Budget Office reports that 37 percent of all retirees with
employer-based drug coverage would lose it under the Prescription
Drug and Medicare Improvement Act of 2003, the Medicare bill
recently adopted by the Senate Finance Committee.
if unintended, consequence emphasizes that the expansion of
bureaucratic control over the financing and delivery of health care
services is not reform.
According to the
Joint Economic Committee, 34 percent of all seniors today get drug
coverage from employers.
With the continuation of the Senate debate, taxpayers are likely to
find even more such surprises in the large and complex Senate
Medicare drug legislation.
President George Bush outlined a sound vision of comprehensive
Medicare reform. The President said that he would like to see a
system for current and future senior citizens similar to the
Federal Employees Health Benefits Program (FEHBP), which covers
federal workers and retirees. That genuinely pluralistic system
offers a wide variety of benefit and plan choices, and all have
prescription drug coverage fully integrated into competing health
plans. More important, in the FEHBP, the relationship between the
government and private plans is a business relationship, not
a regulatory one. Program administration is decentralized, and
market discipline controls costs.
The Senate bill is
substantively very different from the President's vision. The major
provisions of the massive Senate Medicare bill were first made
available last week to members of the Senate, with a Senate Finance
Committee mark-up of the legislation 48 hours later. As The
Washington Post has noted, the bill resulted from a "rapid
series of compromises" that has produced an incoherent "mish mash"
of provisions that are probably unworkable.
FEHBP, whatever its faults, works. But the FEHBP, as a model for
reform has little operational presence in the intricate provisions
of the Senate bill. Indeed, the Senate bill creates a new
entitlement structure in the form of a prescription drug benefit
whose dynamics will rapidly expand direct federal control over the
financing and delivery of prescription drugs, and thus an ever
larger portion of the American health care economy.
A New Drug
President originally proposed a limited drug benefit for seniors
enrolled in traditional Medicare, the Senate bill has adopted a
drug benefit as a new entitlement. CBO and other government
estimates may fall well short of the true cost of this new
Congress have been erroneously charged with trying to "privatize"
the Medicare program. In fact, the model for reform among most
Medicare reformers has been a government program, the FEHBP.
Curiously, if the Senate bill was meant to be a vehicle for
"privatization," many of those who have emerged among the most
enthusiastic supporters of the legislation understand that it is
exactly the opposite. As Nancy Ann DeParle, former Administrator of
the Health Care Financing Administration (HCFA) during the Clinton
Administration, has written, "In signing it, as he [Bush] will be
forced to do, he will preside over the biggest expansion of
government health benefits since the Great Society." Once again, since
Americans over the age of 65 purchase roughly half of all
prescription drugs, this would amount to a massive expansion of
direct government control over a large portion of the health care
sector of the economy.
debate is centered on profound differences over the structure of
the policy and the future structure of Medicare itself. The
structure of the policy determines the function of both the public
and private entities affected by it. The structure will determine
the dynamics of the system. The "gap"-toothed structure of the
Senate proposal literally invites "remedial" action by
congressional liberals, who now believe that$400 billion
expenditure for prescription drugs over a decade is paltry stuff.
Under the Senate bill, Medicare patients would pay a $35 per month
premium and a $275 deductible. Between $276 and $4500, the
government would pay 50 percent of the drug costs. At $4500, the
Medicare beneficiaries would be responsible for 100 percent of the
costs until their personal out of pocket expenses reached $3700,
and then the government would pick up 90 percent of the drug costs.
In other words, the Senate bill has the proverbial "doughnut
structure is not likely to remain popular among many of the bill's
supporters in Congress and elsewhere, it is also likely that such
"gaps" will be filled rather quickly by Members of Congress who
have always supported a far more generous drug benefit, especially
those in the House of Representatives who are already on record of
supporting a giant prescription drug benefit in excess of $800
billion over the next 10 years. In her ringing support of the
Senate Finance Committee bill, DeParle further urged members of
Congress to fill the gaps immediately: "The Democrats should fight
to improve the bill now--filling in the doughnut hole would be a
The Senate bill's
drug provisions will have several consequences.
- It will displace
existing private-sector drug coverage for millions of seniors. The
Congressional Budget Office estimate that 37 percent of retired
employees with employer-sponsored coverage would lose it under the
bill may yet be a conservative projection. Congress has long been a
fruitful source of unintended consequences in federal health
policy. Currently, 78 percent of all seniors have drug coverage,
mostly through private plans or retiree insurance coverage. As the editorialists of
The Washington Post have warned, "Private employers, for
their part, might well be prompted to drop the drug coverage they
currently offer their retirees." For those seniors who
find themselves with no other alternative but the government plan,
the policy result might prove to be more than a mere personal
- In creating a new
entitlement of unknown cost, it will guarantee that
low-income working people pay the drug bills of rich retirees with
six-figure incomes. Bill Gates, retired as president of Microsoft,
will be subsidized by taxpayers along with the retired librarian.
With universal entitlements, the wealthiest are, after all,
entitled. In the face of relentlessly growing and massive
costs, larger demands on general revenues and taxpayer's wallets to
sustain the Medicare program, this is bad public policy.
- The new drug
entitlements will dramatically increase the claims processing for
the Medicare bureaucracy and its contractors. That will probably be
dismissed as a minor administrative burden in a program that is
already in managerial meltdown, but the explosion of utilization
will engender soaring costs that can and will be controlled only
through price controls and a direct or indirect rationing of drugs.
It is only a matter of time. In Medicaid, we have a very clear
example of what to expect with a government run prescription drug
What is happening in Medicaid today could very well be the future
of drug coverage in Medicare.
The Senate bill
(Title II) repeals the "Medicare+Choice" program and replaces it
with a new " Medicare Advantage" program. The residual law
governing the new program, however, is the statutory foundation of
the Medicare+Choice program, which is burdened by government
payment rules and over-regulation. For example, the private-sector
plans would be required to offer drug coverage that meets the
statutory requirements of the new government drug program. This may
be well intentioned, but it is not a prescription for flexibility
in benefit design.
In effect, the
Senate bill prescribes a standardization of the drug benefit for
private health plans, something that does not exist in the FEHBP.
Moreover, in a departure from the FEHBP model, every plan must also
cover every benefit and service covered today in Medicare Parts A
and B; this is not the FEHBP model, which specifies only
categories of benefits and allows plans to offer different
benefit packages and combinations of benefit packages. FEHBP
enrollees can pick and choose a variety of benefit combinations,
low cost to high cost. The Senate bill would unnecessarily
sacrifice this flexibility in private sector benefit design, and
the concomitant satisfaction of consumer demand.
For private health
plans, the Senate bill provides for payment on the basis of
regional benchmarks, which, in turn, are based on Medicare's
existing systems of administrative pricing. With continued
pressures to control Medicare costs, now and well beyond the time
the first wave of baby boomers start to retire, this payment system
could discourage private plans from participating in the new
system. Already insurance carriers have expressed some hesitancy,
based on previous experience with the heavily regulated
Medicare+Choice program. In the case of PPOs, only the three
lowest-cost plans would be allowed to participate in any given
region under the Senate bill, a direct restriction on consumer
choice and competition.
provisions of Medicare advantage, as outlined in the Senate bill,
could lay the groundwork for the tiresome replication of the kind
of intrusive and stifling regulatory regime that severely damaged
the Medicare+Choice program, As the editors of the Post
remarked, "Plans to add another private option for Medicare
recipients seemed doomed to failure, as Congress wants it regulated
in such a way that it's hard to see why any profit-making company
would want to get involved."
The Cost Issue
The CBO has
estimated that the Senate bill's drug provisions would cost $408
billion between 2004 and 2013. The Senate bill
provides some offsets in several areas to reduce the overall costs
of the bill, including freezes in the area of durable medical
equipment, lab coinsurance and deductible changes, an increase in
the part B deductible, and changes in payment for "covered"
outpatient prescription drugs. Taxpayers will find out soon enough
whether the Congressional Budget Office estimate is correct. It is
likely that the $400 billion figure is going to be a floor, not a
ceiling on program expenditures.
At the same time,
many members of Congress apparently believe that Medicare, through
its complicated fee schedules and price controls, provides a
superior way to control health care costs. Contrary evidence is
often ignored. In fact, a comparative analysis of Medicare and the
FEHBP, recently conducted by the Joint Economic Committee (JEC),
found that FEHBP is, in effect, superior to Medicare in cost
control. According to the JEC report, the FEHBP has delivered cost
control that is comparable to Medicare, even though it offers a
richer benefits package. Over the last twenty years,
according to the JEC, Medicare cost growth per average enrollee was
6.7 percent per year, while FEHBP costs grew at 6.5 percent per
year. If FEHBP plans did not offer prescription drug coverage, the
JEC found that FEHBP costs would have grown by only 5.8 percent per
Another Failed Experiment
should be a policy success, not another vehicle for the expansion
of bureaucratic control over the financing and delivery of health
First, in order to
solve the real problem of seniors without Medicare drug coverage,
the Senate could design a benefit for low income seniors who do not
qualify for Medicaid coverage and who do not have access to
employer-based coverage or affordable supplemental coverage. It is
not necessary to design a universal benefit under Title I of the
Senate bill, when a targeted benefit would resolve the very real,
but less than universal, prescription drug problem of those seniors
designing a new "Medicare Advantage" program under Title II and
Title III, the statutory model for participating private plans
should be based on the best features of the FEHBP (Chapter
89 of Title V of the United States Code), which is targeted, light
on both bureaucracy and regulation. This is not a "pie in the sky"
option, but a very real, working model of a successful
public-private partnership. The FEHBP model is far from perfect, as
every Member of Congress and every staffer enrolled in it knows,
but it is a good model, and a sound basis for renovating the
Medicare program. The key objective is to create a similar
structure, and provide for a smooth transition into such a
structure, so that the Medicare program can absorb the demographic
shock of the baby boom generation, which is set to retire in just
needs real Medicare reform, not another failed experiment.