More Taxpayer Subsidies Will Not Correct Congress' Medicare DrugMiscalculation

Report Health Care Reform

More Taxpayer Subsidies Will Not Correct Congress' Medicare DrugMiscalculation

October 27, 2003 7 min read
Derek Hunter
Former Research Assistant
Derek is a former Research Assistant.

House and Senate Medicare conferees are scrambling to find a solution to the problem of senior dumping[1] - which will occur when former employers drop current retirees into the proposed new government entitlement.


Roughly 10 million seniors currently lack coverage. It is not too late for Congress to target those in need without hurting those who are not.


Dumping Seniors
The Congressional Budget Office still insists that if either the House or Senate bill becomes law, roughly 4 million seniors who currently have drug coverage through their former employer would lose that coverage and be dropped into the new government entitlement.[2] Emory University Professor Ken Thorpe, former health care policy advisor to President Bill Clinton, has made similar estimates.[3]


Both bills create a universal drug entitlement for all seniors, regardless of income or need. With the government willing to pick up these prescription drug costs for all seniors, only contractually bound companies would be certain to continue offering coverage.


For example, union contracts expire and must be renegotiated; therefore, all retiree prescription drug coverage is potentially vulnerable.


Members of the conference committee know this, and more importantly, the 12 million retirees who depend upon employer-provided drug coverage are also becoming aware of it.


Hitting the Taxpayer-Again
Conferees are now toying with the idea of subsidizing companies that provide retiree drug coverage with billions of taxpayer dollars in the hope they will continue to offer such coverage.


According to Sen. Charles Grassley, R-Iowa, the conferees are considering spending $75 billion to $80 billion in taxpayer dollars. In other words, to fix the Medicare miscalculation, the conferees are considering allocating roughly the same amount to prop up the drug entitlement as they are prepared to spend on reconstruction efforts in Iraq. Presumably, this spending would be in the form of corporate subsidies beyond those already contained in the Medicare legislation.[4] The conferees are also considering a new system of tax credits for companies so that "employers…set aside money for retiree health care."[5]


The bottom line: Congress is considering paying companies to continue to cover something they already cover in order to deflect political heat from seniors who face the loss of trusted benefits. In other words, Congress made a mistake, and the taxpayers are now expected to pay for that mistake.


Resurrecting the Clinton Medicare Policy
In 1999, President Clinton proposed adding prescription drugs to Medicare in the form of a universal entitlement and ran into the same problem of corporations facing powerful incentives to start dumping retirees. Like prominent Republicans on the Senate Finance Committee today, Clinton then also proposed a new round of subsidies to companies with retiree drug coverage to discourage patient dumping.


Under the Clinton Medicare plan, companies would have received a subsidy that "is up to the level of one-third of the cost of the Clinton plan proposal for everyone who is enrolled in an employer-sponsored plan."[6] Interestingly, the House and Senate conferees are considering paying "companies 28 percent of drug costs incurred by their retirees" as one of the ways to combat dumping.[7]


Creating a New Set of Problems. Paying federal subsidies to corporations to keep them from dumping retirees may not even work. While some companies would be swayed by the desire to keep employees happy, improve their public relations, or wishing to have a strong recruiting tool for future employees, many firms would view this for what it is: an unprecedented opportunity to unburden themselves of a huge liability at the expense of the taxpayers.


In 1999, the Clinton Medicare drug proposal would have caused anywhere from 25 percent to 75 percent of retirees to be dumped out of private coverage.[8] Commenting on the Clinton drug entitlement and its employer subsidies, Dwight Bartlett of the American Academy of Actuaries, said:


Will that be sufficient to induce employers to keep their prescription drug coverage for their retirees in place? I think that's questionable. Frankly, wouldn't you rather have the government pay 100 percent of the cost than one-third of the cost if you keep the coverage in place?[9]


Today, the economic incentives to dump are even more powerful. It is estimated that General Motors alone could save $150 million per year by dropping retiree drug coverage.[10] Even if the government were to pay for 90 percent of that, General Motors would still be left with a $15 million bill every year. If a company could escape the entire liability, there is no obvious reason why it would not take advantage of it. So the offer of a subsidy or a tax credit is no guarantee of the safety of seniors' private drug coverage.


The proposal for either special tax breaks or flat-out subsidies raises some interesting new policy problems. If Congress wants to guarantee that seniors maintain their current coverage without change or deterioration, a direct, up-front federal subsidy to the company for some specified period of time would seem to be the best alternative. If a given company makes an agreement not to reduce or eliminate seniors' coverage, it would get that subsidy for some specified period of time, perhaps a year or two, and the federal government would police the company's drug benefit package to make sure that there is no diminution of the benefit as the condition of the federal subsidy. While a special tax credit would be more administratively complex, it would engender similar political dynamics: intense lobbying by either retirees or company officials for the continuation of the special assistance. 


However, in either case, the enactment of a subsidy or a credit would almost certainly require a change in the Employment Retirement Income Security Act of 1974, the law governing self-insured companies. And this would mean that, for the first time, the government would be in the business of determining and enforcing a benefit standard for self-insured firms. This would be a major policy change and would be a significant step toward federal regulation of the details of company health insurance provisions.


A Better Solution: Targeting the Drug Subsidies
Slightly more than 40 million seniors are on Medicare, and more than three fourths of all seniors have some form of prescription drug coverage.[11] That leaves roughly 10 million seniors, at most, with no coverage, many of whom are low-income seniors who do not qualify for Medicaid, which does cover prescription drugs. These seniors who truly need help could be easily identified and targeted for help without disrupting the coverage of others who currently do not need help.


It is not too late for Congress to correct its current course and help only those in need without harming those who aren't, disrupting existing coverage, and creating a new scheme of corporate welfare that costs taxpayers billions more than they are already expected to pay.

[1]Sarah Lueck, "Medicare Talks Focus on Perks for Employers to Retain Benefits," The Wall Street Journal, October 15, 2003.

[2]Congressional Budget Office, "H.R. 1: Medicare Prescription Drug and Modernization Act of 2003 and S. 1: Prescription Drug and Medicare Improvement Act of 2003," Congressional Budget Office Cost Estimate, July 22, 2003.

[3]Ken Thorpe, "Potential Implications of the Medicare Prescription Drug Benefits on Retiree Health Care Benefits," Emory University, September 13, 2003.

[4]David Espo, "Lawmakers to Miss Drug Bill Deadline," Boston Globe, October 14, 2003.

[5]Mary Agnes Carey, "Medicare Bill May Expand to Protect Retirees' Benefits," CQ Today, October 15, 2003.

[6]Remarks by Dwight Bartlett at The Heritage Foundation, August 18, 1999, in "A High Price Prescription: Clinton's Medicare Drug Proposal,"Heritage Foundation Lecture No. 647, November 3, 1999.

[7]Bill Walsh, "Drug Bill May Have Bad Side Effect; Employers Could Cut Retirees' Insurance," Times-Picayune, October 10, 2003.

[8]James Frogue and Robert E. Moffit, Ph.D., "A Closer Look at Clinton's Medicare Proposal," Heritage Foundation Backgrounder No. 1346, February 17, 2003.

[9]Bartlett remarks, op. cit.

[10]Sarah A. Webster, "Medicare Drug Plan May Save Carmakers Millions; Retiree Health Bills in Congress Likely to Affect UAW Talks," Detroit Free Press, July 8, 2003.

[11]Joint Economic Committee, U.S. Congress, "Medicare Beneficiaries' Link to Drug Coverage," April 10, 2003.


Derek Hunter

Former Research Assistant