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WebMemo #326 on Health Care

August 12, 2003

The Sky's the Limit: Medicare's Upwardly Mobile Drug CostProjections

By

Update: The Costs Keep Rising (February 9, 2005)

According to the latest official projections, the net, ten-year cost of the Medicare Modernization Act (MMA) drug entitlement is $720 billion.[a]

 

When Congress passed the Medicare Modernization Act in 2003, CBO and Administration officials said that the initial ten-year cost (over the period from 2004 to 2013) was going to be roughly $400 billion. The near doubling of the cost is due to a change in the time window (it is now 2006 to 2015) and to the fact that the initial ten-year estimates included 18 months of the less expensive Medicare Drug Discount Card (MDDC), which was created to fill the void between passage of MMA and implementation of the full drug entitlement in January 2006.

 

The MDDC delivers discounts on prescriptions to enrolled seniors and includes a $600 cash subsidy targeted directly toward low-income seniors. Cost estimates for the 18-month MDDC come in at just $5.1 billion, whereas the first year of the drug entitlement in 2006 is estimated to cost $43.7 billion. Nonetheless, Congress, under current law, will let the MDDC shut down in 2006.

 

Estimates of the 10-year cost of the Medicare drug benefit will only balloon as the baby boom generation starts to retire and join the Medicare rolls. If Congress repealed the entitlement and instead adopted targeted and expanded MDDC program, the new policy could save taxpayers billions while assisting those seniors who actually need help.[b] Congress should take heed not only from the ever-rising cost estimates of MMA but the recent history of drug entitlement proposals for Medicare: Delay only increases the costs.

 


 

Whatever the outcome of the current House-Senate conference on Medicare legislation, taxpayers can depend on one thing: The cost projections of the Medicare drug entitlement keep rising.

 

In less than one month, the Congressional Budget Office (CBO) significantly increased its estimates of the mammoth House and Senate bills. Initial estimates put the cost of the program at $400 billion over 10 years. CBO now estimates that the drug benefit will cost:

  • $432 billion from 2004-2013, in the Senate bill, and
  • $425 billion from 2004-2013, in the House bill.[1]

Universal Benefit Drives Cost

House and Senate leaders refuse to target limited taxpayer funds to low-income seniors who do not have, or cannot afford, prescription drug coverage. Instead, they insist on creating a universal Medicare drug entitlement.

 

House and Senate leaders also ignore the fact that most seniors already have prescription drug coverage from a variety of sources, including private, employer-based retiree coverage. Instead, they insist on displacing existing private coverage in favor of a government entitlement.

 

This means, of course, not only that many seniors will lose their perfectly good existing private coverage, but also that America's current and future taxpayers are going to pay-big-time.

 

Higher Costs A "Down Payment"

The recently passed House and the Senate versions of the proposed Medicare prescription drug entitlement are expensive. Sponsors claimed the provisions would cost about $400 billion over 10 years. Both bills passed on June 27, 2003.

 

Then, on July 22, 2003, the Congressional Budget Office (CBO) issued another report on the bills. The result: The drug benefit in the Senate version of the Medicare drug provisions (S.1) is now estimated to cost $432 billion over the period 2004-2013. The House version (H.R.1) is now estimated to cost $425 billion over the same period.[2]

 

Thus, in less than one month, CBO significantly increased its estimates of the mammoth House and Senate bills. But today's CBO estimates do not, and cannot, take into account what can happen when and if a bill becomes law and is routinely subjected to the legislative changes that Congress, under pressure from liberal seniors' lobbies, can and will make at any time.

 

Senator Edward Kennedy (D-MA), indicating that $400 billion is just a start, made it very clear in an interview with US News & World Report that the current Medicare legislation is a "down payment" on the Medicare drug benefit.[3] With the congressional leadership building the foundation of the Medicare drug entitlement, it is only a matter of time before Members of Congress erect a massive entitlement structure.

 

Ignoring Real Market Competition

The current debate over a Medicare prescription drug entitlement is hardly new. For many years, Members of Congress have pointed to the absence of drug coverage in Medicare as prima facie evidence that the program was both slow to change and too hindered by legislative and bureaucratic inflexibility.

 

Instead of trying to reform the program and attacking the bureaucratic inflexibility at its roots by injecting real market competition into program, however, many Members of Congress have insisted on simply adding a Medicare drug benefit as an entitlement just like other Medicare benefits, to be administered under the same type of structure that governs other Medicare benefits. Likewise, the price tags for these various Medicare drug proposals have risen significantly from year to year.

 

In 1988, Congress passed the Medicare Catastrophic Coverage Act, which included a self-financing prescription drug entitlement. Original CBO estimates put the five-year cost of prescription drugs at $5.7 billion. But less than 12 months later, CBO estimates put the price at $11.8 billion, nearly doubling the earlier projections. These Medicare Catastrophic drug projections, interestingly enough, were positively puny by today's standards. Nonetheless, seniors did not want to pay for the rapidly rising cost of the new benefits, including the new drug benefits. Following protests by angry seniors over how much the law was going to cost them, the law was repealed in 1989.[4]

 

For the Record: Recent Medicare Prescription Drug Proposals

Given past history on Medicare drug cost projections, no one can say with any certainty how much any Medicare prescription drug entitlement will cost. One thing is clear, however: Over time, the costs of Administration and congressional proposals to add a Medicare prescription entitlement have all gone in one direction: up.


Escalating Cost Estimates of a Medicare Drug Benefit

 

1999

 

  • The Breaux-Thomas Proposal. The Bipartisan Commission on the Future of Medicare announced the results of their study on how best to improve Medicare. Along with an overhaul of the Medicare system to include competition between private plans for Medicare recipients' business, the majority of the members of the Commission, led by Senator John Breaux (D-LA) and Representative Bill Thomas (R-CA), called for $60 billion to cover prescription drugs for low-income seniors. The Breaux-Thomas proposal included a targeted drug benefit for low-income seniors within the broader context of an overall reform of the Medicare program, based on the best features of the successful Federal Employees Health Benefits Program (FEHBP). The Clinton Administration strongly opposed the Breaux-Thomas proposal, calling it "inadequate and inefficient."[5]
  • The First Clinton Medicare Proposal. President Bill Clinton proposed a prescription drug benefit as part of a broader package of changes in the Medicare program. The overall Medicare proposal was estimated to cost $374 billion over 10 years and $794 billion over 15 years. For the drug benefit provisions, the Clinton proposal was to cost $118 billion over 10 years.[6]

2000

 

  • The Gore Proposal. Vice President Al Gore, as a presidential candidate, called for adding a prescription drug benefit to Medicare that would cost $253 billion over 10 years.[7]
  • The First Bush Proposal. Governor George W. Bush, as a presidential candidate, proposed an overall reform of Medicare at a cost of $198 billion over 10 years, $158 billion of which was to be used to cover prescription drugs.[8]
  • The Second Clinton Proposal. President Clinton proposed another Medicare prescription drug benefit, this time at a price tag of $160 billion over 10 years.[9]
  • The House Republican Proposal. House Republicans passed a Medicare prescription drug benefit that was estimated to cost $157 billion over 10 years.[10]

2001

 

  • The Graham Proposal. Senator Bob Graham (D-FL) introduced a Medicare prescription drug bill that was estimated to cost $318 billion over 10 years.[11]
  • The Breaux-Frist Proposal. Senators John Breaux (D-LA) and Bill Frist (R-TN) introduced legislation to reform Medicare. The proposal also included provisions to cover prescription drugs in Medicare at a cost of $176 billion over 10 years.[12]

2002

 

  • The Graham-Miller-Kennedy Proposal. Senators Bob Graham (D-FL), Zell Miller (D-GA), and Edward Kennedy (D-MA) proposed an amendment to the Greater Access to Affordable Pharmaceuticals Act of 2001 (S. 812) that was to spend $594 billion over seven years.[13]
  • The Tripartisan Proposal. A proposal sponsored by Senators James Jeffords (I-VT), Olympia Snowe (R-ME), Charles Grassley (R-IA), Orrin Hatch (R-UT), and John Breaux (D-LA) to add a prescription drug benefit to Medicare was defeated in the Senate. It was estimated that the proposal would have cost $340 billion over 10 years.[14]
  • The House Medicare Reform Proposal. The House or Representatives passed a Medicare reform bill that provided $320 billion over 10 years for prescription drugs in Medicare.[15]

2003

 

  • The Second Bush Proposal. President Bush proposed $400 billion over 10 years for a Medicare prescription drug benefit.[16]
  • Senate Medicare Bill (S. 1). On June 27, 2003, the Senate passed a Medicare prescription drug benefit that the CBO estimates would cost $432 billion over 10 years.[17]
  • House Medicare Bill (H.R. 1). On June 27, 2003, the House of Representatives passed a Medicare prescription drug benefit that the CBO estimates would cost $425 billion over 10 years.[18]
  • House Democratic Proposal. House Democrats called for a prescription drug benefit ranging from $800 billion to $1 trillion over 10 years.[19]

Explosive Entitlement Growth

Over the past few years, the cost of proposed Medicare drug provisions has steadily increased. Yet the latest 10-year CBO estimates barely begin to take into account the first wave of 77 million baby-boomers that will begin to retire in 2011. When they do, and their enrollment nearly doubles the size of the Medicare population, Medicare drug costs will soar.

 

Members of Congress should be honest with taxpayers. What members of the House and Senate, as well as the current and the previous Administration, have determined to be necessary to help senior citizens to pay for prescription drugs has increased significantly over the past five years. There is no way to know how much this new entitlement will end up costing taxpayers.

 

Remarkably, the latest $400 billion 10-year cost estimate is already outdated. The CBO projection, in any case, has turned out to be a floor, not a ceiling, for the next explosive growth in federal entitlement spending.



[a] Robert Pear, " New White House Estimate Lifts Drug Benefit Cost to $720 Billion," The New York Times, February 9, 2005.

[b] For more information, see Derek Hunter, "The Truth about the Medicare Drug Discount Card," Heritage Foundation Backgrounder No. 1766, May 28, 2004.

[1]Congressional Budget Office, "H.R. 1: Medicare Prescription Drug and Modernization Act of 2003 and S. 1: Prescription Drug and Medicare Improvement Act of 2003, Congressional Budget Office Cost Estimate, July 22, 2003, p. 3, at http://www.cbo.gov/showdoc.cfm?index=4438&sequence=0.

[2]Congressional Budget Office, "H.R. 1: Medicare Prescription Drug and Modernization Act of 2003 and S. 1: Prescription Drug and Medicare Improvement Act of 2003, Congressional Budget Office Cost Estimate, July 22, 2003, p. 3, at http://www.cbo.gov/showdoc.cfm?index=4438&sequence=0.

[3]Gloria Borger, "Rx Drugs: Whose Issue is it?" US News & World Report, June 30, 2003.

[4]For more information on this, see Robert E. Moffit, "The Last Time Congress Reformed Health Care: A Lawmakers Guide to the Medicare Catastrophic Debacle," Heritage Foundation Backgrounder No. 996, August 4, 1994.

[5]Robert Pear, "Clinton Planning to Cut Long-Term Cost of Medicare," The New York Times, June 27, 1999.

[6]Robert Pear, "Clinton Lays Out Plan to Overhaul Medicare System," The New York Times, June 30, 1999.

[7]Mike Allen, "Bush Details Medicare Plan; Proposal Includes Drug Benefit," The Washington Post, September 6, 2000.

[8]Ibid.

[9]Joseph P. Shapiro, "Medicare's Drug Woes: A Costly but Crucial Plan," US News & World Report, February 21, 2000.

[10]Press release, "Graham Prescription Drug Plan Officially Dubbed Affordable," June 8, 2001, at http://graham.senate.gov/pr060801.html.

[11]Ibid.

[12]"Politics & Policy RX Drug Benefit: CBO Says 'Rival' Plans Are Affordable," American Political Network, American Health Line, Vol. 6, No. 9 (June 11, 2001).

[13]Press release, "Graham-Miller-Kennedy Prescription Drug Benefit Receives CBO Score," July 19, 2002, at http://graham.senate.gov/pr071902.html.

[14]Amy Goldstein and Helen Dewar, "Senate Defeats 2 Drug Proposals; Prescription Cost Accord Is Elusive," The Washington Post, July 24, 2002.

[15]Ibid.

[16]Sarah Lueck, "Federal Worker Health Plan Offers Choices, but at What Cost?" The Wall Street Journal, February 20, 2003.

[18]Ibid.

[19]Editorial, "Into the Medicare Maw," The Wall Street Journal, March 5, 2003.

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