Time to Rethink the Disastrous Medicare Legislation

Report Health Care Reform

Time to Rethink the Disastrous Medicare Legislation

November 17, 2003 15 min read

Authors: Robert Moffit and Stuart Butler

The Medicare conference agreement fails the two critical requirements of a responsible drug benefit program for the nation's seniors. The original idea underlying this legislation was never just about adding drug coverage to Medicare. It was about doing so in a way that would not lead to huge additional liabilities to future generations, and in a way that would reform the program so that it could respond to the changing needs of the elderly and disabled.[1] But the agreement will not lead to that. Instead it guts critical reforms, relegating them to a "demonstration project" that is doomed to failure. And it opens the floodgates to new entitlement spending that will mean huge taxes on future workers.


It is time for Congress and the President to go back to the drawing board and do two things:

  1. Congress should enact a limited measure, based on the discount card agreed to by the conference that will actually help most seniors who now lack affordable drug coverage.
  2. The President and Members of Congress committed to reform must do what they failed to do effectively over the last two years - methodically build the case with the American people for critical reforms in the program. Changes in sensitive programs like Medicare can only be achieved through a public campaign, not through back-door deals.

What's Wrong With the Conference Agreement

Early text from Medicare conferees indicate critical decisions have been made that should cause great concern to reformers and to taxpayers. Among them:

  • The agreement means explosive new costs and huge unfunded liabilities that will burden future generations. In less than a month after the House and Senate passage of the Medicare drug provisions, the Congressional Budget Office revised the projected ten-year costs upwards from $400 billion to $425 billion and $432 billion, respectively.[2]

    But this is just the tip of the iceberg. Of far greater concern is the staggering increase in the unfunded liabilities of an already insolvent Medicare program. The projected unfunded liability of the Medicare drug proposal, for current Medicare beneficiaries alone, is estimated at $2.6 trillion.[3] The projected drug costs will build pressure to repeal the Bush tax cuts[4] and significantly increase the tax burdens on working families and future generations.[5] Instead of adopting a financing mechanism similar to the FEHBP, which would impose a cap on the dollar amount of the government contribution to health plans, the conferees have instead proposed a process for the President and the House and Senate to address formally the future demands on the general revenues required to finance the Medicare program.[6].

    The unintended consequence of patient dumping discussed below will incur even higher federal costs with tens of billions of dollars in federal subsidies to profitable corporations in an attempt to discourage them from dumping millions of retirees out of their private coverage. Thus, taxpayers will be forced to bear the high price to prevent a massive disruption of the private coverage aggravated by the incentives in the Medicare bill. It makes no difference whether this disruption is intentional, carefully engineered or merely the product of a major congressional miscalculation.

  • The agreement guts the House bill's "premium support" provision in favor of a limited and doomed demonstration program. The heart of real Medicare reform is premium support financing structure and a competitive system modeled after Congress' own health system, the Federal Employees Health Benefits Program (FEHBP). This was the key component of the majority (Breaux-Thomas) recommendations of the National Bipartisan Commission on The Future of Medicare in 1999, and an original model of reform for the Bush Administration. The House bill had provided that Medicare would move toward such a system beginning in 2010. Senator Edward Kennedy (D-MA), among others, has been adamantly opposed to the creation of a consumer- based system, even for the next generation of seniors.

    The agreement ends the prospect of real reform in favor of a "demonstration project" for Medicare reform in six metropolitan areas - and even that is not scheduled to begin for seven years. But the demonstration proposal is a retreat from the structural changes that are necessary for the future of the Medicare program. Like its predecessors, such a "demonstration" is almost bound to fail; various providers who wanted to be insulated from both price competition and congressional micro-management or obstruction have deliberately undermined previous Medicare demonstration projects.[7]

  • The agreement contains an unworkable and potentially unpopular drug benefit, with millions of Americans losing part of their existing coverage. Instead of targeting benefits to seniors who need them, the Medicare conferees are insisting on creating a universal drug entitlement to be delivered through the vehicle of stand-alone insurance. Indeed, media is reporting that conferees are going to make the government drug benefit less onerous to Medicare beneficiaries, by increasing taxpayer obligations even more.[8] In the process, according to both Congressional Budget Office and recent independent economic analysis,[9] more than 4 million seniors with existing private coverage are bound to lose it or have it scaled back.[10] Meanwhile, the politically engineered premiums and deductibles, coupled with their odd combination of "doughnut holes" or gaps in drug coverage, are likely to be unpopular with seniors. The proposed government drug benefits are clearly inferior to existing employer-based coverage. Not surprisingly, surveys show that most seniors, when the drug provisions are explained to them, don't like them.[11]

  • The conferees have agreed to a "fallback position" on the provision of prescription drugs that will further undermine private plans. It is questionable whether the insurance options would even materialize in sufficient numbers under the agreement, leaving the drug benefit itself to be delivered under some version of a "fall-back" provision run by the government.[12] The fallback means that the federal government would assume responsibility for the provision of prescription drugs in any region of the country where there is an insufficient number of private plans.[13] Under the conference agreement, a government fallback program would be operational if beneficiaries do not have access to at least one stand alone prescription drug plan and one integrated health plan in each region; two drug only plans must be available if no integrated plan is available in any given region.

    It is worth noting that the Bush Administration initially denounced the Senate fallback provision because it would discourage private plans from entering the market in the first place, and would lead to government control of the delivery and pricing of prescription drugs.[14] White House officials correctly argued that the fall back provision would discourage private entities from bearing the insurance risk for prescription coverage. This could lead to direct government control over the financing and delivery of most prescription drugs in the United States.

  • The conferees commit Congress to spending tens of billions in federal subsidies and create special tax breaks for corporations to make the universal drug entitlement politically palatable, and thus expand direct federal control over corporate health benefit practices. The creation of a universal government entitlement for drug coverage would create a powerful incentive for companies to dump retirees out of their existing coverage into the government drug program, or at least to scale back their existing coverage. The Congressional Budget Office (CBO), as well as independent health policy analysts, has indicated that roughly one out of every three retirees with employer- based coverage would lose it. To offset these incentives, the House and Senate conferees have agreed to special federal subsidies to corporations to discourage them from dumping retiree drug coverage, estimated at more than $70 billion over ten years.[15] Moreover, the provision of such taxpayer funding as a condition for the continuation of employer- based drug coverage will open up a new avenue of federal control over private sector benefit setting.[16]

  • Cramping private health plan competition. Both the House and Senate bills attempt to create new competitive options for private health insurance, but these are marred by regulatory excesses that will surely limit personal choice and free market competition. Particularly onerous are the comprehensive standardization of health benefits for private health plans and the imposition of a straight-jacketed system of geographical service areas. [17]

An Interim Proposal
It is time for Washington to recognize that the current process of developing a drug benefit with Medicare reform was ill-fated from the start. Once it was clear to Capitol Hill that the President was not going to build on his initial set of principles by taking the high-profile lead to build public and congressional support in addressing the tough issues, it became increasingly difficult for serious reformers in Congress to achieve a responsible outcome. Those fundamental issues, such as how to deal with the staggering liabilities of Medicare that threaten the program's ability to deliver existing benefits, remain unresolved as Congress seems poised to add to the burden on future generations.


Faced with the prospect of political and policy failure, Congress and the President should change course and focus on two objectives in the remaining weeks of this session. First, Congress should put off creating a major new drug benefit and instead enact a modest program focused on those genuinely in need. Second, the President should reassemble a "coalition of the willing" of those members of congress from both parties who are prepared to change the Medicare program for the next generation of retirees, the baby boom generation. [18]. Working closely with this coalition - consisting of congressional leaders who are committed to responsible reform-, the President should embark on a national campaign to discuss the key reform issues in Medicare and to build public support for major reform legislation.


Specifically, with the active support of the President, Congress should:

  • Enact the drug discount card already agreed to by the House-Senate conference.

The conferees have already adopted a prescription drug card, and they are in agreement on the need to subsidize the coverage of low-income seniors. The provision would enable all seniors to have a choice between at least two different drug cards that would secure drug discounts between 15 percent and 25 percent. Low-income seniors would also be able to get a $600 annual subsidy to cover the cost of their prescriptions.[19]


Congress also may wish to add a provision for government-subsidized private catastrophic coverage to protect poor seniors against high drug costs. This could be done immediately, and the access problem facing poor seniors without prescription drug coverage could be resolved quickly and efficiently.

  • The President should embark upon a major public information campaign to explain to Americans why the Medicare program should be changed for the Baby Boomers who start in retiring in huge numbers, beginning in 2010. He should work directly with willing members of Congress, in either party, who are committed to real reform of the program. Together, they should develop and enact a coherent and responsible Medicare reform plan.

In 1997, with the strong support of President Bill Clinton, Congress created the National Bipartisan Commission on the Future of Medicare. This, among other major Medicare provisions, was a significant advance in public policy under the Balanced Budget Act of 1997. Chaired by Senator John Breaux (D-LA) and Representative Bill Thomas (R-CA), the commission completed 18 months of hearings, briefings, studies, and analyses on the Medicare program and its future. A majority of the commission reached a consensus and voted in 1999 to recommend changes in the program that would transform it into a superior system like the popular and successful Federal Employees Health Benefits Program. President Clinton failed to build upon the work of the Commission, and an historic opportunity to make change was lost.


President Bush does not have to repeat this disastrous mistake. But to avoid it, he must be directly engaged. To fashion a coherent policy and build strong public support to advance the reform agenda on Capitol Hill, the President must work closely with congressional reformers who are sincerely committed to the necessary structural reform. Together, they could develop and present a detailed, market-based reform program to Congress for enactment as soon as possible. With congressional and executive branch cooperation on a shared goal of real Medicare reform, lawmakers should be able to move very quickly, building upon the solid policy work and first-rate analyses produced in 1999 by the Bipartisan Commission and its staff. Meanwhile, President Bush should commit to building public support for the reform measure.


A critical element to achieve success is that the President must commit himself to building public support for real Medicare reform , so that his recommendations will command wide support when presented to Congress.

Consequences of Failure

The President must make a strong and sustained case for change. The Congress has an historic opportunity to prepare the Medicare program for the baby boomers-the next generation of senior citizens. They will be retiring in just eight years. The consequences of failure are unacceptable, both for future retirees and for the future generations of taxpayers who will be supporting them. It is wrong for Congress to deny an entire generation the right to choose their own health care plans, especially when medical and information technology are rapidly evolving and opening up unprecedented opportunities to serve the personal needs of millions of Americans.


The broader structural reform of Medicare should continue. It should not be reduced to another failed demonstration program, or otherwise watered down and rendered ineffectual. But it should be done carefully and with the full support of the President in his capacity as the nation's leader. It is unlikely that solid Medicare reform will be accomplished without a clean and coherent set of reform proposals forged by a willing coalition of Members committed to real reform, a reliance on the solid work done by the previous Bipartisan Commission, or the President making a strong public case for change and weighing in on the specifics of Medicare reform policy.


Meanwhile, Congress can and should, quickly and efficiently, resolve the problem for seniors without drug coverage. They can do that immediately, and they should.


Stuart M. Butler, Ph.D., is Vice President for Domestic and Economic Policy Studies atThe Heritage Foundation, and Robert E. Moffit, Ph.D., is Director of the Center for Health Policy Studies at The Heritage Foundation.

[1] On this point, see Robert E. Moffit, " Courting Disaster: Adding A Prescription Drug Benefit Without Serious Medicare Reform," Heritage Foundation Executive Memorandum, No. 816, May 17, 2002.

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

[3]See remarks of Thomas R. Saving, Medicare Trustee, in Robert E. Moffit et al., "What Will Medicare's Future Hold for Seniors and Taxpayers?" Heritage Foundation Lecture No. 797, September 23, 2003, p. 4.

[4]Daniel J. Mitchell, "Why Medicare Expansion Threatens the Bush Tax Cuts and Undermines Fundamental Tax Reform," Heritage Foundation Backgrounder No. 1672, July 28, 2003.

[5]William Beach and Brian Riedl, "The New Medicare Drug Entitlement's Huge New Tax on Working Americans," Heritage Foundation Backgrounder No. 1673, July 30, 2003.

[6] For a discussion of this cost containment issue, see Stuart M. Butler, et al., " Cost Control in the medicare Drug Bill Needs Premium Support, Not a 'Trigger'", Heritage Foundation Backgrounder, No. 1704, November 10, 2003.

[7] For a brief account of similar health care and Medicare demonstration efforts, see Robert E. Moffit, " A Demonstration Project= No Medicare Reform," Heritage Foundation WebMemo No. 366, November 13, 2003.

[8] Joanne Kenen, " Medicare Outline May be In Reach by Friday," Reuters, October 23,2003, 7:35 PM.

[9]See Kenneth Thorpe, "Potential Implications of the Medicare Prescription Drug Benefit on Retiree Health Care Benefits," Emory University, September 13, 2003; see also Derek Hunter, "Recent Research Confirms That Seniors Will Lose Coverage Under New Medicare Legislation," Heritage Foundation Web Memo No. 345, at http://www.heritage.org/Research/HealthCare/wm345.cfm.

[10]On the dynamics of retiree coverage loss, see Edmund F. Haislmaier, "How Congress's Medicare Drug Provisions Would reduce Seniors' Existing Coverage," Heritage Foundation Backgrounder No. 1668, July 17, 2003; see also Lanhee J. Chen, "What Seniors Will Lose With a Universal Medicare Drug Entitlement," Heritage Foundation Backgrounder No. 1680, August 26, 2003, and Derek Hunter, "The Medicare Drug Entitlement's High Cost to Seniors With Employer-Based Coverage," Heritage Foundation Web Memo No. 344, at http://www.heritage.org/Research/HealthCare/wm344.cfm.

[11]According to a recent Kaiser Family Foundation survey, only 34 percent of seniors have a "favorable impression" of the congressional Medicare proposals. See Derek Hunter, "What New Research Reveals About the Medicare Drug Debate," Heritage Foundation Web Memo No. 342, September 25, 2003, at http://www.heritage.org/Research/HealthCare/wm342.cfm.

[12]On this point, see Robert Laszewski, "Will the Conferees' Medicare Insurance Provisions Really Work?" Heritage Foundation Lecture No. 801, October 15, 2003.

[13] Mary Agnes Carey, "Medicare Conferees Agree on Fallback Drug Plan," CQ Today, October 21, 2003. p. 1.

[14]Robert Pear, "Compromise Calls for U.S. to Guarantee Medicare Drug benefit," The New York Times, October 21, 2003. Under the proposed compromise, according to Senator Charles Grassley (R-IA), the taxpayers would assume the financial risk of providing drug benefits in any geographically defined market with fewer than two private drug plans. 

[15] Robert Pear, 'Deal 'In Principle' for Medicare Plan to Cover Drug Costs,", The New York Times, November 16, 2003.

[16]On this point, see Derek Hunter, "More Taxpayer Subsidies Will Not Correct Congress's Medicare Drug Miscalculation," Heritage Foundation WebMemo No. 357, October 27, 2003.

[17]As health insurance expert Robert Laszewski notes, "Most health plans operate in only one state, or two or three states, and rarely in every town and village in those areas." Laszewski, "Will the Conferees' Medicare Insurance Provisions Really Work?" p. 2.

[18] Pointing to the difficulty of getting cooperation on Medicare legislation, Rep. Bill Thomas (R-CA) used the phrase in his October 19, 2003 appearance on ABC.

[19]Sarah Leuck, "Drug Cards Could Be Fallback If Prescription Bill Bogs Down," The Wall Street Journal, September 18, 2003.


Robert E. Moffit
Robert Moffit

Senior Research Fellow, Center for Health and Welfare Policy

Stuart Butler