Medicare, the huge government insurance
program that covers 41 million seniors and disabled citizens, is
facing a major financial crisis. None of this is surprising.
Rising Costs
Title I of the Medicare Prescription Drug
Improvement and Modernization Act of 2003 creates a new and complex
universal prescription drug entitlement. According to the latest
Medicare trustees report, the Medicare hospital insurance program
will be exhausted in 2019, seven years earlier than the past year's
estimate. But that
is just the tip of the iceberg. The hospital insurance trust fund
does not include the new drug entitlement, and that alone will add
$8.1 trillion to the program's long-term unfunded liabilities over
the next 75 years.
Medicare's massive costs will result in
huge tax increases. According to Medicare Trustee Thomas R. Saving,
a professor of economics at Texas A&M University and senior
fellow at the National Center for Policy Analysis, the Medicare
program is now projected to consume:
- 24 percent of all federal income taxes by
2019 and
- 51 percent of all federal income taxes by
2042.
The
true cost of the drug entitlement expansion is unknown, and the
trustees could be understating the real cost. When the new Medicare
law was enacted in 2003, the Congressional Budget Office (CBO)
estimated the 10-year cost at $395 billion. Less than three months
later, the White House Office of Management and Budget (OMB)
revealed that it estimated the 10-year cost at $534 billion.
More
recently, Richard S. Foster, Medicare's chief actuary, said, "All
our estimates showed that the cost of the drug benefit, through
2013, would be in the range of $500 billion to $600 billion." This is just for the
next 10 years, before the baby-boom generation hits the program.
All of the various government actuaries have concluded that
taxpayers will likely pay far more than the initial official
estimates for the first 10 years and trillions of dollars after
that.
Ironically, the entire financial situation
could be far worse. During the debate on the new drug entitlement,
Democrats offered proposals that would have cost nearly $1 trillion
in the first 10 years, far in excess of anything proposed by
the Administration or the congressional leadership. Many critics of
the new drug program actually want a more expensive program.
Bad Drug Policy
When
the new drug entitlement takes effect in 2006, seniors will pay an
estimated $420 in additional drug-related premiums in the first
year, plus a $250 deductible. The government would then pay 75
percent of drug costs up to $2,250. Above that amount, seniors
would pay $3,600 out of pocket--the "doughnut hole"--before
becoming eligible for catastrophic coverage, with the government
paying 95 percent of catastrophic costs and seniors paying 5
percent. Unlike the hospitalization payments, which are drawn from
dedicated taxes deposited in a trust fund, the government will pay
for the drug benefit from general revenues.
In
the meantime, the new Medicare law creates a prescription discount
drug card, effective this year, that includes a $600 subsidy for
low-income seniors. Unlike the subsidies provided for seniors under
the drug entitlement, the drug card subsidies do not require an
asset test for eligibility. The discount card is projected to save
between 10 percent and 25 percent. For many seniors, especially
poor seniors without coverage, this is an attractive program; it is
also market-friendly and builds on existing private-sector
entities. Remarkably, Congress has decided to kill this promising
program after just two years of operation.
Thus, the drug discount card is temporary
and expires in 2006, but the new drug entitlement is permanent and
would take effect in 2006, accelerating the displacement of the
existing drug coverage for millions of retirees, including the
coverage that many seniors have today through former employers. So
Congress has enacted a universal government drug entitlement,
setting in motion dynamics that will crowd out other
alternatives.
A Better Medicare Drug Policy
Congress made a huge mistake in enacting
the universal drug entitlement and should deal with the emerging
financial problems of Medicare, including the prescription drug
problem, as quickly as possible. Specifically, Congress should:
- Delay the
implementation of the universal drug entitlement scheduled for
2006. Even without a prescription drug entitlement,
Medicare is facing formidable financial challenges. A range of
public and private-sector health policy analysts have repeatedly
warned Congress of the gravity of these challenges and have
recommended serious structural changes to Medicare, such as a
premium support financing system, to enable the program to deliver
high-quality health care to future retirees.
In the meantime, Congress has not yet adopted a strong mechanism to
cope with future entitlement costs and the unfunded liabilities
that face current and future generations of taxpayers. This needs
to be done before any new entitlement begins in 2006. In the face
of these unmet challenges, there is no good reason for Congress to
expand the Medicare entitlement, displace existing drug coverage,
and accelerate the loss of drug coverage offered to retirees
through former employers.
- Make the drug
discount card program a permanent feature of Medicare. The
Centers for Medicare and Medicaid Services staff is already
processing applications from over 100 companies that want to offer
the drug discount cards on a regional or national basis. The
infrastructure for a potentially successful program is already
being established. There is no good reason to shut down the entire
operation and deprive seniors of a personal choice. Indeed, the
drug discount card program, combined with catastrophic coverage and
even richer subsidies to low-income seniors, could be the
foundation of a superior drug option for Medicare
beneficiaries.
Federal subsidies to low-income seniors, or those without drug
coverage, could be delivered through debit cards issued by private
health plans. Any qualified health plan that provides for
catastrophic coverage and meets current federal or state insurance
regulations should be able to participate. Income-related subsidies
could be channeled through qualified health plans. This would give
Medicare beneficiaries a strong incentive to sign up for drug
coverage and minimize adverse selection.
Like the entities offering the drug discount cards, the plans could
be national or regional and could be required to disclose
information that would allow for consumer comparisons. Consumer
comparisons are routine under the Federal Employees Health Benefits
Program (FEHBP), the popular and successful program used by federal
employees and retirees.
- Integrate the
drug discount card program into the new Medicare Advantage
program. Medicare beneficiaries should be allowed to
continue to use the drug discount card, and the subsidies for
low-income seniors should be retained or even increased. In 2006,
the Medicare Advantage health plans, including new regionally based
preferred provider organizations, will be available to seniors.
These health plans should have the opportunity to integrate the
drug discount card and low-income drug assistance programs into
their health plan offerings. Unspent funds for those who are
subsidized through the discount card could be rolled over tax-free
from year to year, much like a health savings account.
Conclusion
Taxpayers face a serious financial problem
in the Medicare program. As Professor Tom Saving, a Medicare public
trustee, has reported, the program is projected to consume over
half of all federal income taxes by 2042.
Taxpayers can expect the real costs of the
drug entitlement to be much greater than the initial published
estimates. Worse, some Members of Congress are claiming that the
current drug entitlement subsidy is not enough and want to fill the
entitlement's unpopular "doughnut hole" and double the initial
expenditures on the new entitlement. Such prescriptions would not
only worsen Medicare's already difficult financial problems, but
also pave the way for government restrictions on prescription drugs
for seniors. To control costs of the drug entitlement program, the
government would somehow have to limit the supply of drugs,
probably through tighter drug formularies or some form of
government price fixing or purchasing mechanism. Yet, with demand
for prescription drugs rising rapidly, the government cannot
provide more by paying less.
There is a better alternative. Members of
Congress should get a handle on the exploding costs of the Medicare
program before implementing a universal entitlement expansion. To
that end, they should at least delay implementation of the drug
entitlement while making the prescription drug discount a permanent
feature of Medicare, including the new Medicare Advantage system
that will take effect in 2006. Such a policy could establish the
foundation for a more rational and responsible Medicare drug
program: one that accommodates, rather than displaces, a wide
variety of private-sector drug options.
Of
course, Congress can also choose to do nothing.
But
nothing will be very expensive.
Robert E. Moffit, Ph.D., is Director
of the Center for Health Policy Studies, and Brian M. Riedl is
Grover M. Hermann Fellow in Federal Budgetary Affairs in the Thomas
A. Roe Institute for Economic Policy Studies, at The Heritage
Foundation.