The Heritage Foundation

Executive Summary #1668 on Health Care

July 17, 2003

July 17, 2003 | Executive Summary on Health Care

Executive Summary: How Congress's Medicare Drug Provisions WouldReduce Seniors' Existing Private Coverage

Millions of seniors stand to lose their private employer-based drug coverage or find that their existing drug coverage is significantly scaled back from what it is today. That is the likely result if provisions in major Medicare legislation recently approved by both houses of Congress (S. 1 and H.R. 1) to provide all Medicare beneficiaries with a new Medicare prescription drug benefit are approved in their current form.

A House-Senate conference committee is now attempting to reconcile the differences between the two massive bills. Rather than reconciling two profoundly flawed bills, however, the conferees should go back to the drawing board. They should use as a blueprint the 1999 majority recommendations of the National Bipartisan Commission on the Future of Medicare, which proposed that Medicare beneficiaries be given a choice between traditional Medicare as it exists today and new, private plans offering comprehensive, integrated benefits including full outpatient prescription drug coverage.

Replay of a Bad Policy

This is not the first time that Congress has tried to add a prescription drug benefit to Medicare as a universal entitlement. In 1988, Congress passed the Medicare Catastrophic Coverage Act, which included a Medicare prescription drug benefit. But strong opposition from senior citizens, the law's intended beneficiaries, forced Congress to repeal the legislation a year later. Among the chief opponents of the 1988 Catastrophic Act were retirees with prescription drug coverage provided as a retirement benefit by their former employers. They calculated that under the new Medicare prescription drug program, they would pay more in premiums and receive less generous coverage in return, relative to their existing employer-sponsored coverage.

Now, with the passage of S. 1 and H.R. 1, Congress and the Administration are perilously close to repeating that history. According to The New York Times, "The Congressional Budget Office estimates that 32 percent of retired workers with employer-sponsored drug coverage would lose it under the House bill. The comparable figure for the Senate bill is 37 percent." This implies that the CBO believes about 3.8 million to 4.4 million retirees could lose their employer-provided drug coverage outright.

What has not been closely examined is the effect the legislation would be likely to have on the rest of the approximately 12 million retirees with employer-sponsored drug coverage as well as the approximately 4.8 million additional retirees who have purchased Medicare supplemental insurance (Medigap) plans with prescription drug coverage. A close reading of both bills indicates that those retirees would also experience reductions in their current prescription drug coverage under the pending legislation.

The most likely scenario is that under either bill's provisions, almost all employers currently offering retiree drug coverage sooner or later would drop their coverage outright, scale back their plans' benefits to the new Medicare standard plan design, or replace it with wrap-around coverage that pays the initial deductible and cost-sharing for their retirees. The effects of such wrap-around coverage would be to:

  • Limit employers' liabilities and shift much of the risk and cost for prescription drugs onto the taxpayer.
  • Give retirees with employer wrap-around plans up-front coverage. In other words, they would get free drug coverage on the first $4,500 worth of drugs under the Senate bill or the first $2,000 worth of drugs under the House bill.
  • Force retirees with higher drug costs to pay a large share of the bill. These retirees would be forced to pay entirely out-of-pocket for the next $3,700 worth of drugs under the Senate bill or the next $3,500 worth of drugs under the House bill.

Not surprisingly, retirees are beginning to be concerned about how the pending legislation would affect their existing employer-sponsored or individually purchased coverage. Absent a significant rewrite of the final bill in the conference committee, there is a growing likelihood that those concerns could translate into a full-scale retiree revolt following final passage of the legislation--as was the case with the Medicare Catastrophic Coverage Act in 1989.

Needed: Better Medicare Choices
To head off such a revolt, Congress should scrap the drug provisions in both the House and Senate bills and go back to the 1999 majority recommendations of the National Bipartisan Commission on the Future of Medicare to give Medicare beneficiaries a choice between traditional Medicare as it exists today and new, private plans offering comprehensive, integrated benefits including full outpatient prescription drug coverage.

Such an approach would forestall a brewing political backlash and--even more important--ensure that both today's retirees and tomorrow's retirees get the kind of quality, integrated, chronic care that they need and deserve. It would move Medicare away from its current model of fragmented care that is costly and results in sub-optimal health outcomes for senior citizens. The result would be a system that not only paid for prescription drugs, but also integrated them with other health care benefits to get the most value for seniors out of the ability of drugs to reduce other health care costs and improve the quality of their health outcomes and lives.

Edmund F. Haislmaier is a Visiting Research Fellow in the Center for Health Policy Studies at the Heritage Foundation.

About the Author

Edmund F. Haislmaier Senior Research Fellow, Health Policy Studies
Center for Health Policy Studies

Related Issues: Health Care