The Heritage Foundation

Executive Summary #1860 on Health Care

June 14, 2005

June 14, 2005 | Executive Summary on Health Care

Executive Summary: High Anxiety: Implementing the Medicare Prescription Drug Program

Members of Congress deserve an early warning: On January 1, 2006, the huge Medicare prescrip­tion drug entitlement goes into effect. At issue is whether or not the Medicare bureaucracy can administer the program without disrupting the lives of millions of senior citizens and within the rigid requirements and tight timetables established by Congress.

Over the next several months, the Medicare bureaucracy must accomplish an enormous num­ber of difficult tasks that entail large risks to seniors if they are not done right. One thing is certain: If there are glitches in the Medicare drug implemen­tation next year, Congress can expect angry calls and letters.

In January 2005, the Centers for Medicare and Medicaid Services (CMS) issued 1,162 pages of final regulations governing the administration of the Medicare prescription drug entitlement. This massive regulatory output is the culmination of months of preliminary work to implement Con­gress's latest, and perhaps most ambitious, experi­ment in government central planning. Congress authorized $1 billion to fund implementation of this program, including outreach and education of seniors.

Multiple Problems. Over the next few months, Members of Congress, seniors, and taxpayers will have an opportunity to see how well the federal government regulates the financing and delivery of prescription drugs. In a program of this size, one can expect a variety of administrative glitches. But the most serious problems, rooted in the Medicare law itself, are already surfacing:

  • Gaps in Drug Coverage. Millions of seniors will fall into the congressionally designed "doughnut hole" next year and will be paying 100 percent of their drug costs until they spend a total of $3,600 and then qualify for cata­strophic protection. Kaiser Family Foundation analysts estimate that roughly 6.9 million seniors will end up in the doughnut hole in 2006. A recent Heritage Foundation analysis using Congressional Budget Office (CBO) data shows that the number of Medicare beneficia­ries entering the doughnut hole will increase steadily each month, peaking toward the end of the year. Meanwhile, plan contractors will have to track seniors' "true" out-of-pocket spending, under CMS supervision, and track it accurately. If they do not, Congress will surely hear from angry seniors.
  • Loss of Existing Private Coverage. While the federal government will end up purchasing 60 percent of all drugs sold in America, millions of seniors will lose their existing drug coverage or have it degraded. The CBO estimates that 2.7 million seniors will be moved out of their exist­ing employer-based coverage into the new Medicare drug program in 2006. An estimate published by The New York Times puts the fig­ure at 3.8 million. The actual number could be even higher.
  • Greater Cost Shifting to Seniors and Taxpay­ers. Because of the way that Congress drafted the Medicare drug provisions, many large employers will be able to get approximately $71 billion worth of taxpayer subsidies for the costs of providing the drug coverage to retirees over the next 10 years, even if they shift more of the total cost onto retirees. As a result, many seniors will be paying more out of pocket for an inferior drug benefit while employers collect new taxpayer subsidies. This, too, will ensure that Congress receives angry calls and letters next year.
  • Disruption of Existing Drug Coverage for the Poor. For 6.4 million seniors on Medicaid, their drug coverage ends on January 1, 2006. Preliminary research shows that these benefi­ciaries see no reason why they should be forced to change their existing drug coverage. Mean­while, state Medicaid officials, by their own account, face serious practical difficulties in meeting the congressionally imposed deadlines for enrolling millions of these very poor seniors, including those in nursing homes, in Medicare within the statutory timetables.
  • More Bureaucracy and Red Tape. Before enactment of the Medicare Modernization Act, total CMS staff numbered 4,500. However, the new law is increasing the size of the Medicare bureaucracy and broadening its regulatory reach. The CMS says it will need to add at least 500 new employees to administer the drug benefit.

A Better Policy. Short of outright repeal, Con­gress could at least delay the drug entitlement and avoid the massive cost and disruption guaranteed by its implementation. To this end, Representative Jeff Flake (R-AZ) has proposed the Prescription Drug COST (Control Overspending to Save Tax­payers) Containment Act of 2005 (H.R. 1382). The bill would delay the onset of the drug entitlement for one year, retain Medicaid drug coverage for the dual-eligible beneficiaries in 2006 under current terms and conditions, and continue to provide the Medicare drug discount card and subsidies to low-income persons for another year.

A delay of a year or longer would not only save tens of billions of dollars in the first year alone, but also enable Congress to take the time to fashion a rational and responsible drug benefit and to deter­mine precisely how the taxpayers and seniors are going to finance it. Meanwhile, Congress can still target generous help to seniors who do not have drug coverage or who need direct help in purchas­ing drug coverage.

Robert E. Moffit, Ph.D., is Director of the Center for Health Policy Studies at The Heritage Foundation.

About the Author

Robert E. Moffit, Ph.D. Senior Fellow
Center for Health Policy Studies