PITFALL #1: Making HCFA more powerful.

The Clinton Administration estimates that its proposal would save $25 billion,¹² but much of its "modernization" projected cost savings would come from allowing HCFA to contract and purchase goods and services in a manner similar to what is found in large employer-based health insurance programs. Like corporate benefit managers, HCFA officials would identify high-quality, efficient providers and offer incentives for Medicare beneficiaries to visit less costly doctors, hospitals, and clinics. This would enable HCFA, like corporate benefit managers in employer-based insurance, to steer beneficiaries into cheaper options that they, not the retirees, have selected for business.

Again, this is not a truly free market. It is a closed and controlled "market" in which consumer choice and competition are severely limited. The CBO has recognized the "potential [for] substantial" savings but estimates that these provisions will reduce outlays by only $4 billion.¹³

In 1999 testimony before the Senate Finance Committee, CBO Director Dan Crippen identified two reasons why these proposed HCFA contracting provisions probably would not result in the level of savings estimated by the President:

• Approximately 85 percent of Medicare beneficiaries are insulated from the cost consequences of their medical decisions, and this would remain true even if HCFA designated certain providers for preferential treatment. In the private sector, providers contract at a discount because they anticipate that more patients will be sent their way by the health plan. Private insurers, through various pricing arrangements, can steer patients to these "preferred" providers. As Crippen points out, "as currently structured, the Medicare fee-for-service program does not have the tools private plans use to extract such price concessions" (and therefore affect the decisions made by beneficiaries).¹⁴ Thus, because the elderly would have little incentive to use HCFA's preferred providers, the cost savings to the program would be marginal at best.

• Based on Medicare's previous experience, federal officials, not consumers, would make the key decisions, and congressional politics would muddy the governmental process of "competitive" bidding. Already, for example, Members of Congress have voiced "significant opposition" to statutorily authorized efforts by the Secretary of Health and Human Services to reduce Medicare payments to local providers through selective contracting and competitive bidding, and have blocked demonstration projects in certain states. The CBO expects this to remain a "substantial impediment."¹⁵ As long as HCFA is the key player in the process, congressional micromanagement is unavoidable.

PITFALL #2: Restricting competition and choice among private plans.

The President's proposed "competitive defined benefit" system would allow Medicare beneficiaries to choose from health plans that offer the same core Medicare benefits. If seniors chose a plan that was less than 96 percent of a predetermined reference point (the estimated cost of the traditional Medicare fee-for-service plan in that area), their Part B premiums would be reduced by 75 percent of the difference. The remaining 25 percent would be returned to the federal government.

Unlike a real consumer choice proposal, in other words, the Clinton proposal would not allow the retiree to get the full benefit of the personal savings from a wise choice of health plans. If seniors chose to remain in traditional fee-for-service Medicare, their premiums would not be affected. The Clinton Administration estimates that this change alone would save $8 billion over 10 years, beginning in 2003.¹⁶

This provision is designed to promote greater price competition through private plans. Under this model, participating "private" plans would have a strong incentive to keep their premium costs below the reference point. In this proposed market with multiple plans, there presumably would be price and quality competition among plans. Seniors would benefit from having more options, even with their limitations, than just traditional Medicare.

Taxpayers and future retirees should realize, however, that President Clinton's "competitive defined benefit" would not establish a genuinely competitive environment. Traditional Medicare, for example, is not subjected to the same competitive pressures as participating private plans. Also, traditional Medicare gets a price advantage because seniors would not begin to see savings accrue to themselves until they found plans below 96 percent of the fixed reference point.

Most important, the Clinton plan contains no language that permits private plans to compete by offering varied and additional benefits. (This is as if the government were to specify what kind of car Ford, GM, and Chrysler must build and then allow them to compete only on price. Applied to any other good or service, this type of arrangement would be considered a profoundly authoritarian limitation on consumer choice and competition.) Coverage of other services beyond those that Medicare traditionally covers is what makes opting out of traditional Medicare particularly attractive for many retirees. The variety of services offered by the different private plans that compete in the FEHBP also is one reason it is so popular among Members of Congress, congressional staff, federal workers, and their families.

PITFALL #3: Expanding government control over prescription drugs.

The centerpiece of the Clinton Medicare proposal is the creation of Medicare Part D--a new prescription drug benefit. Today, over 60 percent of senior citizens, including upper-income senior citizens, already have prescription drug coverage, largely from private sources including Medigap and employment-based health insurance coverage. According to the National Academy of Social Insurance, only 4 percent of seniors have out-of-pocket costs that exceed $2,000 per year.¹⁷

Instead of directing Medicare's limited financial resources toward those who are most in need of help, the President wants to displace the existing private market for prescription drugs and have the rest of the taxpayers, including low-income working families who struggle to pay their own medical bills, subsidize all Medicare beneficiaries, including upper-income retirees. According to Robert Pear, top health care policy reporter for The New York Times,

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.¹⁸

Under the most recent version of the Clinton proposal, beginning in 2003, seniors would pay $26 per month for the program, which would reimburse them for 50 percent of up to $2,000. The cost per beneficiary would increase gradually to $51 per month by 2009 for 50 percent of up to $5,000 in drug costs.¹⁹ This benefit design has a number of shortcomings.

• The prescription drug benefit is designed to shift the risks of coverage from the insurers to the elderly and/or the taxpayer.
  Because the drug benefit would be in the form of a straight subsidy rather than insurance, it appears that Medicare patients might, upon enrollment, assume all the risks of giving up Medigap or private employment-based health insurance coverage for the new, artificially cheap, but capped prescription drug benefit. This is the exact opposite of a catastrophic policy, in which seniors would be expected to spend up to a certain amount--a stop-loss amount--and then would be guaranteed 100 percent coverage for the costs of a health benefit by an insurance company.

In an attempt to rectify the lack of stop-loss coverage in the earlier version of his Medicare proposal unveiled last summer, President Clinton proposes a "reserve fund" to deal with the problem. But the language falls far short of a rock-solid guarantee. In the President's fiscal year (FY) 2001 budget, the Administration requests money for

a reserve fund of $35 billion in on-budget surplus money over 10 years...reserved for debt reduction or, in the event that the President and the Congress agree, a policy that provides for protections against catastrophic drug costs for Medicare beneficiaries, or policies that otherwise strengthen the Medicare program.²⁰

• Lower-income working families would subsidize the first dollar of prescription drug coverage for wealthy retirees.
  Because the Clinton Medicare drug proposal is not means-tested, the richest Americans would be eligible for the same coverage as those with modest incomes. The Clinton proposal would subsidize the rich, presumably to entice them to drop private coverage and enroll in the Medicare prescription drug program.

• Employers would be encouraged to curtail or dump retiree prescription drug coverage altogether.
  About one third of seniors enjoy prescription drug coverage through employer-based plans. Estimates vary, but Dwight Bartlett III, senior health analyst for the American Academy of Actuaries, has said that employers would be particularly tempted to drop prescription drug coverage for retirees under President Clinton's proposal even though the President has proposed to subsidize employers to maintain such coverage.²¹ According to the Congressional Budget Office, 25 percent of employers could be expected to drop private prescription drug coverage under the terms of the Clinton proposal.²² PricewaterhouseCoopers, a prominent consulting firm, projects that 50 percent to 75 percent of seniors with employer-sponsored prescription drug coverage could lose it.²³

Also, many seniors might be induced to give up superior private-sector prescription drug coverage for an inferior benefit if they mistakenly assumed that front-end subsidization of the proposed Medicare plan somehow is better than private catastrophic coverage. Retirees should be wary of any new Medicare prescription drug proposal that appears to offer something for nothing.

• Prescription drug costs would be much higher than government experts project.
  The Clinton Administration's initial 10-year $118 billion cost estimate for its proposed Medicare prescription drug benefit was way off the mark. The CBO estimated that the plan would cost $168 billion over the same period. In his FY 2001 proposal, Clinton substantially revises his cost projections upward to $160 billion. This new total also includes the higher premiums to be charged to Medicare patients.

Notably, this new and much higher $160 billion figure does not include the proposed $35 billion that may be available for catastrophic protection for seniors with high drug costs.²⁴ Of course, once such a benefit is available, based on subsidies of first-dollar coverage, use of the new Medicare benefit likely would soar. Members of Congress and the bureaucrats at HCFA then would scramble desperately to find ways to "control" the rising costs of the benefit by raising retiree costs, reducing the availability of the benefit through tighter price regulation, or a combination of both strategies. In any case, if the history of Medicare policy is any guide, Members of Congress should expect official cost estimates to be too low.

• Seniors' options would be restricted.
  Seniors would get only one chance to buy into Medicare Part D (upon becoming eligible for Medicare or when their employer-provided insurance expired). If they disenrolled, they would not be allowed back into the program.²⁵ Whatever else it may be, this is not a "patient-friendly" provision.

• Unlike private catastrophic insurance, the Clinton plan includes no guaranteed stop-loss protection against the highest costs.
  Although the President's FY 2001 budget submission mentions a $35 billion fund to help with catastrophic costs, the language also plainly allows the earmarked money to be used for "debt reduction" or to "strengthen the Medicare program." The money would be used to help with drug costs only "in the event that the Congress and the President agree [on] a policy that provides protections against catastrophic costs for Medicare beneficiaries."²⁶ The likelihood of future Administration-congressional agreement in the middle of a future congressional budget debate is anyone's guess.

The Messy Details of Administration.
The creation of a Medicare Part D program means that HCFA would be responsible for the administration of the new Medicare prescription drug benefit, sharply increasing the agency's already daunting administrative burdens.

Members of Congress should ponder this prospect carefully. As they know, HCFA already has considerable difficulty overseeing Medicare Parts A, B, and C. Its handling of and oversight over the processing of hundreds of millions of claims in Part A and Part B has been an historic mess, plagued by confusion, claims denials and disputes, and disgraceful levels of fraud and abuse. Medicare Part C, the so-called Medicare+Choice program, has been an administrative disaster, distinguished by reams of suffocating paperwork, reimbursement disputes, and disruptive withdrawal of private plans.²⁷

A report issued by the U.S. General Accounting Office (GAO), a financial investigative agency of Congress, underscores HCFA's inability to handle its current responsibilities efficiently. Specifically, it notes that "substantial program growth and greater responsibilities appear to be outstripping HCFA's capacity to manage its existing workload."²⁸ Yet, under the proposed Medicare Part D, HCFA would oversee the processing of an avalanche of new Medicare claims for untold millions of drug prescriptions.

Members of Congress should note that HCFA was charged with a similar responsibility in the late 1980s with enactment of the Medicare Catastrophic Coverage Act of 1988. However, popular resistance to the cost of its changes to Medicare and their subsequent repeal (including repeal of the Medicare prescription drug provisions) helped to abort the looming administrative problems. Planning documents and records of the period show that HCFA's initial attempts to manage the first Medicare prescription drug program under the 1988 law were fraught with practical infirmities.29

Members of Congress who support the President's prescription drug proposal must do so in the firm belief that this time HCFA's managerial performance will be different. This requires great faith.

Using geographically based intermediaries.
To administer the new prescription drug benefit, the Clinton proposal would empower HCFA to contract with pharmacy benefit managers (PBMs). PBMs are used widely in the private market today. Insurance companies, managed care organizations, doctors, employers, and consumers all benefit from the services provided by PBMs, who purchase and distribute prescription drugs mainly for their employment-based managed care plans.

PBMs have evolved over the years from processors of claims to sophisticated, full-service managers not only of drug purchasing and distributing arrangements, but also of information for doctors, health plans, and patients on disease management, drug interaction, and a host of related items. Virtually all employer-based plans with a prescription drug benefit (and nearly all plans in the private sector include this feature) rely on the services of PBMs.³⁰

The President's proposal would divide the country into an unspecified number of geographic areas and have Medicare contract out with "private sector entities" to manage the drug benefit in each of these areas. Competition for this contract would be held "probably every 2 to 3 years," ending in the award of a "single contract."³¹ Several features of this approach are troublesome. For example:

• Seniors likely would be deprived of the benefits of choice and competition.
  The best system would allow for serious free-market competition among prescription drug managers. Restricting the future Part D Medicare patients to only one per region obviously eliminates both choice and competition.

• Competition would be constrained, and government control would expand.
  Medicare patients account for an estimated 30 percent of pharmaceutical spending.³² If only one plan won the government contract for a potentially sizeable majority of seniors in each region, other PBMs likely would lose business or even be forced out of business altogether by HCFA's decision-making. Certainly, there is nothing in the language of the President's proposal that would prevent such a consolidation of the market. Thus, the likely result would be a government-dominated market with fewer players and less vigorous competition.

The CBO estimates that 80 percent of Medicare beneficiaries would enroll in Part D. Thus, an overwhelming majority of seniors, and therefore a large percentage of the prescription drug market, eventually would be ensnared in a government-run program.³³ Choice and competition also would be reduced for the under-65 drug-buying population as PBMs went out of business.

Seniors should enjoy the benefits of competition in the delivery of the whole range of PBM services. Competition works. In the Federal Employees Health Benefits Program, for example, federal workers receive a wide array of choices in their health insurance options. The resulting competition between plans yields high satisfaction rates and historically superior cost performance compared with traditional employment-based health insurance.

• Seniors would be at the mercy of politically driven management decisions.
  In a normal market, consumers make the key decisions that determine which businesses prosper. Markets are remarkably flexible when it comes to meeting demands for new products or sources of supply. This is not the case in a political environment, such as that established under the Clinton Medicare proposal, in which market forces are either irrelevant or dramatically restrained by regulatory obstacles or the maddening uncertainties of political decision-making. If HCFA decided that a PBM had not performed adequately and wished to award the contract to a new PBM, seniors would have no guarantee of a smooth transition. Management decisions would not necessarily spare seniors confusion or (at worst) service disruptions.

If there is any doubt on this point, Members of Congress need only look at the dismal experience of the Medicare+Choice experiment. The exodus of plans from the system means that hundreds of thousands of senior citizens have lost their HMO coverage and have had to return to traditional Medicare or find some other HCFA-approved plan because of the political decisions of Congress and the managerial decisions of HCFA.

• Seniors would be subject to the worst features of monopoly.
  In a monopoly, only one firm supplies a product. Consumers either have to buy the product from the firm or do without it. Monopolies exist where legal barriers bar entry to other competitors. In the case of the Clinton Medicare proposal, the barrier is the single contract arrangement. By allowing only one winner per region, Congress effectively would grant monopoly status to the PBM--and indirectly to HCFA--in that geographic area. It is also worth noting that there is nothing in the language of the Clinton Medicare proposal that would prevent one PBM, as a national corporate entity, from winning in every region. In any case, doctors, health plans, and drug manufacturers in a given region would have no choice but to do business with the "winning" PBM in a statutorily mandated anti-competitive environment.

New Avenues for Heavy Regulation and Explosive Litigation.
HCFA--as private carriers participating in the Medicare+Choice program already know--can be an unreliable and unpredictable business partner.³⁴ The normal political pressures and budget restrictions that would be imposed by the Clinton Medicare proposal likely would lead to congressional micromanagement, HCFA's overregulation of the PBMs, or both. According to the President's proposal, "all PBMs would be required to meet access and quality standards established by the Secretary [of Health and Human Services]." The President's proposal goes on to list the standards that would be included in the final Medicare proposal but would not be limited to those that are listed in the blueprint.³⁵

Taxpayers and future retirees should note how vague the language of these PBM standards is--at least in the President's initial blueprint--and how easily, in the crucial details of their enactment or implementation, they could be transformed into a powerful new engine of bureaucratic manipulation and control. For example:

• The "appropriate use of medications."
  The President's Medicare reform proposal states that the PBM standards would require "Inclusion of strategies to encourage appropriate use of medications." What these strategies may be is anybody's guess, but they certainly could include any number of interventions by HCFA bureaucrats.

Private-sector PBMs, not to mention doctors, already go to great lengths to assure the "appropriate use of medications." Even in the more flexible circumstances of private-sector contracting there are disputes among medical professionals. Under the Clinton proposal, just who would define "appropriate use of medications" is unclear. But given the troubling experience of Medicare Part A and Part B, particularly the denial of claims on the grounds that they are medically "unnecessary" or "inappropriate," future retirees are right to be concerned that their personal physicians would not make these decisions.³⁶

• Use of "outside experts" in the creation of a prescription drug formulary.
  According to the Clinton Medicare proposal, the PBMs would "Use a medical panel with outside experts free of conflicts of interest" to create the formulary. This stipulation would be difficult to implement. Presumably, HCFA already would have screened for such expertise in choosing the winning PBM for each region. But it is not clear what the standards for this expertise would be or how HCFA would determine whether there were conflicts of interest.

Formularies are lists of drugs approved for patient use, usually by the PBMs and insurance companies. Drugs can be approved for many reasons, but the primary two are effectiveness and cost.³⁷ Although the Clinton plan states that "No formulary would be established by the Medicare program, but private benefit managers could establish formularies," it qualifies this as "subject to the coverage requirements."³⁸ The temptation for HCFA to meddle would prove too great, especially if drug costs continued to climb.

To meddle in formulary creation after a contract has been awarded is precisely the kind of relationship that undermines a business partnership. Worse, depending on how the formulary is devised and what limitations are placed on the availability of prescription drugs, it could be detrimental to the well-being of Medicare patients.

• The use of "objective criteria" in selecting drugs.
  According to the Clinton proposal, PBMs would "Use objective criteria in selecting drugs for the formulary." Who would determine these objective criteria? It could be HCFA or a panel of "experts" selected by HCFA. It could resemble the worst features of corporate health care regimes, in which professional medical judgments are subordinated to short-term cost considerations and consumers have no real options.

• The requirement for "fair dealing" with drug companies.
  According to the Clinton Medicare proposal, PBM standards would include "Open and fair dealing with all drug and biologic companies." No one, of course, favors unfair dealing or shady deals made behind closed doors at the expense of taxpayers or Medicare patients. But it is unclear how "open and fair dealing" would be defined. Among doctors, hospitals, home health care agencies, and nursing homes and private carriers in Medicare Part C, HCFA's reputation as an agency dedicated to open and fair dealing is not universally shared.

• More Medicare paperwork requirements.
  According to the Clinton Medicare proposal, PBM standards also would require "Publication of criteria for any cost containment measure that could affect patient care" and "Submission of data about costs and utilization on a regular basis to help improve quality of care."

It is difficult to imagine how any cost containment measure could not affect patient care. Needless to say, either by congressional statute or by HCFA rules to be published in the Federal Register, future requirements would be made either more or less clear or more or less confusing. Members of Congress have ample historical experience in these, though it seems doubtful that they would have the stomach to flesh out such detailed requirements in Medicare reform legislation. They probably would turn over the real decision-making power to HCFA and intervene only after HCFA's efforts to be more precise set off a firestorm of opposition from providers or the politically well-connected sectors of the health care industry.

Likewise, regular submission of cost and utilization data would keep contractors immersed in paperwork, regardless of whether such submissions actually improved the quality of care. These additional Medicare paperwork exercises would guarantee that at least some of the program's limited resources were not devoted to patient care.

• More regulatory compliance standards.
  According to the Clinton Medicare proposal, PBM standards would comply with "standards for capacity and pharmacy availability to serve all beneficiaries in a geographic area." Moreover, PBMs would have to be in "Compliance with contract requirements and consumer protections."

Once again, it is unclear how "standards for capacity" and " pharmacy availability" would be defined. Nor is it clear what the term "consumer protections" means within the context of PBMs and prescription drug pricing. Given the vagueness of the language, these terms present ample opportunity for creative interpretations by HCFA officials. The scope of this transparent transfer of vast regulatory authority to HCFA begs an obvious question: If the Clinton Medicare proposal gives HCFA this much regulatory leeway and enables it to involve itself in the details of allegedly PBM-run regions, why not let HCFA run the prescription program directly?

• Lawsuits and other concerns.
  The Clinton Medicare proposal also raises a number of additional questions. For example, could one of the larger PBMs win all the contracts in all the regions? If not, why not? And if not, how would HCFA determine which regions a large PBM could win? How would the bidding process be structured? None of this is clear from the text of the proposal, but it doubtless will be clarified when the Clinton plan is transformed into legislative language. If it is not, Members of Congress--particularly those who support such an approach--should clarify these issues.

A related issue is the range of prescription drug contracts. According to the language of the Clinton proposal, Medicare would "contract out with private sector entities [such as] PBMs, retail drug chains, health plans or insurers, or states (through mechanisms established for Medicaid)."³⁹ "States" and "mechanisms established for Medicaid" do not, of course, fall under commonly accepted definitions of "private sector entities." As Dr. Howard Cohen, a health policy expert with Greenberg and Traurig, has observed, the inclusion of government entities as PBM contractors is more indicative of what the Clinton Administration had in mind concerning the role of the PBM:

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.⁴⁰

If Congress does not clarify these issues, or if it refuses to specify the other issues raised in the proposed PBM bidding process, HCFA would be free to regulate. Through extensive regulation, a whole series of the Clinton Administration's policy ideas would be defined more precisely by bureaucrats: for example, how one defines "appropriate standards," what constitutes "conflicts of interest," whether PBMs have engaged in "open and fair dealing"; whether the bidding process was "fair," and numerous others. Each one could invite a flood of lawsuits in the federal courts. Indeed, given the heavy regulatory structure of the Clinton proposal, as well as the size of the program, it is hard to see how this could be avoided.

PITFALL #4: Expanding the financially troubled Medicare system to cover a younger population.

Today, Medicare coverage is confined to Americans eligible for Social Security. The President proposes to allow Americans aged 55 to 64 to buy into Medicare if they find themselves without health insurance coverage. The "buy in" would be open to two groups: people aged 62 to 64 who do not have access to employment-based or publicly financed coverage, and those 55 and older who have lost coverage as a result of job loss.⁴³

PITFALL #5: Locking in taxpayer obligations to bail out an unreformed Medicare program.