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WebMemo #464 on Health Care

April 1, 2004

How the Drug Entitlement Drives Different Medicare Cost Estimates

By

The Congressional Budget Office (CBO) estimates that the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 will cost $395 billion over 10 years, while actuaries for the Centers for Medicare and Medicaid Services (CMS) estimate $534 billion. Why this discrepancy? The chief culprit is the drug benefit, which accounts for about $100 billion of the difference, according to CBO Director Douglas Holtz-Eakin.[1] And if history is any guide, the final cost of the 2003 Medicare Act will be far higher still than today's estimates.

                       

The heightened concern over the costs of the legislation comes in the wake of the recent release of the 2004 report of the Medicare Trustees, which projects a sharp deterioration in the financial health of the troubled Medicare program. [2]

 

Differing Assumptions Cause Differing Cost Estimates

  • Medicare Part D Assumptions. Medicare Part D is the new part of Medicare that provides for a universal drug entitlement. Since participation in Medicare Part D is voluntary, an important factor in estimating its cost involves determining how many Medicare beneficiaries will choose to participate in it come 2006, the first year of the new drug entitlement. No one knows for sure how many seniors will sign up for the new benefit, either by choice or by being dumped into it by their former employers.[3] CMS assumes 94 percent of Medicare beneficiaries will sign up, while CBO estimates that number to be 87 percent.[4]

    The reason for this 7 percent difference is that CBO does not include those Medicare enrollees who chose not to enroll in Medicare Part B, which covers general, outpatient health care. Participation in Part B is voluntary, and the federal government subsidizes 75 percent of Medicare Part B premiums. CBO assumes that seniors who have already turned down such a generous federal subsidy would do the same with a similar offer for drug coverage. CMS does not.[5]

    Also excluded by CBO are "some beneficiarieswho have generous prescription drug coverage through the Federal Employees Health Benefits program (FEHBP) and other federal programs."[6]

    Which estimate is correct, or more correct, will only be revealed over time. But past 10-year cost projections for proposed Medicare drug benefits show a history of ever-rising costs.[7]
  • Medicare Advantage Assumptions. The new Medicare law replaces the current "Medicare+Choice" program with a new "Medicare Advantage" system. This will be a system of private health plans, including regionally based preferred provider organizations (PPOs) that will compete for Medicare beneficiaries beginning in 2006. There is a $32 billion difference between CMS's and CBO's cost estimates for Medicare Advantage. CBO estimates the 10-year cost of Medicare Advantage to be $14 billion, while CMS estimates the same program to cost $46 billion.
    These estimates differ because of, once again, differing assumptions about enrollment. CMS estimates 32 percent enrollment, while CBO estimates only 9 percent.
    [8]

 

Conclusion

Today's heightened concern over costs comes in the wake of the 2004 report of the Medicare Trustees, which projects a sharp deterioration in the financial health of the troubled Medicare program. While Congress is right to take Medicare's rising cost seriously, there is no reason to believe that the differences in the CMS and CBO cost estimates are anything but legitimate differences in analysis.

 

CMS estimates the cost of the Medicare law to be $139 billion more than CBO because they use two different sets of assumptions, both of which may prove to be wrong. The lion's share of the difference lies in the drug benefit itself and differing estimates of how many seniors will participate, and not in the projected payments to private plans in Medicare Advantage. While only the future will tell which estimate is more accurate, the 2003 Medicare Act-and especially the prescription drug benefit-will likely cost far more than many of today's estimates, if history is any guide.

 

Derek Hunter is Research Assistant in the Center for Health Policy Studies at The Heritage Foundation.



[1] Douglas Holtz-Eakin et al., "Comparison of CBO and Administration Estimates of the Effect of H.R. 1 on Direct Spending," Congressional Budget Office, February 2, 2004. /static/reportimages/D90DA099C4728D13E97E335680D41326.pdf

[2] On this issue, see Robert E, Moffit and Brian M. Riedl, " Medicare's Deepening Financial Crisis: The High Price of Fiscal Irresponsibility," Heritage Backgrounder No. 1740, March 25, 2004.

[3] For more information see Edmund F. Haislmaier, "How Congress's Medicare Drug Provisions Would Reduce Seniors' Existing Private Coverage," Heritage Foundation Backgrounder No. 1668, July 17, 2003. http://www.heritage.org/Research/HealthCare/bg1668.cfm

[4] Holtz-Eakin et. al.

[5] Ibid.

[6] Ibid.

[7] For more information see Derek Hunter, "The Sky's the Limit: Medicare's Upwardly Mobile Drug Cost Projections," Heritage Foundation WebMemo No. 326, August 12, 2003. http://www.heritage.org/Research/HealthCare/wm326.cfm

[8] Holtz-Eakin et. al.

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