than 40 million seniors and disabled Americans, lawmakers should consider "the enormous potential cost of such coverage and the poor track record of previous attempts to add it," writes Heritage health care expert James Frogue.

Two proposals before Congress, sponsored by Sen. Edward Kennedy, D-Mass., and Rep. Pete Stark, D-Calif., would require the Department of Health and Human Services to contract with pharmaceutical companies and insurers to provide a drug benefit. The estimated cost to taxpayers ranges between $15 billion and $45 billion a year but could go even higher, Frogue writes, because government officials routinely underestimate health-care costs.

Consider what happened when Congress passed the Medicare Catastrophic Coverage Act in 1988, Frogue says. The law, which provided a drug benefit as well as unlimited hospital coverage for serious illnesses, enjoyed overwhelming support from interest groups and the public. But government estimates for drug coverage ballooned from $5.7 billion over five years to $11.8 billion only a year later. As seniors watched their "supplemental premiums" climb-along with new taxes of up to $1,600 annually per couple to pay for coverage many already had-they complained loudly to lawmakers, who eventually repealed the legislation.

Moreover, Congress is exaggerating the problem of drug affordability, Frogue says. Most seniors have drug coverage through "Medi-gap" insurance, "Medicare + Choice" plans or employer-provided coverage, and those who don't spend an average of $637 a year-or $12.25 a week-on prescription and non-prescription drugs. Even the poorest seniors report spending less on drugs than they do in restaurants.

Despite proponents' claims that the current proposals are market-oriented, bills like Sen. Kennedy's would give the Health Care Financing Administration-the bureaucracy that runs Medicare-regulatory power over insurers and drug companies. "The price controls embodied in this approach would stifle incentives for innovative pharmaceutical companies to develop new medicines," Frogue writes.

If lawmakers want to add a drug benefit to Medicare, they should look to the Federal Employees Health Benefits Program (FEHBP), which covers members of Congress, the White House staff, and nearly 10 million other federal employees and their dependents, Frogue says. Because enrollees can select the health plan of their choice, almost every participating insurer elects to offer a drug benefit.

Indeed, FEHBP offers the best model for reforming the entire Medicare program, says Stuart Butler, Heritage's vice president for domestic and economic policy, in a related new paper. It gives federal employees a level of quality and efficiency that rivals many of the best corporate plans available, primarily because it is regulated more by market forces than by government.

According to Butler, Congress should:

  • Adopt a "premium support" approach to Medicare reform. This would assure seniors they would have a basic package of benefits they could afford and encourage them to pick the most cost-effective coverage.

  • Create a semi-independent "Benefits Board" to propose changes. The board's annual recommendations to modify Medicare coverage should be subject to an up-or-down vote in Congress without amendments.

  • Establish a "Medicare Board" to determine costs and benefits. The board would negotiate with private insurers to get the best benefits for the lowest cost-just as the government does now for FEHBP enrollees.

  • Allow the "fee-for-service" Medicare program to compete with private plans. Seniors who want to stay with the traditional plan would be better served by the program if it is given the flexibility to compete with private bidders.

"The fact that it takes major legislation to add drug coverage to Medicare-a benefit long offered by private insurers-ought to make lawmakers realize the program requires more fundamental reform," Butler says.

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