Congress is under considerable pressure to
address the absence of outpatient prescription drug coverage in
Medicare, the huge and financially troubled government health care
program that covers almost 40 million elderly and disabled
Americans. Several bills in Congress seek to do this, including S.
841, sponsored by Senator Edward Kennedy (D-MA), and its companion
bill in the House, H.R. 1495, sponsored by Representative Pete
Stark (D-CA). This legislation would require the Secretary of the
U.S. Department of Health and Human Services (HHS) to contract with
benefit managers, retail pharmacies, insurers, and other entities
to provide Medicare beneficiaries with a prescription drug
benefit. The Clinton
Administration also is urging Congress to add a drug benefit to
Medicare.
The
task before Congress, however, is not so much whether to provide
prescription drug coverage to Medicare beneficiaries, but how to do
it considering the enormous potential cost of the benefit and the
poor track record of previous attempts to provide such coverage.
There is concern that congressional "remedies" could lead to a
disruption of the prescription drug market and undermine the
quality and availability of the very benefit lawmakers hope to
provide. Before Members of Congress consider providing a
prescription drug benefit in Medicare, they should recognize three
key facts:
-
Medicare is in
financial trouble, and the addition of a costly new benefit,
especially if not done properly, could make its financial condition
even worse.
Despite Congress's extension of the life of Medicare's
hospitalization trust fund, achieved mainly by juggling covered
services between the program's two parts, the fiscal outlook for
Medicare remains bleak. To propose a massive new benefit in a
program that already is hurtling toward bankruptcy could turn a
staggering problem into a financial disaster for taxpayers. Even
worse, adding a prescription drug benefit could threaten existing
Medicare coverage.
-
A new prescription
drug benefit would be likely to increase Medicare costs
dramatically.
A recent study by the National Academy of Social Insurance
estimates that a new prescription drug benefit for Medicare would
increase the program's costs by 7 percent to 13 percent over the
next 10 years.3 Similar findings are
found in other studies.4
-
Seniors could see
their Medicare premiums double, and many could find themselves with
duplicate coverage.
Because details of the ways in which a drug benefit would be
financed are unavailable, it is not clear who actually would pay
the cost of this benefit, which could run as much as $40 billion
annually.5 If the full cost were
to be borne by beneficiaries, premiums for Medicare Part B could
more than double. Many Americans over age 65 would not react kindly
to this large increase because two-thirds of seniors already have
some kind of prescription drug coverage through Medicare's
supplemental program, employer-sponsored policies, Medicare health
maintenance organizations (HMOs), or Medicaid. Congress should
recall that, when all seniors were required in 1988 to pay
additional premiums for catastrophic coverage, drug coverage, and
other benefits that many already had, a powerful political backlash
caused the legislation to be repealed.
Adding prescription drug coverage as a
benefit in Medicare should be done within the context of overall
Medicare reform. The model for reform, as anticipated by the
National Bipartisan Commission on the Future of Medicare, is based
on the successful record of the popular and effective Federal
Employees Health Benefits Program (FEHBP), a consumer-driven system
that serves 9 million federal workers, including Members of
Congress, their staffs, and their dependents. Congress should
create a Medicare Board that would negotiate prescription drug
coverage and a Benefits Board that would propose the drug benefit
and other modifications of the Medicare benefits package in the
fee-for-service program. It also should create a voucher system to
assist lower-income seniors to obtain prescription drugs. It should
allow consumers and seniors groups to offer health plans to their
members and to negotiate better deals for coverage; and it should
create a Medigap option for prescription drugs that would permit
the marketing of a drug-only supplemental policy to seniors.
LEARNING FROM PREVIOUS REFORM
ATTEMPTS
Before Members of Congress debate the many
bills that are being introduced on a prescription drug benefit for
Medicare, they should recall the lessons learned in 1988 and 1989,
after Congress passed the Medicare Catastrophic Coverage Act with
overwhelming support from the public and various interest groups.
The House passed the law by a vote of 302 to 127 and the Senate by
a vote of 86 to 11, adding many generous new benefits to the
Medicare program. Among the benefits were unlimited annual hospital
coverage for catastrophic illness, 150 days of skilled nursing
care, 38 days of home health care, and unlimited hospice care,
which were provided even as Congress capped Medicare Part B
(hospitalization) expenses at $1,370 per beneficiary in 1988
dollars. The law also covered outpatient prescription drugs.
Sticker Shock
The
snag in implementing this law was the high cost of these popular
benefits. To assist with the financing, the law required states to
pay Medicare premiums plus deductibles and coinsurance for millions
of low-income elderly and disabled individuals. Individual Medicare
beneficiaries who were not classified as low-income or disabled
were subject to new premiums and taxes. First, there was an
additional monthly premium of $4 for catastrophic coverage. Second,
Congress imposed an income-dependent, sliding-scale tax of up to
$800 annually per person or $1,600 per couple. And third, seniors
were to pay a flat monthly drug premium of $1.94, a deductible of
$550 for the benefit, and a copayment of 50 percent.6
Within weeks of the bill's passage, it
became clear to seniors just what this meant for their pocketbooks.
Many became outraged, and broad public and congressional support
for the measure began to drop precipitously. The National Committee
to Preserve Social Security and Medicare, an activist liberal
interest group, informed senior citizens that a far greater number
of them would be subject to higher "supplemental premiums" than
Congress had estimated.7 According to the
committee:
The
Congressional Budget Office (CBO) underestimates the number by 24
percent. The widespread tax consequences affect almost half of all
seniors in 1989. In addition, 30 percent to 40 percent of Medicare
enrollees--most of the seniors paying the surtax--will suffer
out-of-pocket costs for Medicare covered services. This is true
even after taking into consideration all the new benefits and the
reductions in Medigap premiums.8
Underestimating Costs
In
June 1988, when Congress passed the Medicare Catastrophic Coverage
Act, the Congressional Budget Office (CBO) estimated the
prescription drug benefit to cost $5.7 billion over five years. One
year later, however, that estimate rose to $11.8 billion. Other
provisions of this legislation saw even greater upward revisions.9
Representative Marilyn Lloyd (D-TX) echoed
the sentiments of many of her colleagues when she stated on
September 29, 1988, that seniors would be "taken to the cleaners"
by the new legislation. The very next day, Representative William
Archer (R-TX), along with 32 cosponsors, introduced H.R. 5426 to
delay implementation of the recently passed law. Congressional
staff handled a constant barrage of letters and calls from outraged
seniors, and eventually Congress found it had no choice but to
repeal major elements of the legislation.10
The
failure of Washington, to estimate the high cost of the new health
benefits also proved fatal to the Clinton Plan in 1993 and 1994.
During the debate over the Clinton health care plan,
Newsweek columnist Robert J. Samuelson observed that,
Five outside groups re-estimated the
Clinton "basic package" of insurance benefits. All found higher
costs than the White House did.11
Clearly, the federal government's cost
estimates can turn out to be inaccurate--and especially so for
open-ended benefits like prescription drug coverage. There are two
main reasons for this. First, there is every political incentive
for sponsors and backers to lowball costs in order to gain support.
Second, when any good or service appears very cheap or even free to
a consumer, there is no incentive to limit its use.
Treading Carefully with
Drug Coverage
Some
Members of Congress point to the escalating costs of prescription
drugs (and the potentially high cost of a Medicare drug benefit) as
evidence that something must be done. According to a leading
pharmaceutical industry publication, total prescription drug
spending went up 15.7 percent in 1998.12 Between 1992 and 1998,
spending on pharmaceuticals in the United States nearly doubled.
Such figures often are cited as evidence that costs have gotten out
of control and government needs to become involved. According to
the 1999 industry profile, however, the 15.7 percent spending
increase in 1998 was due largely to a 12.5 percent increase in the
volume of purchases. The remaining 3.2 percent was the result of
actual price increases.13 This dramatic increase
in the volume of purchases speaks to the quality and effectiveness
of the available drugs.
Although it is true that spending on
prescription drugs consumes a larger share of the health care pie,
this trend is due in large part to the huge development costs of
pharmaceuticals as well as the success and cost-effectiveness of
these drugs in treating patients. Consider, for example, the
Veterans Administration's recent decision to cover the $12,000 to
$15,000 annual cost of providing a patient with a new drug to
combat hepatitis C.14 Although it is
expensive, taking this drug can eliminate the need for more costly
treatments in the future, including a liver transplant that could
cost hundreds of thousands of dollars. This makes the high cost of
the drug a sensible investment from a financial as well as a
medical point of view. Similarly, ulcer surgery is declining
because new "H2 antagonist drugs," which cost $900 per year, make
the physical and financial ordeal of the $28,000 surgery
unnecessary.15 And blood-thinning
anticoagulants, which prevent the recurrence of a stroke, cost over
$1,000 a year, compared with a total lifetime costs for a
debilitating stroke of $100,000. Examples like these abound, and
public pressure to generate such drugs is the driving force behind
the rising drug expenditures.16
Avoiding Overreaction and
Double-Charging
Congress first should determine whether a
significant majority of America's senior population experiences
consistent trouble in obtaining prescription drugs. If it does not,
then the level and range of government intervention into the drug
market that is being contemplated today would be unnecessary, and
ultimately it could hurt more people than it would help.
Nearly 9 out of 10 Medicare beneficiaries
use prescription drugs.17 Between two-thirds and
three-quarters of these seniors also have some drug benefit
coverage through Medicare HMOs, private health plans, the Veterans
Administration, Medigap policies, or Medicaid (a program that
provides medications).18 In 1997, almost 60
percent of Medicare beneficiaries with incomes below the federal
poverty line were eligible for Medicaid, although not all took
advantage of their eligibility.19
According to the Bureau of Labor
Statistics, the average senior spent $637 in 1997 on prescription
and non-prescription drugs--less than 3 percent of the average
senior's total spending that year of $24,413. Even the poorest
seniors report spending less on drugs than they do in
restaurants.20 So it would appear
that, although some seniors have trouble purchasing prescription
drugs, most find paying for prescription drugs not overly
burdensome. In fact, according to the National Academy of Social
Insurance, only 10 percent of seniors report out-of-pocket
expenditures totaling $1,000 to $2,000 per year, and only 4 percent
spent more than $2,000.21
The
real issue for Congress, then, is how to assist those who cannot
afford adequate coverage. For some seniors, certain high-priced
drug therapies are the only answer, and government can make it
easier for them to obtain necessary treatments. But the problem of
affordability for a few is not a systemic crisis that demands a
complete overhaul of a system; neither is it one that justifies the
exorbitant costs involved that would affect taxpayers and the
pharmaceutical industry as well as senior citizens.
Problems with the
Proposals
Proposals before Congress, such as S. 841
and H.R. 1495, which would require the Secretary of HHS to contract
with benefit managers for large companies, retail pharmacies,
insurers, and other entities to provide a managed prescription drug
benefit to Medicare beneficiaries, take the wrong approach.
Contrary to their proponents' claims, the S. 841 proposal is not a
plan oriented toward the "private sector." It would give new powers
to the Health Care Financing Administration (HCFA)--the powerful
bureaucracy that runs the Medicare and Medicaid programs--to
regulate pharmacies, insurers, and pharmaceutical
manufacturers.
This
subsidized benefit approach would have serious repercussions. It
would jeopardize that prescription drug coverage already enjoyed by
seniors who have supplemental coverage, and it would carry a large
potential cost to taxpayers. The reason: If Medicare offered
prescription drug coverage with taxpayer subsidies, then the
incentive seniors would have to purchase Medigap or Medicare HMO
coverage would diminish. Moreover, employers could become less
inclined to offer private health plans to their elderly employees.
(If drugs already were covered by someone else, why would employers
spend the extra money?) This new subsidized benefit would crowd out
the more efficient private market from the drug market. In
addition, the price controls embodied in this approach would stifle
incentives for innovative pharmaceutical companies to develop new
medicines--an enterprise that is so crucial in combating today's
debilitating diseases and improving the quality of life for senior
citizens.22
Financing the Benefit
A
key problem with S. 841 is its financing. Even its sponsor, Senator
Kennedy, estimates that its drug benefit would cost taxpayers $20
billion per year.23 Unfortunately,
government officials routinely underestimate the cost of health
care.
Even
more problematic than the high potential cost is the question of
how such a benefit would be financed. Senator Kennedy has suggested
using tobacco tax money to finance the plan.24
Smoking, however, is on the decline and thus would be unlikely to
provide a revenue stream sufficient to cover the ever-expanding
cost of prescription drugs. To the extent that taxation discourages
tobacco use, there would be a corresponding shortfall in necessary
revenue. Such a shortfall would have to be made up either in higher
premiums and copayments for seniors or a drawdown on general
revenues from the Treasury. It is not clear how the program would
be funded if it turned out to exceed estimates. Thus, it simply
would be unwise to make the financing of prescription drugs
dependent on taxes paid by smokers.
A Purchasing Cartel
Another problem is that S. 841's approach
would establish, in effect, a Medicare cartel. If Medicare is the
largest single purchaser of prescription drugs, then it is more or
less free to pay whatever price it wants for the drugs it buys. A
manufacturer, especially one with a new drug under patent, could
not afford to ignore its largest purchaser, and conceivably the
only purchaser of drugs for a particular class of patients. That
manufacturer would be put in the position of having to sell to
Medicare, even if the price Medicare paid were below what the
company normally would obtain in a competitive market.
This
raises, if indirectly, the issue of current law on prescription
drug patents and the reason that Congress adopts such laws. The
point of offering a patent is to allow a small number of successful
products to pay the cost of thousands of failures. The patent
allows a company to recoup the enormous expenses it incurred for
basic research in developing that new drug. Members of Congress
have agreed to this arrangement because it is the best way to
encourage inventive scientific enterprise to pursue these results.
The issuing and protecting of patents creates incentive for the
kinds of drug research that lead to breakthroughs--the hallmark of
modern medicine.
A
purchasing cartel would undermine the rationale of this
arrangement. If Medicare were to become the sole or dominant buyer
of prescription drugs, it would undermine the patent concept and
have the same effect as price controls--discouraging the level of
investment in research that is necessary to develop new drugs. Less
investment means reduced chances of finding a cure for cancer,
heart disease, and the other ailments that plague America's rapidly
aging society. There certainly are sound reasons to revisit current
patent law governing prescription drugs. But if so, the
reexamination should not be done in the politically charged
atmosphere surrounding the debate over a Medicare prescription drug
benefit.
What Congress Should
Do
Medicare, Medicaid, and today's
employer-based, third-party payment system all share a common
feature: They distort personal decision-making by hiding from
patients the true costs of medical services and discouraging them
from seeking value for their health care dollar. This, in turn,
reduces the incentive for health care providers to find the best
and most cost-effective way to satisfy consumers.
A
better approach would be to empower individual consumers. In the
case of Medicare, this could be accomplished by making more plans
and benefits available to seniors through a comprehensive reform of
the current program. Short of that, Congress should begin to allow
innovative private-sector purchasing of prescription drugs by
Medicare beneficiaries, coupled with an expanded use of targeted
government assistance to assist needy seniors in offsetting the
cost of medicines. Doing this would encourage competing plans to
determine the best way to offer the drug coverage. In addition,
Congress needs to take steps to stimulate creative ways to provide
coverage of drugs through the traditional fee-for-service program
and the Medigap market.
When
it was created in 1965, Medicare provided state-of-the-art health
coverage to beneficiaries. But because all major benefit changes
require an act of Congress, mere discussion of changes to its
benefit structure necessarily have been bogged down in the
political process. Actually making changes becomes next to
impossible. Consequently, the benefits package available under
Medicare is completely out of date compared with private-sector
plans. For example, in 1999, one would be hard-pressed to find a
large corporation that does not offer its workers a plan including
at least some coverage for outpatient prescription drugs. Even the
FEHBP provides drug coverage and other modern benefits to retired
and active federal workers and their families.
Based on its experiences with Medicare
reform in the past, there are several options from which Congress
could choose to ensure seniors also have access to good
prescription drug coverage:
- Establish a Medicare prescription drug
benefit in Medicare managed care plans servicing seniors through
the procedures used in the FEHBP.
In the FEHBP, Members of Congress and federal workers enjoy an
array of choices in health plans. The competition among these plans
results in quality service and keeps prices down. Nearly all the
plans provide a prescription drug benefit because, in effect,
competition has forced plans to include the benefit to retain
customers. Other benefits have been introduced into plans merely by
"jawboning" them to do so--without formal regulations or
legislation. If Congress wanted to extend prescription drug
coverage to seniors and control costs at the same time, it should
model this reform after the way it provides its own prescription
drug coverage.
A bipartisan majority of members of the
recently disbanded National Bipartisan Commission on the Future of
Medicare, chaired by Senator John Breaux (D-LA) and Representative
Bill Thomas (R-CA) supported changing the current Medicare program
to a new system based on "premium support," as in the FEHBP.
- Create a "Benefits Board" to determine
ways in which to include a drug benefit in the benefits available
to Medicare beneficiaries in the fee-for-service program and to
propose subsequent additional improvements in the core benefits
package.
Instead of having Congress or the Administration specify detailed
Medicare benefits, Congress should create a Benefits Board to
propose specific incremental changes in Medicare's core benefits.
The Administration and Congress would select members of this
independent board for specific terms. The board's annual
recommendations to Congress would be subject to an up-or-down vote
without amendment. This change would reduce political pressure on
benefit decisions and remove lawmakers from the process of making
medical decisions. Yet it would give Congress the final say in any
benefit changes. The practical logic for establishing such a board
is the same logic behind the Base Closing Commission created in the
1980s.
The first task for a Benefits Board should
be to determine the best way to introduce a drug benefit into
Medicare's traditional fee-for-service program. Congress could
instruct it to develop a modified benefits package that included
drug coverage within a specified budget. The board could propose
small changes in various features of the benefits package to
develop a well-balanced package that achieved Congress's
objectives. Should it fail to win approval in the up-or-down vote,
the board would develop modified versions until an agreement was
reached.
- Create an independent "Medicare Board"
to negotiate on behalf of seniors for prescription drug
benefits.
The Office of Personnel Management (OPM), which negotiates
with private insurance companies on behalf of federal workers and
retirees for prescription drugs and other benefits in the FEHBP,
provides a good model for an independent Medicare Board that would
negotiate on behalf of senior citizens in Medicare. Such a board
would assume the role of HCFA which currently negotiates with
private plans that want to do business with Medicare's
beneficiaries. HCFA then would be free to make the fee-for-service
Medicare program more up-to-date and efficient. Creating a Medicare
Board also would resolve the conflict of interest inherent in
having HCFA write the rules of competition while operating one of
the competing plans. By comparison, the OPM does not run a plan in
the FEHBP.
The Medicare Board could make sure that
competing plans offered a core of benefits guaranteed by law.25
It could encourage or even require, as a condition of
participation, that private plans offered a prescription drug
benefit. The OPM does so on behalf of FEHBP beneficiaries. Private
plans would agree to different combinations and levels of benefits
that they determined would enable them to meet consumer demand for
a drug benefit in the most efficient way possible in a competitive
market. As a result of these negotiations, the board and the plans
would enter into a contract, and plans would compete on the basis
of that contract for consumer dollars, just as plans do in the
FEHBP.
Under this arrangement, seniors would be
free to choose from a number of plans that offer at least a
standard core of minimum benefits specified by law. Plans would
distinguish themselves on price, service, and different
combinations of additional benefits, just as in the FEHBP today.
For example, if a certain level of prescription drug coverage
proved popular among seniors, plans would have to include it to
remain competitive. The result would be more responsive and
tailored drug insurance coverage for seniors who chose private
plans.
-
Establish a voucher system to assist
lower-income seniors with obtaining prescription drugs.
The federal government, to assist those who cannot afford food,
does not use price controls. Instead, it provides vouchers (food
stamps) to the poor to allow them to purchase the food of their
choice in a freely functioning market. Prescription drug coverage
should be no different. For lower-income patients who did not have
money readily available to buy medications, HCFA could deposit
funds into an account for prescription drug costs only or to
subsidize the core of a drug coverage plan. The value of the
voucher could be means-tested. HCFA could consider using electronic
debit cards; every time a senior citizen visited the nearby
pharmacy, the balance on the card would be adjusted.
-
Create a Medigap option for
prescription drugs exclusively.
Under current rules, there are 10 types of Medigap policies
available to Medicare beneficiaries. Only three (H, I, and J)
include partial coverage for prescription drugs. They are the most
comprehensive and therefore the most expensive plans. Drug coverage
itself has high cost sharing for beneficiaries--a $250 deductible
and a 50 percent copay up to $1,250 for plans H and I and up to
$3,000 for plan J. Seniors who wished to purchase a Medigap policy
that includes a drug benefit would be forced also to purchase
coverage for (1) the Medicare Part A deductible; (2) skilled
nursing facility care daily coinsurance; and (3) medically
necessary emergency care in a foreign country (80 percent coverage
after a $250 deductible).26 The cost of a Medigap
policy plan to cover prescription drugs exclusively would be
significantly lower without the excess coverage listed above.
Conclusion
Members of Congress should proceed with
caution in considering the legislative proposals to add a
prescription drug benefit to the troubled Medicare program. Some of
the approaches not only would be enormously expensive, but they
also could entangle the prescription drug benefit in a bureaucratic
web. Congress must remember the hard Medicare lessons of its past
attempts and take a page from the successful Federal Employees
Health Benefits Program, which provides Members of Congress and
other federal employees and retirees with coverage for prescription
drugs.
But
Congress should recognize that the majority of seniors do not
experience significant problems in obtaining their medications.
Moreover, many of the proposals to include a prescription drug
benefit in Medicare include price controls, a policy that would
stymie the very innovations Americans have come to expect from the
pharmaceutical industry. The best way to change the heavily
bureaucratic Medicare system to allow a prescription drug benefit
for those seniors who truly need it would be to provide an open and
competitive health care market. Congress also should establish a
voucher system to assist poor seniors with buying needed drugs; it
should allow consumers and seniors organizations to bargain
directly for prescription drugs at reasonable prices; and it should
make long overdue changes in the rules governing Medigap coverage
for drugs.
In
rushing to provide a prescription drug benefit, Congress should not
promise seniors a low-cost prescription drug benefit it could not
deliver or that would further erode the already weak financial
foundations of the Medicare program. Fortunately, there is no need
for Members of Congress to repeat the mistakes they made in 1988
and 1989 in passing and then repealing the Medicare Catastrophic
Coverage Act. By building on the majority proposals of the National
Bipartisan Commission on the Future of Medicare, they could
modernize the outdated Medicare benefits package, improve
Medicare's organization, and ensure that all seniors have
cost-effective prescription drug coverage.
James Frogue is a former
Health Care Policy Analyst at The Heritage Foundation.