The Heritage Foundation

Backgrounder #1346 on Health Care

February 17, 2000

February 17, 2000 | Backgrounder on Health Care

A Closer Look at Clinton's Medicare Proposal

Medicare reform, one of the top issues on the nation's domestic agenda, will soon be considered by the Senate Finance Committee. A properly reformed Medicare would secure higher quality health care and real choice for the next generation of seniors by enabling them to decide for themselves which plans, benefits packages, and doctors best suit their own needs.

The blueprint for Medicare reform put forth by President Bill Clinton is as yet only a broad proposal and has not been introduced as legislation in either the House of Representatives or the Senate. Although crucial elements of the plan--which would affect the lives of millions of Americans--have not yet been made clear, it is known that it would change the current system by:

  • Expanding the authority of the Health Care Financing Administration (HCFA), the powerful federal agency that runs the Medicare program;

  • Allowing private plans to compete for Medicare beneficiaries on a standardized benefits package, which would include an optional outpatient prescription drug benefit;

  • Permitting Americans aged 55 to 64 to buy into Medicare if they desired to do so; and

  • Using $432 billion in unrealized on-budget, non-Social Security surpluses to "shore up" the Medicare program.

Candidates for federal office in 2000, as well as Members of Congress and the nation's taxpayers generally, should be aware of at least five disturbing features of the President's proposal:

  1. It would expand HCFA's powers.
    Medicare today is governed by more than 110,000 pages of rules, regulations, guidelines, and related paperwork. The Clinton proposal would give HCFA new authority to contract with "providers" that it, not patients, considered efficient in the delivery of quality care. In such an arrangement, Medicare patients would receive whatever the government decides is the best deal. Real Medicare reform would contract, not expand, bureaucratic power.

  2. It could prove far more costly to taxpayers and retirees than official estimates indicate.
    The Clinton plan contains several features that would produce modest short-term savings, yet even the White House acknowledges that it would increase Medicare spending by adding a prescription drug benefit and expanding eligibility for the program.

Last summer, the Clinton Administration said that its plan, including the prescription drug benefit, would cost $373.4 billion over 10 years. The nonpartisan Congressional Budget Office (CBO), however, said that it would cost far more: $438.8 billion.1 Members of Congress should recall the erroneous cost estimates of prescription drug coverage that helped to sink the 1988 Medicare Catastrophic Act in 1989: The true costs--originally projected at $5.7 billion--skyrocketed to more than $11 billion within 12 months. If history is any guide, the official estimates of the Clinton Medicare plan's costs are likely to be too low.2 Real Medicare reform would inject the free-market forces of consumer choice and competition into the system to control costs.

  1. It would retain Medicare's 35-year-old bureaucratic structure, despite significant changes in health care delivery and a dramatic projected increase in the Medicare population.
    The President's plan stops far short of making the structural adjustments that would ensure Medicare's long-term viability. Medicare faces unprecedented demographic and fiscal challenges. Today, more than 39 million Americans--14 percent of the population--participate in Medicare. By 2030, 76 million people--22 percent of the population--will participate.3 According to the National Bipartisan Commission on the Future of Medicare, there are now 3.9 taxpaying workers per retiree on Medicare. By 2020, that ratio will drop to 2.8 to1; and in 2040, it will be 2.2 to1.4 Instead of making structural changes that will accommodate this increased demand and make the most efficient use of limited Medicare dollars, the President's plan would leave the current structure in place.

  2. It would constrain Medicare patients' choice of private health plans and benefits.
    The President's proposal would create a "competitive defined benefit" for private plans that participate in the troubled Medicare+Choice program. Clinton Administration officials say this change would inject choice and competition into Medicare. The proposal calls for competition on "price," but the choices available to future Medicare patients would be basically the same.5 Today, Medicare patients have no realistic option for their primary health care coverage outside of Medicare; there simply is no other viable health insurance option available. Worse, as a result of the Balanced Budget Act (BBA) of 1997 and subsequent regulation and litigation, Medicare patients are legally restricted in their ability to go outside of the program to spend their own money on medical services of their choice.6 Real Medicare reform would promote, not inhibit, the right of the next generation of retirees to decide for themselves which plans, benefit packages, and medical services and physicians best suit their own needs.

  3. It would cause many senior citizens to lose private employment-based prescription drug coverage.
    Estimates vary, but there is no doubt that the design of the Clinton Medicare program would provide incentives for employers to drop prescription drug coverage for retirees, affecting from 25 percent to 75 percent of retirees who have such private-sector coverage.

Rather than expand the power of the bureaucracy, Congress should build on the success of provisions promoting consumer choice and competition in the Federal Employees Health Benefits Program (FEHBP). Congress should make sure that next generation of retirees has access to a variety of benefit packages. It should further ensure that any administrative agency it establishes will not evolve into a regulatory engine such as HCFA, and that the new system is not transformed into the heavily regulated system envisioned in President Clinton's Medicare reform proposal.

THE PRESSING NEED FOR MEDICARE REFORM

Medicare's problems are both financial and structural. The program is running out of money while simultaneously consuming ever-larger chunks of the federal budget and national economy. According to the 1999 report of the Medicare Board of Trustees, the hospital insurance (HI) trust fund, which pays for hospital services, will run out of funds by 2015.7 Meanwhile, Part B, which pays for physicians' services, will require more money from the general fund to cover its own rapidly rising costs. Medicare expenditures are expected to jump from 3.04 percent of gross domestic product (GDP) in 2010 to 4.88 percent in 2030.8 Moreover, by 2030, at the current level of spending, Medicare and Social Security alone will account for half of all federal spending.9

Perhaps even more seriously, Medicare is evolving from a health insurance program for future retirees into a bureaucratic leviathan that undermines the personal liberty and privacy of patients and the professional independence and integrity of physicians. The program's highly centralized regulatory structure is evolving rapidly into a massive system of bureaucratic control over virtually every aspect of the financing and delivery of health services to America's retirees.

This system directly affects doctors and other providers, but retirees are certainly not insulated from its effects. These effects range from the intrusion into their most sensitive medical records to the reduced availability of certain medical services or procedures as a result of the program's often unintelligible system of administrative pricing or bureaucratic determinations of what constitutes medically necessary treatment.10 Today, there are even legal restrictions on the ability of seniors to spend their own money on medical services.

The present structure of the program should be made less bureaucratic and more economically efficient. Medicare should be more patient-friendly for the next generation of retirees, with real patient choice of private plans, providers, and benefits.

The co-chairmen of the recently disbanded National Bipartisan Commission on the Future of Medicare, Senator John Breaux (D-LA) and Representative William Thomas (R-CA), developed the conceptual foundation of just such a proposal. Their idea: Transform Medicare into something akin to the popular Federal Employees Health Benefits Program which covers Members of Congress, congressional staff, federal workers and retirees, and their families, including those not covered by Medicare.

Members of Congress can build on the FEHBP model and make it even better. They can offer more choice and enhance the security of superior private coverage. For example, workers should be able to take their private health insurance plan with them into retirement as their primary coverage and get a government contribution to offset the cost of that coverage if they wish to do so.

THE PITFALLS OF THE PRESIDENT'S PROPOSAL

President Clinton says his proposed reform of Medicare will "modernize" the program and make it more "efficient."11 But the changes he proposes build largely on Medicare's well-entrenched 1960s framework of central planning and price controls. With the addition of a prescription drug benefit, plus the President's proposal to expand Medicare coverage to those from 62 to 65 years of age, the Clinton plan represents a potentially historic expansion of bureaucratic control over medical benefits, treatments, procedures, and their prices. The pitfalls of this approach are many.

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.

THE UGLY POLITICS OF DRUG COST CONTROL

If Congress decided to establish a Medicare prescription drug program, of course, it would have to determine how much taxpayers would have to spend for those prescription drugs. Costs almost certainly would exceed projections.

The real debate that Congress will face concerns how quickly the costs would soar beyond the official projections and by how much. Moreover, once locked into such an arrangement, there would be no easy way to handle the problem. Of course, the politically attractive option is to impose old-fashioned price controls on prescription drugs and accept, at least for a while, the inevitable drug shortages and related negative economic consequences.41

Congress could tackle this problem four other ways:

  • Raise premiums for Medicare patients.
    This is, in effect, precisely what Congress did when it enacted the Medicare Catastrophic Coverage Act of 1988, which included a Medicare prescription drug benefit. Seniors, who were strongly opposed to paying for the costs of the Medicare expansions, forced Congress to repeal the measure, including the prescription drug benefit, one year later. The idea that people who receive a benefit should pay for that benefit seems perfectly sensible but, of course, is not always politically viable.

  • Raise general taxes, run deficits, or divert money from discretionary spending programs.
    This approach has obvious drawbacks. Members of Congress would have to decide whether they would be prepared to sacrifice other spending objectives, undermine their budgetary achievements, or impose even higher taxes on working families, who on average already pay almost 40 percent of their income in federal, state, and local taxes.

  • Impose fee schedules or reimbursement restrictions on drugs by type or category.
    HCFA already effectively takes this approach when it sets caps on what it pays doctors per procedure in Medicare and prohibits them from charging any more than a set amount for the provision of the covered service. This option is easier to implement than the first two would be, but it would have the negative effect of explicit price controls. Seniors would see their drug costs explicitly lowered, but they also would be forced to pay an implicitly higher price for the policy of artificially lower costs through reduced availability or reduced access to high-quality prescription drugs. Of course, as with every price control, such a restriction would guarantee less, not more. If reimbursements were too restricted, the availability of prescription drugs for Medicare patients would be proportionately reduced.

  • Limit what HCFA can spend on Medicare Part D.
    Congress could set aside a certain amount of money for the Medicare drug benefit and turn the difficult decisions of cutting the prescription drug supply over to HCFA. HCFA then either could begin to regulate prices explicitly or could reverse the bidding process for PBMs. For example, instead of having PBMs come to HCFA with bids and a business plan, HCFA would specify to private-sector bidders exactly how much was available for the contract. As costs rose, however, the PBMs might no longer accept HCFA contracts--a similar situation now exists with managed care plans in the Medicare+Choice program--or, like employment-based managed care plans, might begin to squeeze costs to produce marginal profitability. Squeezing costs could cause PBMs to opt to provide only older and less expensive drugs rather than the newer, more expensive, but potentially more effective drugs. This likely would happen if Congress capped spending. Patients, in effect, would be denied access to the most advanced medical treatments or drugs because of budgetary pressures.

HCFA's power to regulate the market increases as the number of enrolled seniors increases and the political pressure builds to keep premiums unrealistically low. With more people dependent on Medicare Part D, HCFA would have substantially more power, and its PBMs would exercise significant influence over much of America's drug purchasing activity, particularly among the pharmaceutical-buying senior population.

Taxpayers, and all future retirees, should ponder a simple truth: What Congress can give, Congress can take away. Members of Congress cannot control demand for a benefit; they can control only its supply. In matters of cost control, therefore, Congress tends to focus on controlling costs by limiting supply. In Medicare, the cost-control method of choice involves price regulation, fee schedules, and caps on reimbursement. The fact that Congress formally adds a benefit through an entitlement program does not mean that Congress also agrees to pay the real cost for that benefit. Congress may set the price of the benefit below the market price and thus guarantee that there will be less of it.

As doctors and Medicare patients know, with the enactment of the Balanced Budget Act of 1997, there have been "cutbacks" in reimbursements for nursing home care, home health care, and payments to managed care agencies, and this has created a demand for corrective action. Likewise, even as the Clinton Administration claims it wants to add a prescription drug benefit to Medicare, in last year's budget submission, it called for a reduction of payments for certain drugs covered by Medicare under current law, including cancer drugs. These proposed drug payment cutbacks amounted to $2.5 billion over 5 years.42

Future retirees should know that the administration of a benefit in this entitlement program also could limit access to the service through a subtle bureaucratic process. HCFA officials might say that a benefit would be reimbursed but then tell doctors or hospitals that it would pay for that benefit only under certain carefully defined circumstances that the officials themselves considered "medically necessary." This is one way "cheap" government health care benefits can turn out to be quite expensive.

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.

The July 1999 Clinton Medicare proposal outlines the President's plan to use future budget surpluses to finance his expansion of Medicare benefits and coverage. As noted, the Clinton plan envisioned dedicating 15 percent of future budget surpluses to Medicare. In its initial estimate, the Administration projected $374 billion over 10 years and $794 billion over 15 years. 46 But relying on unrealized budget surpluses to finance a program upon which so many Americans depend is frankly dangerous. Warns Comptroller General of the United States David Walker:

We must remember that these are projected budget surpluses, and we know the business cycle has not been repealed. Current projected budget surpluses could well prove to be fleeting, and thus we should exercise appropriate caution when creating new entitlements that establish permanent claims on future resources. 47

Both Republicans and Democrats in Congress say that they are determined not to spend any more money from the Social Security trust fund. But this pledge (assuming that taxpayers and future retirees believe it) makes it all the more unlikely that the Clinton proposal would be able to cover the costs of future Medicare outlays. Simply put, the money is not there. In FY 1999, if one subtracts the Social Security surplus, the federal government ran only a $1 billion surplus. In FY 1998, when corrected for the Social Security surplus, the federal government actually ran a $29.9 billion deficit. 48

As responsible officials of the CBO and the GAO insist, budget projections can be volatile. A downturn in the stock market, a change in the economy, and an unexpected reduction in revenues could result in a flood of red ink. Even if surpluses materialize, seniors should realize that there is no guarantee that a future Congress would be willing to isolate that additional money for Medicare rather than use it for debt reduction or other pressing budget priorities.

Options for Congress.
There are a limited number of ways for the existing Medicare bureaucracy to cope with the demographic tidal wave of baby boomers and their dramatic demand for medical services under the old program. None of these options is politically attractive.

  • Raise taxes.
    Throwing additional money at Medicare will do little to address the underlying problems of an open-ended entitlement program. Moreover, as the worker-to-beneficiary ratio falls, Congress also must consider the broader economic consequences of continuing to finance the program through increased taxation of younger working families. As David Walker reminded Senators on the Finance Committee:

[W]hile the size of future surpluses could exceed or fall short of projections, we know that demographic and cost trends will, in the absence of meaningful reform, drive Medicare spending to levels that will prove unsustainable for future generations of taxpayers. 49

  • Cut Medicare benefits and/or raise premiums, deductibles, and co-payments.
    Medicare already has major gaps in its coverage relative to private insurance (which is why 87 percent of Medicare beneficiaries have some sort of additional insurance coverage). 50 Indeed, the average senior has only 53 percent of his or her medical bills covered by Medicare. 51 Cutting those modest benefits even further and/or charging the elderly more for a sub-par program is certain to meet with fierce resistance from seniors.

  • Raise the eligibility age for Medicare.
    Today, the eligibility age for Medicare enrollment is 65. Many Members of Congress, taking into account the radical changes in life expectancy and working potential of the population, have said that they think the eligibility age should be raised, perhaps to 67. This change would track changes in Social Security and allow resources for Medicare to be dedicated to proportionally fewer beneficiaries. Liberal senior lobbies strongly oppose this method, arguing that it amounts to a cut in benefits. The Clinton Administration also opposes this approach. White House officials say it would increase the number of Americans who do not have access to employment-based health insurance, thereby driving the already high number of uninsured even higher.
WHAT CONGRESS SHOULD DO

Congress should reject any expansion of bureaucratic control over the choices and benefits of the next generation of senior citizens and instead build on the work of the National Bipartisan Commission on the Future of Medicare. In March 1999, a bipartisan majority of the 17 commissioners, led by Senator Breaux and Representative Thomas, endorsed switching Medicare from the current centralized system of government-defined benefits to one of "premium support." Regrettably, the commission fell one vote shy of the supermajority necessary to make this a formal recommendation to Congress. 52

A new structure for Medicare should be modeled after the successful Federal Employees Health Benefits Program, used by nearly 10 million federal workers and their dependents across the country, in which response to ever-changing consumer demand dominates the setting of benefits. As prominent economist and health policy expert Walton Francis points out, the statute that governs the FEHBP has exactly "one paragraph" on benefits, but the benefits packages of private plans in the FEHBP have improved progressively and grown richer. "They are ongoing businesses in an environment in which health insurance plans typically cover (for example) hospital costs without significant exceptions or loopholes," says Francis.

The plans are subject to market pressures. A plan that significantly departed from benefits expected by enrollees and available in other plans would rapidly lose enrollment. Short-run gains from benefit loopholes are possible, but over time, the plan could not survive. 53

The reforms that Congress should include would:

  • Allow a variety of benefits packages.
    Members of Congress should not depart from the experience of the highly successful FEHBP. Under this system, the federal government makes an established contribution to its employees' health insurance premiums. Federal employees then can choose from competing plans that meet basic benefit requirements but otherwise offer different benefit packages at various prices. The Office of Personnel Management (OPM) ensures the integrity of the plans offered under the FEHBP by engaging in sensitive and confidential negotiations with health insurers over price and the basic benefit requirements on behalf of federal employees.

Significantly, participants in the FEHBP also can change plans once a year during "open season." This all but eliminates the likelihood that people will be stuck in plans they find, for whatever reason, to be inadequate. Federal employees in the FEHBP have considerably higher rates of satisfaction with their health plans as a direct result of the broad range of choices they enjoy. And, of course, every plan in the FEHBP offers coverage for prescription drugs.

  • Make sure that any future administration of a system of competing plans resembles the OPM rather than HCFA.
    As outlined by the majority of the Bipartisan Commission, their premium support approach would include the establishment of a Medicare Board, which would play a role similar to the role played by the Office of Personnel Management in administering the FEHBP. As Walton Francis has written, "OPM is a passive price taker--getting the best deal that it can but, as any other purchaser, accepting the dictates of a more or less competitive market." 54 Like the OPM, the proposed Medicare Board would negotiate with private plans that wish to do business with Medicare patients.

Under the commission majority's proposal, individuals on Medicare would pay 12 percent on average of the total cost of the standard option plan. (Federal workers and retirees pay roughly 28 percent on average of the full premium of a private plan in the FEHBP.) Additionally, as a condition of participation in Medicare, private plans would be required to offer a "high option" plan that would include prescription drug coverage with stop-loss protection. Plans would be permitted to vary co-payments and deductibles. 55

Members of Congress should make sure that, in any grant of statutory authority, a new Medicare Board cannot evolve from a referee that establishes common rules for the competitive playing field into a powerful regulatory agency that undermines consumer choice and competition.

  • Resist legislative attempts to turn the FEHBP model into a Clinton version of highly regulated "managed competition."
    Taxpayers should be wary of broad generalizations about health policy. Too often, Members of Congress and the Administration use the same language to describe very different things. This is especially true when it comes to health policy.

There are two key distinctions between the President's competitive defined benefit concept and the original Bipartisan Commission majority's premium support approach:

  1. Under the commission majority's premium support proposal, the government fee-for-service plan would compete on an equal footing with private plans. Under the Clinton proposal, traditional Medicare fee-for-service would be largely insulated from competitive pressures.

  2. Under the commission majority's premium support proposal, private carriers could add as many benefits as they want beyond a core benefits package, with Board approval, to satisfy consumer demand for their services and adjust the cost accordingly. Under the Clinton plan, all private plans would have to offer the same package of benefits and compete solely on cost and provider networks.

The approaches behind the Clinton proposal and the proposal recommended by the Bipartisan Commission's majority also vary widely with respect to prescription drug coverage. The commission majority's proposal would include prescription drug coverage, but seniors, instead of having to rely on a HCFA-run drug plan, would be able to choose from among competing private plans for drug coverage and all their health care needs. If certain seniors decided that traditional Medicare still worked best for them, it would remain an option.

  • Don't lose sight of free-market principles when considering legislative details.
    The hard work over the next few months in developing a comprehensive reform of Medicare will be to make sure that the crucial details of the Medicare legislative proposal do not overwhelm the bedrock principles of real reform. Specifically, any genuine Medicare reform should:
  1. Establish real consumer choice, including a choice of private plans, benefit packages, medical treatments and procedures, and physicians and other providers.

  2. Establish real competition and allow a wide variety of options, including employment-based health plans, fee-for-service plans, various types of managed care plans, medical savings accounts, and both high- and low-deductible plans, among others, to compete for seniors' dollars. Senior citizens should be able to reap the full savings of any choice they make.

  3. Respect the personal liberty and privacy of senior citizens. No government agency should be permitted either to intrude into the privacy of Medicare patients' medical records without their full and voluntary consent or to prevent them from spending their own money on a doctor or medical service of their personal choice.

  4. Radically reduce bureaucracy and regulation. Doctors, hospitals, and other providers should not be required to spend inordinate amounts of time complying with thousands of pages of rules, regulations, and paperwork. If private plans wished to impose complicated coding and fee schedules and other burdensome paperwork requirements, they could. But at least they would be forced to carry that administrative burden into open competition with private plans that did not wish to do so.

A major recent proposal incorporates many of these objectives. S. 1895, the Medicare Preservation and Improvement Act of 1999, was introduced by Senator John Breaux on November 9, 1999. Its lead sponsors include Senators Bill Frist (R-TN), Robert Kerrey (D-NE), and Chuck Hagel (R-NE). This proposal, based on the recommendations of the majority of the Bipartisan Commission, would establish a premium support system for all Medicare recipients. Medicare beneficiaries would be permitted to select either a standard or a high-option plan from among HCFA-sponsored plans and competing private plans. A newly created Medicare Board would admit plans and negotiate benefits and premiums.

Under the bill's language, the standard plan would offer the core benefits codified today under Part A and Part B of traditional Medicare fee-for-service. The high-option plan would offer the core benefits plus stop-loss coverage and outpatient prescription drugs (the stop-loss applies only to the core benefits and not the prescription drugs). The drug coverage would have to be actuarially equivalent to at least $800 on January 1, 2003. The bill's language would allow plans to adjust co-payments and deductibles accordingly and to use PBMs as all private plans do, free from either price controls or intricately detailed government regulation.

The President, with advice and consent from the Senate, would appoint seven members to the Medicare Board, which would function in a manner similar to that of the Office of Personnel Management, which oversees the FEHBP. The intent would be, insofar as possible, to depoliticize the management of the delivery of medical services to senior citizens.

Changes in Medicare benefits currently require an act of Congress or a complex administrative process supervised by officials at HCFA. Even the smallest changes, therefore, necessarily become bogged down in the bureaucratic or political process. This is a major reason why Medicare is inflexible and frequently out-of-date in its benefit package design relative to private plans. The creation of such a Medicare Board would allow Medicare's medical services and treatments to be updated both easily and often.

In addition, all participating plans would be required to compete on an equal footing. Under current law, traditional fee-for-service Medicare is not sufficiently exposed to competition from private plans. Fair and genuine competition is the only way to ensure that seniors get the highest quality medical services and the best value for their money.

CONCLUSION

President Clinton could have built on the solid work of the National Bipartisan Commission on the Future of Medicare to create a superior system of health care coverage for the next generation of American retirees. Instead, he has put forth a proposal that would dramatically expand the bureaucratic power of HCFA and add new entitlement spending to a system that is fundamentally unsound. Medicare beneficiaries still would face a limited choice of plans and a drug benefit that was heavily influenced by HCFA.

For its part, the Bipartisan Commission proposed a new system, in broad outline, based on the principles of patient choice and real competition. Members of Congress can seize an historic opportunity to forge a superior program for America's future retirees.

If lawmakers really want to give the next generation of retirees the option of buying prescription drugs in a competitive market at affordable prices, they should include consumer choice and competition--the best features of their own health care program, the Federal Employees Health Benefits Program. They and other federal employees enjoy a level of personal choice, quality, and efficiency that rivals many of the best corporate plans in America. They also report high levels of personal satisfaction with their own private plans. S. 1895 demonstrates the desire of a bipartisan group of Senators to integrate these attractive features of the FEHBP into a major legislative proposal for the next generation of America's retirees.

The old Medicare system is a paradox: It is increasingly expensive and a poor value for the money. While the old system served its purpose for millions of Americans, it reflected the times in which it was designed. The different needs of a different generation in a new century require a different system. As Americans enter the 21st century--a century in which a technologically sophisticated economy places a premium on personal choice, openness, flexibility, and innovation--the next generation of retirees should not be fated to inherit a bureaucratic relic of the 1960s.

The next generation of retirees should not be locked into a system in which adding or improving a retirement health plan benefit requires a major act of Congress and months or even years of bureaucratic haggling. They should be free to pick the plans and benefits they think are best for them, and the system that provides those services should be characterized by personal choice, competition, and innovation. Congress has a lot of work to do.

James Frogue is a former Health Care Policy Analyst, and Robert E. Moffit, Ph.D., is Director of Domestic Policy Studies, at The Heritage Foundation.

About the Author

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

Show references in this report

1. Based on the July 1999 budget baseline. The 10-year estimated cost difference reflects specific differences in estimates of the costs of the prescription drug benefit, the proposed changes in the traditional fee-for-service program, and the effects of the introduction of the "competitive defined benefit proposal."

2. For more details, see Robert E. Moffit, Ph.D., "The Last Time Congress Reformed Health Care: A Lawmaker's Guide to the Medicare Catastrophic Debacle," Heritage Foundation Backgrounder No. 996, August 4, 1994.

3. Board of Trustees of the Federal Hospital Insurance Trust Fund, 1999 Annual Report of the Federal Hospital Insurance Trust Fund, at http://www.hcfa.gov/pubforms/tr/hi1999/toc.htm.

4. National Bipartisan Commission on the Future of Medicare, at http://medicare.commission.gov/medicare/index.html.

5. In a sense, the Clinton proposal is a resurrection of the President's "managed competition" model embodied in his ill-fated 1993 Health Security Act, under which private plans, all largely the same, would compete within a highly regulated system of "regional alliances" or government-sponsored networks.

6. Under current law as interpreted in federal courts, a Medicare patient may secure a medical service of choice through a private contract with a physician if the Medicare bureaucracy considers the medical service unnecessary. Moreover, under the ruling of the Federal Court of Appeals in United Seniors Association et al. v. Donna Shalala (1999), the private contract between a doctor and a patient is legal as long as the Medicare bureaucracy does not consider the medical service "unwarranted," a category of medical service that the Court of Appeals of the District of Columbia has left undefined. For a discussion of the current state of private contracting in Medicare, see Robert E. Moffit, Ph.D., "Congress Should End the Confusion over Medicare Private Contracting," Heritage Foundation Backgrounder, No. 1347, February 18, 2000.

7. 1999 Annual Report of the Federal Hospital Insurance Trust Fund, p. 2.

8. Robert B. Helms, ed., Medicare in the Twenty First Century: Seeking Fair and Efficient Reform (Washington, D.C.: AEI Press, 1999), p. 3.

9. Ibid., p. 2.

10. For a discussion of this emerging problem in Medicare, see Sandra Mahkorn, M.D., "Why an Unreformed Medicare System Is Hazardous to Your Health," Heritage Foundation Backgrounder No. 1295, June 18, 1999.

11. National Economic Council, Domestic Policy Council, The President's Plan to Modernize and Strengthen Medicare for the 21st Century, July 2, 1999, p. i.

12. Ibid.

13. Dan Crippen, testimony before Committee on Finance, U.S. Senate, 106th Cong., 1st Sess., July 22, 1999, at http://www.senate.gov/~finance/7-22crip.htm.

14. Ibid.

15. Ibid.

16. The President's Plan to Modernize and Strengthen Medicare, p. i.

17. Michael E. Gluck, "A Medicare Prescription Drug Benefit," National Academy of Social Insurance Medicare Brief No. 1, April 1999.

18. Robert Pear, "Drug Benefits Up to $2500 Are in Plan for Medicare," The New York Times, June 28, 1999, p. A17.

19. Charles Babington and Eric Pianin, "Clinton Drug Plan Aimed at Hardest-Hit Elderly," The Washington Post, February 7, 2000, p. A1. In his 1999 Medicare reform proposal, President Clinton charged $24 per month beginning in 2002 for 50 percent coverage up to $2,000, moving to $44 per month in 2008 for 50 percent coverage of $5,000 in drug costs.

20. Office of Management and Budget, Budget of the United States Government, Fiscal Year 2001, p. 72.

21. Dwight Bartlett III, "The Bottom Line on Medicare Prescription Drugs," remarks delivered at The Heritage Foundation, August 18, 1999.

22. Crippen testimony, op. cit.

23. Jack Rodgers, Ph.D., and Mary Jo B. Hayden, M.P.A., PricewaterhouseCoopers LLP, President Clinton's Medicare Prescription Drug Benefit: An Analysis of Displacement of Employer-Sponsored Retiree Prescription Drug Coverage, prepared for Citizens for a Better Medicare, September 21, 1999, p.1.

24. Babington and Pianin, "Clinton Drug Plan Aimed at Hardest-Hit Elderly," p. A1.

25. Conversation with Jeanne Lambrew, Health Policy Analysis, Senior Director of the National Economic Council, Office of Policy Development, the White House, November 9, 1999.

26. Budget of the United States Government, Fiscal Year 2001, p. 72.

27. For an account of HCFA's administration of Medicare Part C, see Sandra Mahkorn, M.D., "How Not to Reform Medicare: Lessons from the Medicare+Choice Experiment," Heritage Foundation Backgrounder No. 1319, September 15, 1999.

28. William J. Scanlon, Director, Health Financing and Systems Issues, Medicare: HCFA Faces Multiple Challenges to Prepare for the 21st Century, testimony before the Subcommittee on Health, Committee on Ways and Means, U.S. House of Representatives, GAO/T-HEHS-98-85, January 29, 1998, p. 1.

29. See Moffit, "The Last Time Congress Reformed Health Care."

30. For a more detailed description of pharmacy benefit managers, see Jeff Sanders, testimony before Committee on Finance, U.S. Senate, June 24, 1999, at http://www.senate.gov/~finance/6-23san1.htm.

31. The President's Plan to Modernize and Strengthen Medicare, p. 23.

32. John Calfee, Price, Markets and the Pharmaceutical Revolution (Washington, D.C.: AEI Press, 2000), pp. 57-58.

33. Crippen testimony, op. cit.

34. Statement of Representative Thomas Bliley (R-VA) before the Subcommittee on Health and Environment, Committee on Commerce, U.S. House of Representatives, 106th Cong., 1st Sess., August 4, 1999. Representative Bliley serves as chairman of the full Commerce Committee.

35. The President's Plan to Modernize and Strengthen Medicare, p. 23.

36. For a discussion of this problem in Medicare Part B, see Mahkorn, "Why an Unreformed Medicare System Is Hazardous to Your Health."

37. For a more detailed description of formularies, see Lauren Hoffman, Pharm.D., at http://www.dcmsonline.org/jax-medicine/1998journals/february98/formulary.htm.

38. The President's Plan to Modernize and Strengthen Medicare, p. 21.

39. Ibid., p. 22.

40. Remarks of Dr. Howard Cohen in Robert E. Moffit, Ph.D., et al., "A High Price Prescription: Clinton's Medicare Drug Proposal," Heritage Lecture No. 647, November 3, 1999.

41. For a detailed description of the failure of price controls, see Edmund F. Haislmaier, "Why Global Budgets and Price Controls Will Not Curb Health Costs," Heritage Foundation Backgrounder No. 929, March 8, 1993.

42. "President Proposes to Cut Medicare to Fund Discretionary Appropriations," Budget Bulletin, prepared by the majority staff of the Senate Budget Committee, June 21, 1999, p. 1.

43. The President's Plan to Modernize and Strengthen Medicare, p. 35.

44. Ibid., p. 36.

45. Ibid.

46. Ibid., p. 38.

47. David M. Walker, Comptroller General, U.S. General Accounting Office, testimony before the Committee on Finance, U.S. Senate, 106th Cong., 1st Sess., July 22, 1999, at http://www.senate.gov/~finance/7-22walk.htm.

48. Congressional Budget Office, "Monthly Budget Review," October 12, 1999, at http://www.cbo.gov/showdoc.cfm?index=1601&sequence=0&from=1.

49. Walker testimony, at http://www.senate.gov/~finance/7-22walk.htm.

50. Mark McClellan, Ph.D., "Medicare Reform," paper delivered at a Symposium on Medicare Reform sponsored by the Journal of Economic Perspectives, National Press Club, Washington D.C., October 15, 1999. Cited with permission.

51. Gary L. Olin and Hongji Liu, "Health & Health Care of the Medicare Population: Data from the 1994 Medicare Current Beneficiary Survey," Health Care Financing Administration, November 1998.

52. Eleven votes were needed to constitute the "supermajority" necessary to make a formal recommendation. The final report received 10 votes, including that of the chairman and Senator Robert Kerrey (D-NE).

53. " The FEHBP As a Model for Reform," in Helms, ed., Medicare in the Twenty First Century, p. 154.

54. Ibid., p. 153.

55. For the chairman's recommendation, see http://medicare.commission.gov/medicare/bbmtt31599.html.