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
And if history is any guide, the final cost of the 2003 Medicare
Act will be far higher still than today's estimates.
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.
Differing Assumptions Cause
Differing Cost Estimates
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. CMS assumes 94 percent
of Medicare beneficiaries will sign up, while CBO estimates that
number to be 87 percent.
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.
Also excluded by CBO are "some beneficiarieswho have generous
prescription drug coverage through the Federal Employees Health
Benefits program (FEHBP) and other federal programs."
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.
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.
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
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.
is Research Assistant in the Center for Health Policy Studies at
The Heritage Foundation.