MAKING MATTERS WORSE
There is more at stake in the policy
debate than simply making pharmaceuticals more affordable for
seniors. Decisions about the way that a prescription drug benefit
is financed and delivered can affect the nature of health care in
this country. The concerns are as serious as they are broad.
Today, 135 biotechnology and
pharmaceutical companies have over 800 medicines in the research
and development pipeline to treat the most common diseases among
the elderly, including Alzheimer's, arthritis, cancer, heart
disease, stroke, and osteoporosis. Pharmaceutical innovations
can dramatically improve the quality of life for millions of
current and future retirees, and reduce hospitalization and other
health care costs, resulting in tens of billions of dollars in
annual savings in the health care sector of the economy.
patients and their doctors continue to have an ability to choose
the best medical treatment? Will researchers continue to find new
cures and develop new drugs with fewer side effects to treat
patients more effectively? Can the Medicare program remain
financially sound with the addition of an expensive new benefit?
The challenge is to craft a Medicare drug benefit that answers
these questions affirmatively.
prescription drug benefit proposed by Senators Bob Graham (D-FL),
Zell Miller (D-GA), and Edward Kennedy (D-MA) raises precisely
those questions. Their bill (S. 2625) has a politically attractive
premium, set at $25 per month, but it creates a massive
government-controlled drug benefit that is scheduled to end in
2010. Their program would set drug prices for seniors at $10, $40,
or $60, and the federal government would pay all costs once a
beneficiary has used $4,000 worth of drugs. Unlike other proposals,
the stop-loss provision is triggered by a beneficiary's total drug
spending, not just the amount spent out of pocket.
proposed program would exacerbate Medicare's managerial
inefficiency and waste, and could drive the price of prescription
drugs to new heights. There would be little incentive for the
benefit administrators to drive a hard bargain for discounts from
pharmaceutical manufacturers, since the government would pay them
dollar-for-dollar for the costs of the drugs. Drug prices are
likely to increase under this plan, since every dollar saved by the
administrators would reduce their payment by a dollar without
adding to their profits.
According to the Congressional Budget
Office, the Graham-Miller-Kennedy bill would cost taxpayers an
estimated $421 billion from 2005 through 2010, or $594 billion
through 2012. Even with the 2010 sunset
provision, the bill would constitute the largest single benefit
expansion in Medicare's history. The CBO estimates could, in fact,
seriously understate the program's true costs.
for this, a highly diverse class of Medicare beneficiaries would
get a one-size-fits-all drug benefit. Premiums and benefits would
be uniform nationally, and beneficiaries would not be able to
select a less expensive drug plan. They would also have
first-dollar coverage, which would blunt any incentives for
efficient use of prescription drugs.
is unlikely that the Senate could enact such a benefit without
resorting to price controls. Price controls and burdensome
regulation are virtually inevitable if--or when--Medicare's
prescription drug costs spiral even higher under the
Congress was faced with just such a cost
spiral 20 years ago in Medicare Part B, the part that pays
physicians. So Congress established a complicated fee schedule,
which sets prices for more than 7,000 individual physician services
in all of the nation's local markets, and imposed a cap on
physician charges. In implementing this system, the Medicare
bureaucracy issued thousands of pages of directives to doctors to
regulate what they do and how they do it as a condition for
Meanwhile, not only have Medicare
physicians' payments been constrained under this system, but
doctors are also facing Medicare payment reductions. And some
newly retired seniors are having difficulty finding a doctor
willing to see them.
Using this failed model in a financially
troubled system for the drug benefit would be a serious mistake.
Government price setting could distort market incentives, leading
to shortages of particular drugs. As costs inevitably rose, access
to the newest drugs could be restricted. Such policies would
discourage pharmaceutical research and innovation to discover new
cures and better medicines, with serious consequences for
Alternative Senate Proposals Fall
other proposals under discussion in the Senate represent more
prudent approaches to a Medicare drug benefit. A so-called
Tripartisan proposal offers a comprehensive drug benefit through
competing private prescription drug plans. A less costly proposal,
sponsored by Senators Chuck Hagel (R-NE), John Ensign (R-NV), and
others, would provide drug discounts and federally sponsored
catastrophic coverage. Both of those bills contain elements that
are positive, but they also contain elements that are problematic
and could lead to serious problems for Medicare in the long
The Tripartisan proposal--the 21st Century Medicare Act,
sponsored by Senators John Breaux ( D-LA), Charles Grassley (R-ID),
and James Jeffords (I-VT)--would require that beneficiaries pay a
significant share of their prescription drug expenses, including a
$250 deductible and half of the cost of their prescription drugs
between $250 and $3,450. A benefit "hole" above $3,450 would keep
federal costs down. Once a beneficiary had spent a total of $3,700
(counting only out-of-pocket expenses), the federal government
would pay all costs. Like many other Medicare drug proposals, the
Tripartisan approach is somewhat complicated and is not easily
explained to seniors and other taxpayers.
Tripartisan proposal (S.2) adopts many of the market principles of
the recently enacted House bill (H.R. 4954), although it offers
more generous coverage and a lower monthly premium. Under both
plans, competing drug plans would have an incentive to manage costs
and negotiate favorable prices with pharmaceutical manufacturers.
Plans would be permitted to pass on the savings to beneficiaries
through lower premiums, which are expected to average about $30 a
month in 2005.
Tripartisan proposal also would establish a new fee-for-service
option that would give seniors both greater financial protection
against high medical expenses and additional preventive care
benefits. That new option would limit the total out-of-pocket costs
paid by beneficiaries for all Medicare services to $6,000 a year.
It would eliminate separate deductibles for hospital and physician
services, replacing them with a combined deductible of $300, and
adjust other cost-sharing requirements. Preventive services would
be made available without any cost-sharing requirements. Such
changes would improve the financial protection afforded to
enrollees in the enhanced program.
addition, beleaguered Medicare+Choice plans would be given somewhat
greater flexibility than is now permitted. The administered pricing
scheme for those plans would be replaced by a limited bidding
Tripartisan bill's drug benefit would increase federal spending by
about $340 billion over the next decade. Other enhancements to
Medicare's benefits would require an additional $30 billion in
proposal would introduce some new elements of competition into
Medicare and provide additional incentives for more efficient use
of health care resources, but it does not go far enough toward
Medicare modernization. Although it is less expansive and more
economically efficient than the Graham-Miller-Kennedy proposal, the
bill would still impose substantial new costs on an already
overburdened program. This level of spending would compromise
Medicare's long-term solvency without the aggressive new efforts
needed to reform the program.
Senators Hagel and Ensign, and others, have proposed a
catastrophic drug benefit that combines a discount prescription
drug card with catastrophic coverage. The bill, the Medicare Rx
Drug Discount and Security Act of 2001 (S. 1239), estimated to cost
$160 billion over 10 years, incorporates an idea similar to the
President's discount drug card program to give seniors access to
privately negotiated discounts.
bill also would provide catastrophic coverage triggered by income
and drug expenditures. For example, catastrophic coverage would
begin when out-of-pocket drug expenditures hit $1,500 a year for
those with incomes below 200 percent of poverty and $5,500 for
those between 400 percent and 600 percent of poverty.
the most prominent model for Medicare reform, the Federal Employees
Health Benefits Program (FEHBP), competing health insurance plans
all offer prescription drug coverage. In terms of catastrophic
coverage, private plans in the FEHBP, not taxpayers, assume the
risk. But in the Hagel-Ensign proposal, the taxpayers, not private
entities, would bear the risk of the catastrophic coverage.
means that the Hagel-Ensign bill is a government drug benefit
program that simply triggers at a higher level. This is not
Medicare reform. The proposal would not harness free-market forces
to keep drug costs down in the same way the FEHBP does.
HOW THE CONGRESS COULD BUILD ON A
Independent analysts, including those with
the U.S. General Accounting Office and the Congressional Budget
Office, have repeatedly advised Congress that a drug benefit should
be crafted within the context of serious Medicare reform. President
George W. Bush also has repeatedly expressed the Administration's
support for principles designed to inject competition and choice
into the Medicare program, based on a reform plan developed by
Senator John Breaux (D-LA) and Representative Bill Thomas (R-CA). That
proposal would give seniors the freedom to choose from among
competing private health plans, just as federal workers and
retirees do in the FEHBP. Those plans would incorporate
prescription drugs as an integral element of their medical benefit
an interim measure, the President has proposed offering
Medicare-endorsed prescription drug discount cards to seniors.
Discount cards are already available to consumers from
pharmaceutical companies, retail pharmacies, drug benefit managers,
and health plans. These cards often offer discounts of 10 percent
to 20 percent (or more) off the retail price. Under the President's
proposal, seniors would pay a fee to participate that is much like
a buyers' club membership fee.
President's discount card proposal, however, is flawed: It would
hand-select a few players from a limited field, and it has
predictably invited lawsuits by groups who say it is
anti-competitive and by pharmacists who fear the entire discount
will be drawn from their dispensing fees.
Creating a Drug
A new drug benefit must include elements of broader
program reform or it will endanger the financial stability of
Medicare. One innovative proposal called the Prescription Drug
Security (PDS) Card plan offers meaningful drug coverage to seniors
most in need while promoting efficiency, innovation, and consumer
It also provides a way of testing market-based reforms that are key
to Medicare's long-term survival.
PDS plan combines a drug discount card with a cash subsidy for
low-income people, a tax-deferred saving option for others, and
catastrophic insurance protection. The plan would target immediate
financial assistance to low-income seniors to assist in purchasing
routine medications while also providing private catastrophic
coverage for large drug expenses.
Low-income seniors without drug coverage
would get a PDS card with $600 a year from the federal government
to help them with routine drug purchases and could roll over any
balance to the next year when another deposit would be made.
Seniors who did not qualify for a subsidy could make a
tax-deductible contribution to a PDS account. All seniors enrolling
in the program would be protected by catastrophic coverage that
starts when their drug spending hits $2,000.
Seniors would be able to choose from among
competing private plans that would track their card balances,
negotiate discounts on their behalf, organize the catastrophic
coverage, and provide other services to improve patient safety.
Administration of the PDS card program would be modeled
after the FEHBP. The administering agency would provide broad
direction to individual plans on required benefits and other
policies, negotiate with plans on their premium offers, and provide
information to Medicare beneficiaries on their options and the
performance of individual plans. Price controls and overregulation
would be replaced with flexibility and a consumer focus.
PDS plan would allow Congress to focus on seniors who lack drug
coverage and not disrupt the good coverage that millions of others
have now. This plan also would allow seniors and their doctors to
decide what drugs are best for them and would actually put in place
a foundation for changes that could save Medicare in the long
Members of Congress want to enact a
prescription drug benefit for senior citizens. There is no debate
over the need to assure that all seniors should have access to
prescription drug coverage.
course, most senior citizens today do have access to prescription
drugs, either through their former employers or through
supplemental coverage. The danger is that Congress will enact badly
designed Medicare prescription drug benefits that end up dumping
senior citizens out of the coverage they do have into a government
program that will be plagued by explosive costs and constrained by
regulatory restrictions on the availability of high-quality
prescription drug coverage.
Congress should do the right thing for
both senior citizens and young working families who finance the
bulk of Medicare costs. President Bush has promoted a drug discount
card without success, but Congress can put resources behind it to
target needy seniors and make it work effectively. The Prescription
Drug Security Card could provide meaningful help for low-income
seniors who do not have access to drug coverage. These seniors
should be the priority for Washington policymakers, who can--and
should--provide this help while creating a framework for expanding
drug coverage in tandem with overall Medicare reform.
Joseph Antos, Ph.D., is
a resident scholar at the American Enterprise Institute and most
recently served at the Congressional Budget Office, where he
directed analyses of Medicare prescription drug benefits and other
legislation. Grace-Marie Turner is President of the Galen
Institute, a not-for-profit health policy research organization
based in Alexandria, Virginia. Robert E. Moffit, Ph.D.,
is Director of Domestic Policy Studies at The Heritage