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WebMemo #857 on Health Care

September 22, 2005

Paying for Katrina Relief: Cancel or Delay the Medicare Drug Benefit

By

Katrina relief and recovery could cost taxpayers hundreds of billions of dollars in additional spending, driving up deficits, but still the costly new Medicare drug entitlement is scheduled to go into effect on January 1, 2006. Sen. John McCain (R-AZ) says that, in light of Katrina, America's taxpayers cannot afford this massive and unnecessary Medicare entitlement expansion next year.[1] Meanwhile, members of the House Republican Study Committee have proposed a one-year delay of the benefit to offset rapidly rising Katrina-related costs. Delaying the prescription drug benefit for one or two years would save tens of billions of dollars that could be put to better use in Katrina recovery.

 

Staggering Costs

Title I of the Medicare Modernization Act of 2003 is projected to cost $37.4 billion in 2006 and $52.5 billion in 2007 alone.[2] Moreover, according to the Medicare Trustees, the Act's universal entitlement to prescription drugs within Medicare will add a staggering $8.7 trillion to Medicare's long-term total unfunded liabilities, or nearly 30 percent of Medicare's total long-term debt of $29.7 trillion.[3] This will crowd out other federal spending priorities and impose enormous burdens on current and future taxpayers.

 

While some in Congress would like to expand the drug entitlement further, worsening the financial condition of the program and adding even more crushing debt, responsible Members of Congress realize that rapidly expanding entitlements must be addressed sooner rather than later. As the universal entitlement is simply unaffordable, it should be struck or delayed and funds should be targeted to the minority of senior citizens who do not have or cannot afford prescription drug coverage.

 

Focusing on Need

The hundreds of thousands of Americans whose lives have been upended by Katrina are in desperate need, and providing effective relief is urgent. In contrast, moving forward in 2006 with a massive Medicare entitlement expansion, much of which will subsidize wealthy and middle-class retirees at the expense of young working families, is neither noble nor necessary. Congress needs to revisit the Medicare drug bill because:

                         

  • The costly universal benefit is unnecessary. Roughly three-quarters of senior citizens already have some form of drug coverage, either through former employers and private insurance or through Medicaid. During congressional debate on the Medicare Modernization Act of 2003, advocates of a universal drug entitlement did not produce a shred of evidence showing that access to drug coverage was a problem for more than a minority of senior citizens: those ineligible for Medicaid, too poor to buy private insurance coverage, and without private coverage through former employers. At the time, this was confirmed by independent analyses, as well as by studies from the Congressional Budget Office and the Joint Economic Committee. Congress simply ignored the professional literature and insisted on the creation of a universal drug entitlement.
     
  • The Medicare drug entitlement will disrupt existing coverage for millions of senior citizens. While congressional proponents of the universal entitlement say that the drug benefit is "voluntary," this is misleading. It is clearly not true for the 6.4 million seniors who are dually eligible for Medicaid and Medicare. On January 1, 2006, their current Medicaid coverage ends, and they are required to enroll in the Medicare drug program regardless of their personal wishes or the wishes of their caregivers. Moreover, millions of seniors enrolled in private coverage sponsored by former employers will see their existing coverage scaled back to a statutory standard set by Congress or dropped altogether. The Congressional Budget Office estimates that 2.7 million seniors will be moved out of employer-based coverage into the new drug program in 2006; other estimates are even higher.[4] In any case, the new entitlement will accelerate the decline of private, employer-based retiree drug coverage.

    Beyond the displacement of existing private-sector drug coverage, the Kaiser Family Foundation estimates that 6.9 million seniors will end up in the notorious drug benefit "donut" hole in 2006, paying 100 percent of their drug costs.[5] Given rapidly escalating drug costs for the sickest seniors and the way the entitlement is designed, the number of seniors stuck in the "donut hole" will grow progressively during 2006, reaching more than 4 million towards the end of the year.[6]
     
  • The Medicare drug entitlement still does not have a high level of support from the senior population that it is supposed to benefit. The most recent survey research from the Kaiser Family Foundation shows that only 32 percent of seniors have a "favorable" impression of the Medicare drug benefit and 32 percent of seniors have an "unfavorable" view, while 36 percent are either neutral or don't know what to think about it.[7] In dramatic contrast to the original Medicare Catastrophic Coverage Act of 1988-which was partially undone by rising cost estimates and repealed in 1989[8]-the Medicare Modernization Act of 2003 never enjoyed broad support in Congress or among the general public.

Conclusion

America must help the victims of Hurricane Katrina rebuild their lives and their region, which is a vital part of the nation. This is an urgent necessity. Because the cost will be enormous, Congress must find ways to offset current and projected spending.

 

Title I of the Medicare Modernization Act of 2003, the universal drug entitlement, is neither necessary nor desirable. The best policy is to repeal most of Title I but retain the Medicare drug discount card and its provision for assistance for low-income seniors. Congress could make this direct assistance even more generous for poor seniors without drug coverage, while going back to the drawing board to create a more rational and fiscally responsible drug Medicare benefit. A redrawn benefit should target increasingly limited taxpayers dollars to those seniors who need help the most.

 

Short of repeal of Title I, Congress could delay implementation of the Medicare drug provisions for one or preferably two years. Again, Congress could still retain the Medicare drug discount card and continue to use it to target direct assistance to needy seniors who lack prescription drug coverage. The Medicaid dual-eligible population would remain in Medicaid for prescription drug coverage during any period of delay. This, in substance, is the policy embodied in The Prescription Drug Cost Containment Act of 2005 (H.R. 1382), authored by Rep. Jeff Flake (R-AZ).  

 

With soaring estimates of the cost to respond to Hurricane Katrina, Congress must carefully balance its spending priorities, such as providing funds for disaster relief and reconstruction while helping seniors in need afford prescription drugs. Allowing the massive Medicare prescription drug benefit to go into effect would directly undercut these goals. Congress should delay the universal benefit and focus on the less costly alternative of targeting aid to those who need it.

 

Further Reading

Edmund F. Haislmaier, "Weird Science: Projecting The Effects of Medicare's Odd Drug Benefit Design," Heritage Foundation WebMemo No. 674, March 3, 2005, at http://www.heritage.org/research/healthcare/wm674.cfm.

 

Derek Hunter, "Medicare Drug Cost Estimates: What Congress Knows Now," Heritage Foundation Backgrounder No. 1849, April 28, 2005, at www.heritage.org/research/healthcare/bg1849.cfm.

 

Robert E. Moffit, "High Anxiety: Implementing The Medicare Prescription Drug Program," Heritage Foundation Backgrounder No. 1860, June 14, 2005, at http://www.heritage.org/research/healthcare/bg1860.cfm.

 

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



[1] "McCain Says Ditch Prescription Drug Benefit," White House Bulletin, September 20, 2005.

[2] Based on February 2005 CMS estimates. See Derek Hunter, "Medicare Drug Cost Estimates: What Congress Knows Now," Heritage Foundation Backgrounder No. 1849, April 28, 2005, at http://www.heritage.org/research/healthcare/bg1849.cfm.

[3] Ibid.

[4] For an account of the Medicare drug bill's implementation problems, see Robert E. Moffit, "High Anxiety: Implementing The Medicare Prescription Drug Program," Heritage Foundation Backgrounder No. 1860, June 14, 2005, at http://www.heritage.org/research/healthcare/bg1860.cfm.

[5] Ibid. at p. 3.

[6] On this point, see Edmund F. Haislmaier, "Weird Science: Projecting The Effects of Medicare's Odd Drug Benefit Design," Heritage Foundation WebMemo No. 674, March 3, 2005, at http://www.heritage.org/research/healthcare/wm674.cfm.

[7] The Henry J. Kaiser Family Foundation, "Views on The Medicare Prescription Drug Benefit," (August 2005). Over a two-year period, there has been a steady decline in the drug benefit's "unfavorable" ratings and a slight increase in the numbers of seniors who have a "favorable" view. However, it has not generated the kind of popular support its congressional advocates had anticipated. The latest data was compiled from the Kaiser Family Foundation Health Poll Report Survey, conducted August 4-8, 2005.

[8] For an account of the rise and fall of the Medicare Catastrophic Coverage Act, see Robert E. Moffit, "The Last Time Congress Reformed Health Care: A Lawmaker's Guide to the Medicare Catastrophic Debacle," Heritage Foundation Backgrounder No. 996, August 4, 1994.

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