Time To Revisit the Costly Medicare Drug Entitlement

Report Health Care Reform

Time To Revisit the Costly Medicare Drug Entitlement

February 10, 2005 5 min read
Robert E. Moffit
Senior Research Fellow, Center for Health and Welfare Policy
Moffit specializes in health care and entitlement programs, especially Medicare.

The net cost of the Medicare drug entitlement is now projected to be a stunning $720 billion over the period from 2006 through 2015, according to the Bush Administration. Some journalists and Members of Congress reacted to this news with horror, claiming that the Administration hid the real cost of the program from Congress. While that is an absurd charge, suggesting perhaps a misunderstanding of moving averages, the projections underscore a simple fact: the drug entitlement was a costly mistake that needs to be repealed or drastically revamped.


Old News

Mark McClellan, Administrator of the Centers for Medicare and Medicaid Services, the agency tasked with implementing the Medicare Modernization Act, has been reported as saying the drug entitlement will cost $720 billion from 2006 to 2015.[1] On the face of it, this estimate seems higher than the earlier Administration projection of $534 billion. But that was for the 10-year period from 2004 through 2013. The current estimate is for the 10-year period from 2006 through 2015. That replaces the first two years, which have been inexpensive, with two full years of drug entitlement spending after the baby boomers have begun to retire. By 2014, when the huge baby-boom generation is retiring in large numbers, the annual cost of the Medicare drug benefit alone will be more than $107 billion and rising annually.[2]


For Members of Congress to react with shock at this "rise" in the projection indicates either that they are playing politics or simply do not understand that 10-year projections change with each passing year. This was widely understood in 2003-or should have been. During the Medicare debate, many independent analysts continually warned Congress that the costs of the drug entitlement would turn out to be far larger than the original official projections, in part because 10-year projections do not indicate the full cost of an entitlement-especially when annual spending rises sharply in the "out" years-and in part because actual health care costs invariably exceed projections.[3] Those warnings were routinely dismissed.


The problem is not with the honesty of the Administration's estimators. Administration officials have always explained that the program's costs would rise over time. The problem is that the drug benefit itself imposes staggering new unfunded liabilities on future generations. These cannot be honored without huge deficits, huge tax increases, or slashing other programs.


Rising Estimates

When Congress enacted the Medicare Modernization Act in December 2003, senators and representatives were assured that the bill would have an initial 10-year price tag of approximately $400 billion over the years 2004 through 2013. But this reached only 10 years into the future and did not include the rapidly rising costs after 2013 attributable to baby boomers receiving full benefits. Still, in January 2004, the Bush Administration upped that 10-year projection to $534 billion. But even these figures stopped the estimating clock at 10 years. In December 2003, shortly after President Bush signed the bill, Douglas Holtz-Eakin, Director of the Congressional Budget Office (CBO) estimated that the cost of the Medicare drug entitlement could reach $2 trillion during the second decade of the legislation.[4] Congress has continued to ignore subsequent warnings by other analysts over the long-term burden on taxpayers from the drug entitlement, including those of former senior CBO officials.[5]


Revisiting the Real Problem

During the Medicare drug debate, Members of Congress were well aware that most senior citizens, roughly three out of four, had some form of drug coverage from a variety of sources. They knew that the problem of access to drug coverage was a problem for only a minority of seniors who were often poor and could not afford-or did not have access to-private, employer-based, or Medicaid coverage. But rather than solve that problem and target taxpayer dollars directly to poor seniors without coverage, Congress insisted on creating a costly and unnecessary universal drug entitlement that would largely displace existing spending with new federal spending and disrupt most seniors' existing coverage.


The result: enormous short term costs that will threaten much of the conservative domestic policy agenda, including control over federal spending, securing the permanency of the Bush tax cuts, defense transformation, and even the much-needed reform of Social Security. And the much larger long-term unfunded liabilities of the Medicare drug entitlement will impose trillions of dollars in additional tax burdens on young working families.


Time to Reverse Course

The Medicare drug entitlement is scheduled to go into full effect on January 1, 2006. Even before the latest Medicare drug cost projections were released, many Members of Congress experienced a growing anxiety about the future cost of the drug entitlement. Recent cost projections should provide one more jolt of realism to Congress. The country cannot afford this runaway new entitlement.


The best option for digging out of this costly fiscal hole is to repeal the drug entitlement before it goes into effect in 2006 and target the increasingly limited taxpayers' dollars to those seniors without drug coverage, the seniors who need help the most. Procrastination will only ensure that the problem will get worse.


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

[1] Robert Pear, "New White House Estimate Lifts Drug Benefit Cost to $720 billion," The New York Times, February 9, 2005.

[2] Ceci Connolly and Mike Allen, "Medicare Drug Benefit May Cost $1.2 Trillion," The Washington Post, February 9, 2005, p. A-1.

[3] See, for example, Stuart M. Butler and Robert E. Moffit, "Time To Rethink The Disastrous Medicare Legislation," Heritage Foundation WebMemo No. 370, November 17, 2003, at http://www.heritage.org/Research/HealthCare/wm370.cfm.

[4] Hon. Douglas Holtz-Eakin and Jeff Lemieux, "The Cost of Medicare: What The Future Holds," Heritage Lecture No. 815, December 15, 2003, at http://www.heritage.org/Research/HealthCare/HL815.cfm.

[5] See, for example, Joseph R. Antos, Jeff Lemieux, and Dan L. Crippen, "Will Congress Contain Medicare's Exploding Costs?," Heritage Lecture No. 857, December 17, 2004, at http://www.heritage.org/Research/HealthCare/hl857.cfm.


Robert E. Moffit
Robert Moffit

Senior Research Fellow, Center for Health and Welfare Policy