Senators John Breaux (D-LA) and Bill Frist (R-TN)
have introduced two Medicare reform bills that are refreshing
examples of bipartisanship on an important issue. Both bills are
modified versions of legislation they introduced in the 106th
Congress and promote reforms in the current system based on the
work of the 1999 National Bipartisan Commission on the Future of
Medicare and the popular Federal Employees Health Benefits Program
(FEHBP) that covers federal employees and retirees.
President George W. Bush has endorsed
these efforts, recently remarking that "The framework for reform
has been developed by Senators Frist and Breaux and Congressman
[William] Thomas, and now is the time to act."1 The
President also is expected to submit his own proposal on reforming
Medicare.2 By considering and building upon provisions
in the Breaux-Frist bills, the President and Members of Congress
have an opportunity to craft effective reforms of the overburdened,
over-regulated, and financially troubled Medicare system.
The
Medicare Preservation and Improvement Act of 2001 (S. 357), which
is known as Breaux-Frist I, offers comprehensive reforms of the
Medicare system based on the exhaustive work of the Bipartisan
Commission. The bill would create a new Medicare Competitive
Premium System, based on the FEHBP model, that would take effect in
January 2004. The Medicare Prescription Drug and Modernization Act
of 2001 (S. 358), or Breaux-Frist II, provides for a more
incremental and modest reform of the system and guaranteed access
for seniors to prescription drug coverage.3 This bill
would establish universal but voluntary drug coverage.
Though the two bills differ in scope, both
would establish a new agency to administer Medicare plans and
benefits and limit the authority of the Health Care Financing
Administration (HCFA), which runs the Medicare program. Both bills
also are designed to foster market competition among providers;
provide access to prescription drugs for seniors; fully subsidize
the drug costs of low-income seniors and provide a sliding scale of
subsidies or discounts for others; and change the way Congress and
the Administration measure and monitor the solvency of the
program.
Thus, the Breaux-Frist bills are designed
to address serious problems in the current Medicare system, which
will face huge financial pressures in the next decade when
America's 77 million baby boomers start to retire. Moreover, there
is a significant gap in today's medical coverage for seniors,
particularly when it comes to prescription drug and catastrophic
coverage. Senior citizens are being forced to rely on an outdated
structure that pays only 53 percent of their health care costs and
is over regulated, cumbersome, inflexible, and sluggish in
responding to claims. These problems threaten the provision of
up-to-date, high-quality medical care for an increasingly large
number of seniors and Medicare patients.4
Stimulating a Productive Debate on
Medicare
Senators Breaux and Frist reintroduced their reform bills to
restart the national debate on Medicare reform because of growing
support for their approach. They hope the bills will allow both
houses of Congress "to use one, the other, or the best of both, to
craft Medicare reform legislation."5
Together, the President and Congress
should build on the best provisions of these bills, particularly
Breaux-Frist I, which emulates the superior system of competing
plans in the FEHBP, a consumer-driven program that currently is
available only to Members of Congress, the White House, and other
federal workers and retirees. A major key to the popularity and
success of the FEHBP--which is the model for the recommended
reforms put forth by the majority of the Bipartisan Commission as
well as by the Bush Administration--is an acceptance of rapid
change and innovation in benefits provisions, flexibility in
pricing, and reliance on the free-market forces of consumer choice
and competition.6 In no other health insurance system
are policyholders given such a broad range of personal choices.
Breaux-Frist I specifically proposes a new
Medicare system based on features of the FEHBP, such as competing
plans and a generous system of government premium support. It
offers seniors access to prescription drug coverage. And it would
create a new administrative body, known as a Medicare Board, that
would negotiate benefits and coverage with individual plans,
approve benefit packages, provide comparative information to
enrollees on the plans, and enforce consumer protection rules. The
board in this way would mirror the activities of the Office of
Personnel Management (OPM), the federal agency that administers the
FEHBP and handles these tasks for federal workers and retirees in
that program.
If
the Administration and Congress are serious about replicating the
success of the FEHBP in Medicare, careful legislative drafting will
be needed to create a practical and improved version of that
program for Medicare patients. Specifically, the President and
Congress should:
-
Adopt
safeguards to prevent regulatory creep, a back-door return to price
controls, and central planning that characterize the approach of
HCFA today;
-
Make the
Medicare system more consumer friendly; and
-
Offer
retirees access to medical savings accounts (MSAs).
The PRESSING NEED TO REFORM MEDICARE
The
President and Members of Congress from both parties understand the
strong fiscal reasons to reform Medicare and establish a sound
footing for the future. Chief among these is the dramatic growth in
the number of rapidly aging persons eligible for Medicare coverage,
which will double over the next 30 years even as the ratio of
workers to beneficiaries falls by almost half.7
Moreover, the beneficiaries are experiencing ever higher longevity,
and advances in biomedical technology will increase the
demographically driven upward pressure on services, and thus on
spending. The infusion of market discipline into the system would
serve to slow the growth in spending while increasing its
efficiency and effectiveness in ways that centralized planning and
price regulation could never achieve.
Although a bureaucratic system can control
the supply of medical services, it can do so only imperfectly and
cannot at all control consumer demand. Historically, the policy
response to rising Medicare costs has been to try to control the
supply or volume of medical services by reducing or slowing
government payments for those services. This policy has had
unintended and unproductive consequences. Former HCFA Actuary Guy
King, now an actuarial specialist with the Washington-based office
of Ernst and Young, explains it this way:
Reductions in payments to health care
providers, or more accurately, reductions in the growth of such
payments, have been used to no avail throughout Medicare's history.
This unsuccessful policy has brought the system to the brink of
bankruptcy, with no easy fix in sight. Health care providers defeat
the intent of reducing the growth of payments by simply billing
Medicare for more procedures and for more costly procedures.
Moreover, the draconian cuts that are needed to keep Medicare
afloat will inevitably result in reductions in the quality of care
and in the rejection of more Medicare patients by health care
providers.8
The
key objective of Medicare reform is not simply to control costs or
restrain spending, extend the life of Medicare's trust funds, or
improve administration of the program. The key policy objective of
reform should be to create a superior system of high-quality
medical care for America's senior citizens that also respects their
personal dignity, freedom, and privacy.
KEY COMPONENTS OF THE BREAUX-FRIST
BILLS
Breaux-Frist I (S. 357), if enacted, would
transform Medicare into a system that is similar in structure and
dynamics to the successful FEHBP, which covers Members of Congress,
White House personnel, and millions of federal employees, retirees,
and their dependents. Breaux-Frist II (S. 358) proposes a universal
prescription drug benefit that would be delivered through existing
Medicare+Choice plans and administered by a new Competitive
Medicare Agency similar to the Social Security Administration.
Specific features of the Breaux-Frist bills are as follows.
Breaux-Frist I: Seniors would enjoy
personal choice of plans and benefits, just as federal employees in
the FEHBP do today. Retirees would be able to enroll either in
traditional Medicare or in a private health insurance plan of
choice. They would be able to choose their benefit packages but
also would be guaranteed a standard or core benefits package, which
at a minimum would include the same benefits they now have as
specified in current law. Participating plans would be required to
offer both standard and high-option plans as well as drug and
catastrophic coverage. Drug coverage would be adjusted annually and
would be worth an "actuarially equivalent value" of $850 in 2004.9
The catastrophic "stop loss" limit for all plans would be $2,000
for the current benefits required in competing
plans.10
Breaux-Frist II: This bill proposes making programmatic
improvements in the ailing and restrictive Medicare+Choice program,
which administers the Medicare HMOs.
Premium Support Financing
Breaux-Frist I: Retirees would receive
generous government support for premium payments to the health plan
of their choice, a feature FEHBP enrollees already enjoy. As in the
FEHBP, the level of government support for the premiums would be
based on a mathematical formula calculated to yield a national
weighted average (NWA) premium for core benefits to be offered by
all competing plans.11 Retirees who select plans whose
premiums are less than 85 percent of the NWA would pay nothing. If
the premium is more than 85 percent but less than 100 percent of
the NWA premium, the government support would be 80 percent of the
amount by which the premium exceeds 85 percent of the NWA premium.
If the plan's premium is greater than 100 percent of the NWA
premium, the beneficiary would pay the difference.12
The level of
premium support proposed in Breaux-Frist I is significantly more
generous than that currently allowed in the FEHBP, which
contributes about 72 percent of the cost of a premium up to a fixed
dollar amount. Under S. 357, government support for a retiree would
not fall below the amount retirees need to buy the approved
standard package of health care benefits. Moreover, as it is in the
FEHBP (but not in today's troubled Medicare+Choice program), the
government contribution would be tied directly to the ever-changing
conditions of the health insurance market.13 In dollar terms, if
health insurance costs increased, the government's premium support
would also increase proportionately.
Breaux-Frist
II: All seniors would receive a 25 percent subsidy for their
premium costs of prescription drug coverage. Seniors below 135
percent of the poverty level would receive full subsidization of
their prescription drug costs, and there would be a sliding scale
of subsidies for seniors whose incomes are between 135 percent and
150 percent of poverty. The drug benefit would include a $250
deductible, $2,100 in initial coverage, and 50 percent cost-sharing
between the government and the beneficiary. The proposal also
includes "stop loss" catastrophic protection of $6,000 for drug
costs.14
Integration of Prescription Drug
Coverage
Breaux-Frist
I: Prescription drug coverage in competing health plans would
be included as an integral element of health insurance coverage,
similar to the way coverage is included in the FEHBP. Most of the
FEHBP plans, in fact, cover between 80 percent and 90 percent of
prescription drug costs. By modeling that practice, the bill would
universalize prescription drug coverage, lower prescription drug
costs through intense private competition, and protect seniors
against the costs of catastrophic prescription drug expenses.
As with
Breaux-Frist II, subsidized comprehensive prescription drug
coverage for low-income retirees would be guaranteed. Those under
135 percent of poverty would pay nothing; those with incomes
between 135 percent and 150 percent of poverty would get premium
discounts.15 Beneficiaries at or over 150 percent of
poverty ($12,389 for individuals and $15,614 for couples) who
choose a high-option health plan would get a premium discount of 25
percent.16 To ensure that the drug premium discount is
income-related, Breaux-Frist I treats the value of the discount for
premiums as taxable income.
Breaux-Frist II: The prescription drug
benefit would be similar to the one proposed in Breaux-Frist I.
However, for Medicare beneficiaries, the drug benefit would be
delivered through existing Medicare+Choice plans and other private
entities or, if they are enrolled in traditional Medicare, through
a Medicare Prescription Plus plan. The bill requires a standard
prescription drug benefit with a $250 deductible, $2,100 in initial
coverage, and 50 percent cost-sharing between Medicare and the
beneficiary. It also requires every drug plan to have a
catastrophic "stop loss" limit of $6,000, meaning that no senior
would ever be liable for any amount above that limit.17
Beyond these core benefit requirements, drug plans could vary their
offerings.18
Like Breaux-Frist
I, S. 358 would fully subsidize seniors with incomes below 135
percent of the poverty level ($11,150 for individuals and $14,052
for couples). Seniors with incomes between 135 percent and 150
percent of poverty would also be eligible for a sliding scale of
subsidies and drug discounts.19
A Board or Agency to Set the Rules of the
Game
Breaux-Frist
I: A new Medicare Board, comprised of members appointed by the
President and confirmed by the Senate, would be created within the
executive branch. The board would set the ground rules of market
competition among the private plans in the new system. It would
negotiate premiums with private plans; approve the benefits
packages; ensure consumer protection, fiscal solvency, and quality
standards; establish a risk-adjustment mechanism to safeguard
against adverse selection; and provide solid, clear, and
comparative information to beneficiaries.20 HCFA would
be confined to running the traditional Medicare program, but it
would be given new authority to be flexible in administering that
program to enable it to compete with other plans in the new
system.
Breaux-Frist
II: A new Competitive Medicare Agency would be created within
the executive branch under an advisory board, similar to the
current arrangement governing the Social Security
Administration.21 The new agency would administer the
Medicare+Choice program and the new Medicare prescription drug
program. HCFA would be confined to running traditional Medicare,
Medicaid, and the State Children's Health Insurance Program
(S-CHIP).
Clearer Medicare Solvency Standards
Breaux-Frist
I: The existing Medicare trust funds--the Hospitalization (HI)
Trust Fund (Part A), which reimburses hospitals for medical
services to seniors, and the Supplemental Medical Insurance Trust
Fund (Part B), which pays doctors and outpatient medical facilities
for services provided to seniors--would be combined into a single
Medicare Trust Fund. All current funds, including existing HI
payroll taxes, beneficiary premiums, and general revenue transfers,
would go into this new trust fund.
Many Americans
are unaware of the true character of Medicare's financial problems
because the solvency of the system almost invariably is discussed
only in terms of the financial condition of Part A, the HI trust
fund.22 Often ignored is the growth in income transfers
from the general fund to cover Medicare spending in Part B, and the
impact of that growth on taxpayers and retirees. Under this
legislation, the Medicare Board would be responsible for reporting
to Congress on an annual basis, which would reveal the extent of
the Medicare Trust Fund's dependence on transfers from general
revenues to cover its costs. In any year in which general revenues
exceed 40 percent of total Medicare spending, the trust fund would
be deemed officially insolvent, which would require Congress to
vote on additional general revenue transfers into the
fund.23
Breaux-Frist
II: The Medicare trust funds would remain as separate entities,
and there would be no statutory requirements that Congress vote on
additional transfers of monies from the general revenue fund to
cover rising Medicare costs. The Medicare Board of Trustees would
be required, however, to provide regular reports and evaluations to
Congress on the level of general revenue spending in the Medicare
program.24
HOW TO IMPROVE THE BREAUX-FRIST
PROPOSALS
President Bush and Congress have an
opportunity to fashion a comprehensive Medicare reform proposal
that builds on the Breaux-Frist proposals, based on the excellent
policy work of the 1999 National Bipartisan Commission on the
Future of Medicare. The recommendations of the majority of members
of that commission, like S. 357, are modeled on the FEHBP, with its
solid record of providing quality health care options to federal
employees and retirees for over four decades.
Policymakers can improve upon the
Breaux-Frist proposals to target federal subsidies to those who
need them and to expand private-sector options in order to maximize
cost-effective delivery of prescription drug coverage and other
medical benefits to retirees.25 For example, Congress
and the executive branch should include provisions that:
-
Adopt
safeguards to prevent HCFA-style regulatory creep. Any new
agency created to administer a premium support system should behave
like the OPM--as a flexible, fair-minded referee for competing
private plans with minimal regulation--rather than like HCFA, an
overly prescriptive regulatory agency that systematically sabotages
patient choice and market competition. Clear and unambiguous
statutory restrictions are essential to protect a new competitive
system against government price controls or fee schedules, detailed
determinations on the kind or duration of medical treatments or
procedures covered beyond the categories of benefits statutorily
required as core benefits, government restrictions on the kinds of
medical services that private plans can offer, government practice
guidelines for doctors, or government restrictions on how Medicare
patients can exercise personal choice using their own money.
President Bush and Congress should avoid repeating the
Medicare+Choice debacle in which a nominal system of patient choice
and competition was created only to be systematically strangled by
red tape.
-
Give retirees
access to medical savings accounts if they want them. President
Bush and Congress could improve on the flexible payment approach by
including premium support for MSAs, coupled with catastrophic
coverage, for retirees who want it, particularly new retirees.
Though it makes sense for many medical payments to be made through
the administrative apparatus of third-party insurance arrangements,
this approach does not make sense for routine medical expenses,
such as office visits, or for predictable medical conditions
unrelated to health risks. Covering risk is the function of
insurance in the first place.
-
Make the new
system more consumer-friendly. The proposals in Breaux-Frist I
could be improved by making plan offerings even more flexible and
consumer-friendly. First, Washington could ensure that new retirees
can keep their employment-based coverage in retirement as their
primary coverage (assuming their employer is agreeable to getting
the government contribution to offset the cost of the
plan).26 Second, the federal government could specify in
legislation that competing plans offer an actuarial equivalent of
the standardized benefits package in which medical coverage and
procedures are spelled out under current Medicare law and
regulation, as long as drug benefits and catastrophic coverage are
included. After all, one of the key arguments for reform is that
Medicare's benefits and delivery system are outdated; the use of
actuarial equivalency would preserve the value of an entitlement
with the dynamism and flexibility of modernized benefit
offerings.
CONCLUSION
President Bush, in developing his own
legislative reform proposal for Medicare, can build on the best of
the Breaux-Frist proposals, which promise a good start to this
year's debate on Medicare reform. Both Congress and the President
should recognize and build on the hard work of the National
Bipartisan Commission on the Future of Medicare, which inspired the
Breaux-Frist proposals, in legislation that is crafted to create a
new Medicare system.
Working closely with Congress, President
Bush has the unique opportunity to change the terms of the debate
on Medicare reform, which often has been mired in political
demagoguery, competing financial forecasts or cost projections, and
technical jargon that is bewildering to seniors and their families.
The President should emphasize that the new system should be based
on personal choice, high-quality care, and patient satisfaction. He
should work closely and cooperatively with Congress but insist that
every provision of comprehensive legislation be judged on the
values that are fundamental to real reform: They must advance
patient choice and market competition; respect the professional
independence and integrity of doctors; and protect the dignity,
personal liberty, and privacy of Medicare patients. Only
legislative proposals that embody these values are worth
debating.
Robert E. Moffit, Ph.D., is Director
of Domestic Policy Studies at The Heritage Foundation.