When Congress takes up a drug benefit
again, it should keep things simple and concentrate on the risk,
approaching certainty, that it wishes to prevent: people going
without drugs--or without food--because of the cost. That means
concentrating on poor people.
--Michael Kinsley
Taxpayers are in big trouble. Although
Medicare is facing exploding costs, Congress has just added an
expensive universal drug entitlement to the program rather than
simply targeting assistance to poor seniors who lack drug coverage.
Some prominent Members of Congress want to expand the new program,
making Medicare's financial situation even worse.
By
enacting the Medicare Prescription Drug Improvement and
Modernization Act of 2003, commonly called the
Medicare Modernization Act of 2003, Congress and the Administration
aggravate Medicare's worsening financial condition without
introducing the level of real reform necessary to contain future
costs. As the editors of The Washington Post recently noted,
"Congress...by approving a drug benefit without deeper reforms,
wasted a golden opportunity."
The
12 titles of the 681-page Medicare legislation, accompanied by a
402-page narrative report, constitute a mammoth set of program
changes. The regulatory regime spawned by this massive legislation
will likely dwarf all previous Medicare amendments. Together, these
major changes in law and regulation will have an enormous impact on
current and future Medicare patients and taxpayers, as well as
hospitals, doctors, and other medical professionals, for many years
to come.
Serious Problems
While the law's main provisions do not
take effect until 2006, staggering problems are already surfacing,
particularly with the new drug entitlement program under Title
I.
Exploding
Costs
If left unchecked, future costs of the universal
prescription drug entitlement will explode. Even without the new
drug entitlement, Medicare spending is projected to grow by 43
percent in real dollars by 2013. The Medicare trustees now
report that the drug entitlement alone will add a stunning $8.1
trillion to Medicare's unfunded liabilities over the next 75 years,
sharply increasing the financial burden on current and future
taxpayers.
Moreover, projected costs of the new
Medicare law apparently were significantly higher than the
projections publicly available when Congress enacted these
provisions last year. Richard S. Foster, chief actuary for the
Medicare program, recently revealed that his estimates showed that
the drug benefit would cost $500 billion to $600 billion over 10
years--far in excess of the $400
billion budgeted in 2003 during debate on the Medicare
Modernization Act.
Displacement of
Existing Prescription Drug Coverage
The increasingly unpopular Medicare prescription drug
provisions will accelerate the displacement of existing drug
coverage, including private, employer-sponsored prescription drug
coverage. In recent years, many employers have been cutting back on
retirees' health coverage, but the economic incentives created by
Title I of the Medicare law, which provides for a universal drug
entitlement, will surely accelerate the displacement of existing
drug coverage, shifting billions of dollars of costs from private
corporations directly onto taxpayers.
Moreover, months of polling from a variety
of sources show that the complex drug entitlement is already
proving unpopular with senior citizens who have read about it and
understand it. According to a USA
Today/CNN/Gallup Poll released on March 30, 2004, only 36 percent
of respondents aged 65 and older favor the new drug benefit, while
48 percent oppose it and 16 percent expressed no opinion. Thus, bad
drug policy is compounded by its growing unpopularity.
A Risky
Experiment in Central Planning
With the universal drug entitlement going into effect on
January 1, 2006, the Medicare bureaucracy will have limited time to
prepare for the administration of the complex new government drug
program. Of course, the Medicare bureaucracy has no experience in
managing such a drug benefit.
However, to enforce the new Medicare law,
Medicare officials must track the spending of each of the millions
of Medicare beneficiaries who participate in the program,
determining whether or not they meet their statutorily defined
thresholds for deductibles and catastrophic coverage. This will
require that the Centers for Medicare and Medicaid Services (CMS),
which administers Medicare, update its voluminous computer files
and make all of the necessary adjustments and modifications. As
Nancy Anne DeParle, Medicare's administrator during the Clinton
Administration, has recently observed, "It can be done, but it is
not simple. And if it is not done perfectly, millions of
beneficiaries and pharmacists will be calling CMS and Congress to
complain."
Sooner or later, Congress will have to
address these growing problems, either in technical amendments or
major legislation.
A Better Policy
The
issue is increasingly not just whether to amend the Medicare law
and bring its costs back under control. Congress must also take
constructive steps that expand seniors' health care choices and
improve the functioning of the new competitive system authorized in
statute.
Specifically, Congress should:
- Delay the costly
drug provisions scheduled to go into effect in 2006.
Congress should delay these provisions until it establishes a
serious mechanism to control costs, preferably through a financing
system that is compatible with real reform of the Medicare program.
The best mechanism to control costs over time is a "premium
support" financing system, broadly similar to one used by the
popular and successful Federal Employees Health Benefits Program
(FEHBP). This option was recommended originally in 1999 by the
majority of the National Bipartisan Commission on the Future of
Medicare.
Under an FEHBP-style formula, the
government would make a payment to the health plan chosen by the
enrollee. The payment would reflect the real costs of providing
care, based on the weighted average premium of competing health
plans, but the government contribution per enrollee would be capped
at an annual amount. Such a system would provide for reliability
and predictability in government health care payments and be far
more humane than controlling costs through across-the-board cuts in
Medicare spending or tighter price controls on Medicare
services.
- Make the new
prescription drug discount card and the accompanying low-income
subsidies a permanent feature of Medicare. The new law
provides for a Medicare prescription drug discount card, available
this year, that will enable seniors to buy prescription drugs at a
10 percent to 25 percent discount off retail prices. Seniors could
choose between at least two cards, sponsored by a variety of
entities, including pharmacies, pharmacy benefit managers, and
private insurers. Low-income seniors would also be eligible for a
$600 subsidy on their cards without an asset test for
eligibility.
Even though the program has the potential
to succeed, however, Congress has scheduled it to end in 2006. In
other words, Congress would take the discount card program away
from seniors, whether they want to keep it or not, thus depriving
seniors of the choice of continued participation. Congress should
quickly reverse this wrong-headed policy.
- Restructure the
Medicare drug benefit and transform it into a cost-effective
catastrophic program. Title I of the new law provides for
a voluntary prescription drug benefit to be offered through private
health plans and new "drug only" insurance plans, effective in
2006. More than three-fourths of senior citizens currently have
some form of drug coverage, but the new government entitlement
would displace, disrupt, or downsize this existing coverage.
A far better option would be to combine a
catastrophic coverage requirement with a national system of debit
cards, with subsidies targeted to low-income seniors who currently
lack drug coverage. The funds in the debit card accounts could then
be rolled over from year to year, tax-free, just as funds are
rolled over in the new Health Savings Account.
- Be a reliable
business partner with private health plans serving
seniors. The Medicare Modernization Act can enable private
health plans, now covering an estimated 4.7 million Medicare
enrollees, to provide seniors with modern, high-quality, integrated
health care coverage. Reversing the previous policy of capping plan
payments at 2 percent annually, the new funding will enhance
coverage for Medicare enrollees.
An estimated 95 percent of the initial
2004 Medicare funding for health plans will be used to expand
access to doctors and other medical professionals, enriching
benefits, and reducing premiums. The remaining 5 percent is
earmarked for a new "stabilization fund," which will enable health
plans to enhance benefits in the future. To build on this initial
success, Congress should remain a reliable business partner with
private health plans and refrain from costly and inefficient
micromanagement of the program.
- Guarantee a fair
and honest demonstration of a real competitive system.
Title II provides for a limited FEHBP-style demonstration program,
but in only six metropolitan areas beginning in 2010. Hostility to
competition is nothing new. A limited demonstration project of this
type is often a pretext for killing a proposal or designing it to
fail. Already, Members of Congress have stated their intention to
prevent the demonstration program from taking effect in their
jurisdictions and other selected areas of the country. As Robert
Reischauer, President of the Urban Institute and former Director of
the Congressional Budget Office (CBO), recently remarked, "The
notion that this thing will get off the ground is absolutely
fanciful."
A fair and honest demonstration of a truly
competitive system like the FEHBP is possible if Congress and the
Administration have the political will to do it. One way would be
to start the demo program in 2007, confine it to new retirees, and
open it up to all existing health plans that meet federal or state
standards, including federal and state government employees' plans.
This could be done in the 12 largest U.S. metropolitan areas.
What the New Medicare Law Does
The
Medicare Modernization Act is the largest entitlement expansion
since the enactment of the Medicare program in 1965.
A Massive
Statute
The scope of the new Medicare law is enormous. It provides
for:
- A universal drug
entitlement and discount card program. Title I creates a
universal, although voluntary, prescription drug entitlement under
a new Medicare Part D, effective in 2006. It also provides for a
prescription drug discount card, available in 2004.
- A new system of
competing private health plans. Title II amends Medicare
Part C and replaces the existing Medicare+Choice program with
Medicare Advantage, a new system of competitive, regionally based
private health plans, particularly preferred provider organizations
(PPOs) that are to be operational in 2006. It also creates an
FEHBP-style competitive demonstration program confined to six
metropolitan areas in 2010. The demonstration program was a
substitute for the creation of a real competitive system based on
the FEHBP.
- Numerous changes
in traditional Medicare. Titles IV, V, VI, and VII make
numerous changes in the traditional Medicare program, including
Medicare Part A and Part B, particularly in reimbursements for
hospitals, doctors, and other health care professionals. It
provides for new benefits, including wellness and screening, and
authorizes billions of dollars in additional Medicare
reimbursements to hospitals, doctors, and other health care
professionals in rural areas.
- A congressional
process to track future Medicare costs. Title VIII
establishes new "cost containment" procedures, outlining the
specific steps that Congress must or should take to track and
curtail the excessive growth of Medicare spending.
- A modicum of
administrative and regulatory reform. Title IX changes
Medicare administration and institutes modest reforms of the
regulatory regime that governs health care providers and Medicare
contractors. It also provides for new measures to combat Medicare
waste, fraud, and abuse. However, the law does not significantly
change either the administrative pricing system or the central
planning apparatus that governs the provision of medical services.
Thus, the Medicare regulatory structure, a target of the original
reform proposals, is left fundamentally unchanged.
- Medicaid changes
and drug importation. Title X makes changes in the
Medicaid program, allows Medicaid beneficiaries to take advantage
of the new Medicare drug provisions, and sets conditions for
importing prescription drugs.
- Health savings
accounts. Title XII, in a provision separate and distinct
from Medicare, creates new tax incentives for the creation of
health savings accounts (HSAs) for the non-elderly population.
Continued
Bureaucracy and Red Tape
The new Medicare law continues to expand the power of the
Medicare bureaucracy. The new law is highly prescriptive and will
prove to be a powerful engine of massive regulation. In its
practical operations, this will undermine a key goal of Medicare
reform, which was to transform and streamline Medicare
governance.
The
majority of the National Bipartisan Commission on the Future of
Medicare, co-chaired by Senator John Breaux (D-LA) and
Representative William Thomas (R-CA), proposed a very different
method of governance. It proposed to transform the program into a
"premium support" system that much more closely resembled the
popular and successful Federal Employees Health Benefits Program,
the original and most prominent model for Medicare reform. In sharp
contrast to the roughly 40 pages of statute that govern the
FEHBP,
the new 681-page Medicare law largely amends existing Medicare
statutes and adds even more layers of administrative complexity.
Compared with the private sector,
government health programs are often touted as relatively simple.
Particularly in the case of the Centers for Medicare and Medicaid
Services, the opposite is true. Medicare's regulatory complexity is
likely to increase--notwithstanding enactment of the new law to
"reform" the program--from setting and enforcing price controls on
thousands of medical treatments and procedures performed by doctors
and hospitals in traditional Medicare, to implementing the new
Medicare Advantage program under Part C, to administering the new
prescription drug entitlement under Part D.
Administering
Drugs
An estimated 42 million beneficiaries will be eligible to
enroll in the new drug program on November 1, 2005. To meet this
deadline, the CMS must deal with a wide variety of daunting
challenges.
According to Dr. Cynthia Tudor, Director
of the CMS's Division of Program Analysis and Performance
Measurement, there is hardly one sentence in the 10 major sets of
provisions under Title I that is not subject to regulatory
interpretation. Enforcing these provisions
will occupy the Secretary of HHS and CMS staff for the next several
months. They must establish regions for the drug plans; set
standards for the Medicare Advantage plans and the new prescription
drug plans (PDPs) that provide drug-only coverage; determine Part D
premiums for the drug coverage; provide employer subsidies to firms
that retain drug coverage; provide federal subsidies for low-income
beneficiaries; provide guidance to the states that will have
primary responsibility for determining eligibility for low-income
subsidies; establish rules to provide for at least two private
health plans in every region of the country; and establish a
fallback drug plan if two plans fail to materialize.
It
is worth noting that the drug-only PDPs are not some robust product
of market reality, but largely a creation of congressional
imagination. Some private-sector analysts question whether or not
these types of plans will even materialize, much less in sufficient
numbers. Nonetheless, the
Administration is expecting them to play a substantial role in
delivering the new drug entitlement.
While establishing standards for the drug
plans and the provision of drug benefits under the new Part D, the
CMS must also ensure that its rules are compatible with the new
Medicare Advantage plans under the revised and updated Part C. The
Medicare Advantage plans will, of course, also offer the new drug
entitlement.
Beyond making rules for the Medicare
Advantage plans, the CMS must also set standards for employer-based
health plans to get the new tax-free government subsidies. Under
the new law, the former employer is eligible for a 28 percent
subsidy for qualified retiree drug benefits of between $250 and
$5,000 annually. Thus, the CMS must determine whether the
employer-sponsored plans are actuarially equivalent to the
government prescription drug benefit. This will entail new
government data requirements for employer-based health plans and
government audits of the employer-based plans.
In
the meantime, the CMS must develop rules to protect Medicare
beneficiaries, including standards for drug price disclosure and a
process for beneficiary grievances and appeals. The CMS must also
deal with a variety of issues related to establishing the new drug
benefit, including rules for enrollment and election periods,
provision of information on premiums, cost sharing and coverage,
the definition of "creditable" coverage under Part D, and drug
formulary standards.
The
development and implementation of drug formulary standards will be
a crucial and potentially troublesome issue. As Anthony A.
Barrueta, senior government relations counsel for the Kaiser
Foundation Health Plan, has argued, the CMS will have to address
the classes and categories of various drugs, as well as the rules
governing brand names and generics. As Barrueta notes, the more
drugs that are on health plans' formularies, the less health plans
will be able to control drug costs. Conversely, it can be
expected that adoption of tighter drug formularies--or a rule that
would allow or encourage the adoption of such formularies--will be
politically unpopular.
Under the congressionally fixed time lines
for administration of the drug benefit, this entire process will
prove to be a formidable challenge. For example, in dramatic
contrast to the wide variety of drug coverage available to federal
workers and retirees, the congressional prescription of government
supervision and control over the financing and delivery of the
Medicare drug benefit is precise and detailed. Under the terms of
the new Medicare law, "education" for the estimated 42 million
eligible Medicare beneficiaries must begin by October 1, 2005. The
initial enrollment in the government drug program begins one month
later on November 1, 2005.
Former Medicare Administrator Nancy Ann De
Parle has already given Members of Congress some flavor of what
they can expect:
For example, in order to make sure that
the drug benefit's deductibles, cost-sharing and catastrophic
limits work as stipulated in the law, CMS will have to develop a
way to keep track of what each Medicare beneficiary spends on
drugs.
As
DeParle further notes, CMS officials must adhere closely to the
rules about spending on drugs, what is or is not a permissible
cost, what drugs are and are not covered for purposes of
reimbursement, and whether and when a Medicare beneficiary reaches
the appropriate thresholds for deductibles and catastrophic
coverage. To reduce confusion and
complaints among millions of Medicare patients, the government's
computer files and programs must be updated and in excellent
working order for this huge enterprise to be executed with
efficiency and fairness.
Administering
the Medicare Advantage Program
Beyond developing the new prescription drug program, HHS
and CMS must also replace the flawed Medicare+Choice program with
the new Medicare Advantage program, effective in 2006. This task
includes conducting the health plan bidding and implementing the
new payment system for health plans, defining regions and service
for service areas, and setting benefit requirements, including the
requirements for the new drug benefit under Part D.
The
CMS will also need to develop guidance and rules for premium
setting and allowable cost sharing, and conduct training programs
for representatives of the health plans that enter the new
system.
Administering
Traditional Medicare
While implementing all the new programs, HHS and CMS will
also be making numerous changes in the traditional Medicare
program, including complex reimbursement changes for hospitals,
doctors, and other medical professionals. Indeed, five of the 12
titles of the new law mostly focus on programmatic and
reimbursement changes within the existing Medicare system.
In
addition to administering traditional Medicare and its new
programs, CMS officials must cope with the huge and growing
Medicaid program, administer the State Children's Health Insurance
Program (SCHIP), and enforce provisions of the Health Insurance
Portability and Accountability Act of 1996. The enormity of these
tasks will consume a great deal of time, energy, and effort from a
career staff that is already overburdened.
Surveying the CMS's mounting
administrative problems, Thomas H. Stanton, senior fellow at the
Center for the Study of American Government at Johns Hopkins
University, concludes: "In summary, an evaluation of the capacity,
flexibility, accountability and life cycle of CMS reveals an agency
that is losing its ability to administer the Medicare program." Among
federal agencies, the CMS already stands out as being among the
most managerially challenged.
In
summary, the new Medicare law prescribes numerous mandates,
standards, and regulatory requirements that must be met by health
plans, hospitals, clinics, doctors, and other medical
professionals. While Title IX provides some modest regulatory
reform that will benefit physicians, the overall impact of the new
law is to expand Medicare's regulatory regime. It will certainly
invite even more congressional micromanagement, further undermining
Medicare's effectiveness and efficiency.
Far Short of
Reform
Despite its enormous complexity, size, and scope, the new
Medicare law is largely an amendment to the existing Medicare
statute, coupled with a prescription drug entitlement. In this
respect, it is a major retreat from Medicare reform.
The
original proposals for Medicare reform, which were greatly
influenced by the National Bipartisan Commission on the Future of
Medicare, were based on the principle that Medicare enrollees
should receive a generous, but fixed, government contribution
toward a health plan of their choice. Such plans would contain a
core benefits package and be approved by Medicare, and these
health plans would compete directly with each other for market
share, just as health plans do today in the Federal Employees
Health Benefits Program.
The
House version of the Medicare bill contained this "premium support"
approach, although it would not have
become effective until 2010. However, the House-Senate conference
dropped it in favor of a weak and limited demonstration
program.
If
Medicare reform is understood as the creation of a new competitive
system, broadly based on "premium support" with full and direct
health plan competition, including competition with traditional
Medicare, then the new Medicare law falls far short of reform. It
is not the promised transformation of Medicare into a new
competitive program similar to the FEHBP, notwithstanding the
rhetoric of some of its proponents in and out of Congress.
Why Key Provisions Should Be Changed
Title I, which outlines the drug
entitlement that is to become effective in 2006, is at the heart of
the major problems with the Medicare Modernization Act. There is
time--but not much--to address these problems. Congress can ignore
them only at great cost to both seniors and current and future
taxpayers.
Exploding Costs
of the Prescription Drug Entitlement
A major objective of Medicare reform--now lost--was to
absorb the coming demographic shock of the baby-boom generation in
a cost-effective fashion. Instead, the new drug entitlement will
guarantee even heavier unfunded obligations on current and future
taxpayers and make Medicare's overall financial challenge even more
demanding. As noted, the Medicare
trustees recently confirmed these misgivings and announced that the
drug program's unfunded liabilities would cost at least $8.1
trillion over the next 75 years.
When
the Medicare law was enacted last year, the CBO estimated--as it
has recently reaffirmed--that the total 10-year cost of the law
would be $395 billion. The Administration estimated its 10-year
cost at $534 billion, based on different assumptions. Joseph
Antos, senior health policy analyst at the American Enterprise
Institute and a former Assistant Director of the CBO, observed:
The actual cost of MMA [the Medicare
Modernization Act] will be much higher than either estimate reveals
because the drug benefit represents a permanent commitment of
resources to seniors rather than a benefit that will expire in a
decade. It is likely that even the ten year cost will be much
higher than today's estimates indicate. Those facts were widely
known from the beginning of the debate but little acknowledged by
the administration or congress.
Recent revelations in the press have
confirmed this assessment.
Actuarial assumptions often differ, and
10-year estimates are only the tip of the proverbial iceberg. On
December 8, 2003, the very day that President George W. Bush signed
the Medicare Modernization Act into law, CBO Director Douglas
Holtz-Eakin estimated that the legislation's second-decade costs
could range between $1 trillion and $2 trillion, depending on the
assumptions.
Sharply
Increasing Tax Burden
The coming explosion in Medicare drug spending will
increase unfunded liabilities and impose huge burdens on taxpayers,
as well as threaten the Bush tax cuts and undermine longer-term tax
reform. As noted, the expansionary dynamics of a universal drug
entitlement will generate huge unfunded liabilities in an already
overburdened Medicare program.
This
will have enormously unfavorable tax consequences. Medicare Trustee
Thomas R. Saving has observed that, based on current assumptions,
the "shortfalls" in the Medicare program would consume 24 percent
of all federal income tax revenue in 2019, the year that the
hospitalization trust fund is projected to be exhausted, and 51
percent of all federal income tax revenue in 2042.
During the debate on the new Medicare law,
Heritage Foundation analysts predicted that these rapidly rising
costs and future liabilities would impose huge burdens on working
families and threaten current and future tax reforms. More
recently, the Bush tax cuts are already in jeopardy as some
congressional Republicans are beginning to rethink the future of
the tax cuts that they have enacted.
As
Heritage Foundation analyst Daniel J. Mitchell notes, "Regardless
of what happens to the 2001 and 2003 tax cuts, the prescription
drug entitlement will likely be the death knell of further tax
relief and fundamental tax reform." While reopening the
Medicare drug debate is a painful political prescription, leaving
it in place guarantees sharply higher taxes.
Accelerated Loss
of Private Drug Coverage
According to a recent ruling by the Equal Employment
Opportunity Commission (EEOC), a federal civil rights panel,
employers can reduce or eliminate health benefits for retirees who
are eligible for Medicare without violating current federal law
against age discrimination. The Medicare prescription
drug benefit can be expected to accelerate the loss of private
employer-based drug coverage among seniors while producing
windfalls for large corporations. Prominent independent analysts,
as well as the CBO, predicted that enactment of the drug
entitlement would encourage large corporations to scale back or
even drop their existing retiree coverage to the level prescribed
by the new law. By providing the
government-prescribed level of drug coverage, they can receive
billions of dollars in new taxpayer subsidies.
Less
than two years before the drug entitlement goes into effect, that
process is already underway. According to The Wall Street Journal,
18 large companies have estimated that the new Medicare law will
reduce their drug benefit costs by a total of $11.8 billion, while
employers who retain drug coverage at government-prescribed levels
will be eligible for tax-free government subsidies. For
example, Lucent Corporation will receive a projected $500 million
in taxpayer subsidies under the new Medicare law.
How Congress Should Improve the New
Medicare Law
Over
the next several months, Members of Congress need to debate major
changes in the new Medicare law.
However, seniors and taxpayers should
realize that Congress is quite capable of making the current
problems even worse by enacting changes that would dramatically
increase the current taxpayers' cost of the drug entitlement, thus
worsening Medicare's overall financial condition and imposing
enormous unfunded liabilities on future taxpayers.
Responsible Members of Congress can target
the new law's problems while improving on provisions that could
expand patient choice and enhance competition among health plans.
By so doing, they can secure high-quality care for current and
future generations of Medicare patients without imposing enormous
burdens on current and future generations of taxpayers.
Specifically, Congress should:
Step #1: Delay
Introduction of the 2006 Provision Until Meaningful Controls on
Future Entitlement Spending Are in Place.
The
drug benefit will be financed directly out of general revenues,
with beneficiary premiums paying for about one-sixth of the
estimated prescription drug benefit costs between 2006 and 2014. This will
certainly change. To many seniors, the drug benefit, with its gaps
in coverage, is unattractive and far inferior to their current
coverage. Given the gaps in coverage, particularly the infamous
"doughnut hole" and projected future
premium increases, pressure is already building in Congress to
eliminate these gaps, thus making the drug benefit far more
expensive than originally projected.
With
drug costs certain to rise over the next several years, it is
likely that many Members of Congress will try to hold
beneficiaries' premium increases at artificially low levels and
shift the rising costs to the taxpayers. Even before 2011, when the
first wave of baby boomers retires, the pressure to keep premiums
artificially low will intensify.
This
powerful combination of economic, demographic, and political
pressures inevitably will accelerate the movement--already well
underway--toward some form of government pricing or price controls
on prescription drugs. In another variant of the
same "cost containment" strategy, the Medicare cost explosion could
encourage Members of Congress to impose expenditure caps on drugs
or even Medicare itself, reducing the supply of drugs or medical
services to the senior population.
Process Is Not
Enough
The new law does provide for a special congressional
process to control Medicare costs. Under Title VIII, when the
Medicare trustees determine that general revenues constitute 45
percent of Medicare spending in two consecutive annual reports, the
President is required to submit legislation to Congress, and
Congress is urged to act. According to the most
recent trustees report, Medicare spending will reach this general
revenue threshold in 2012.
A
far more humane and efficient alternative to axing Medicare
budgeting, imposing tough price controls on drugs, or mandating
tighter payment rules for other medical services is to establish a
single-payment formula for Medicare, broadly similar to the one
used in the Federal Employees Health Benefits Program. Under such a
formula, the federal government calculates a contribution to an
enrollee's health plan based on the weighted average of competing
plans, coupled with a cap on the annual amount of the government's
contribution. If enrollees wish, they can buy a more expensive
plan, above the level of the government's contribution, by paying
the difference.
A
central weakness of the existing FEHBP formula is that it does not
adjust for either risk or income. That can and should be altered
for a reformed Medicare program. If Congress wanted to assure
protection to low-income retirees or retirees with higher health
care costs, it could means test or otherwise adjust the annual
government contribution.
Such
an arrangement would be far superior to today's open-ended Medicare
entitlement. Regrettably, many in Congress seem to assume that
taxpayers' generosity is unlimited.
Step #2: Make
the New Prescription Drug Card Permanent.
Medicare beneficiaries should be
permitted, if they wish, to continue using the drug discount card
beyond 2006. It should not be taken away from them in 2006, as
required under current law.
The
drug card program holds promise. Initial independent research
indicates that seniors without drug coverage would secure average
savings of 17.4 percent over current retail prices. Of the
7.3 million expected to sign up for the discount cards, an
estimated 4.7 million persons will qualify for the $600 low-income
subsidy. Under the card program,
the companies offering them must provide three drugs in each of 209
therapeutic classes of drugs and agree to protect the privacy of
the cardholders.
Subsidies for low-income seniors should be
retained and perhaps increased, while the drug subsidy program
itself could be transformed into a means-tested program for a
broader cross section of the Medicare population. Moreover, any
unspent funds for those who are subsidized through the discount
card could be rolled over tax-free from year to year, much as funds
are rolled over in a health savings account.
Step #3:
Transform the Drug Entitlement Into a Catastrophic Coverage
Requirement Combined with Income-based Subsidies for Drug
Coverage.
Under Title I of the new Medicare law,
Congress has created a new and complex drug benefit. It mirrors
nothing that currently exists in the private health care markets.
Under the terms of the law, participating seniors would pay a $35
monthly premium, a $250 deductible, and a 25 percent co-insurance
toward the benefit. The government would pay 75 percent of the
prescription drug costs, up to $2,250 annually. Beyond that amount,
seniors would pay 100 percent of drug costs up to $3,600, above
which catastrophic coverage would pay 95 percent and seniors would
pay 5 percent of the catastrophic costs. The new entitlement is
expected to displace much of existing drug coverage and accelerate
the decline of employer-based retiree drug coverage.
There is a much better way to guarantee
prescription drug access to seniors who lack coverage. Instead of
displacing existing drug coverage with a universal entitlement,
Congress could target federal subsidies to low-income seniors or
those without drug coverage. Subsidies could be delivered through
debit cards, and the subsidized debit cards could be marketed by
health plans on the condition that they cover catastrophic drug
costs.
Congress could build such a new system on
the newly created Medicare drug discount program. This year, 106
organizations have applied to become card sponsors, and a
variety of companies already have been selected. This is a strong
indication of genuine enthusiasm for the new program among
private-sector sponsors.
Step #4: Ensure
that the New Medicare Advantage System Works.
By
2006, the Medicare Advantage program will fully replace the
Medicare+Choice program. While the Medicare Advantage system is far
less robust than the FEHBP, it is nonetheless an improvement over
Medicare+Choice, and the revitalization of private plan competition
in Medicare already shows promise. As noted, the initial changes in
Medicare payments to private plans appear promising, with more than
nine out of 10 plans enhancing benefits and reducing seniors' cost
sharing or premiums.
Medicare Advantage's future success,
however, will depend upon Congress's not only maintaining a
reliable and predictable payment to private health plans, but also
resisting the temptation to micromanage the new competitive
process. Moreover, the character and quality of the
Administration's regulatory regime will also determine Medicare
Advantage's success. Over-regulation could discourage plan
participation and undermine the program's capacity to function
efficiently. In a recent speech to the American Enterprise
Institute, Leonard Schaeffer, Chairman of Wellpoint (the nation's
second largest publicly traded health insurer), said that
Wellpoint's participation would depend upon the character and
quality of CMS regulations: "We have to see the regulations."
There is a crucial lesson here: Beyond
stubborn congressional insistence on artificially capped plan
payments that did not reflect changing market conditions,
over-regulation proved to be particularly damaging to the older
Medicare+Choice program, undermining the enthusiastic participation
of health plans.
Congress can make other improvements. For
example, Congress should allow the Medicare Advantage health plans
to integrate the newly created drug discount card and low-income
assistance subsidies into their annual health plan offerings.
Step #5: Design
the Competitive Demonstration Project to Work, Not
Fail.
Rather than a transition to a new system
of health plan competition based on the FEHBP model, the
House-Senate conference committee produced a limited demonstration
program in six metropolitan areas. Based on previous experience,
this demonstration program is not likely to get underway, much less
succeed, because of a strong historic congressional aversion to
Medicare competitive pricing programs. When economic efficiencies
are thwarted and savings are lost, seniors and taxpayers both
lose.
Seniors and taxpayers can expect a repeat
performance. In a revealing November 24, 2003, speech on the
Medicare legislation, Senator Max Baucus (D-MT), ranking member of
the Senate Finance Committee and a strong supporter of the new
Medicare law, reminded his skeptical colleagues:
What has happened in the past when we have
had these demos? They have been repealed. They have not been
extended. In 1997, Congress set up premium support demonstration
projects. Congress then rushed in to repeal them as quickly as they
could. They were gone. The same will happen here. Do my colleagues
know why? Because the dollars provided to private plans in the
premium support demonstration areas will be much less than in other
parts of the country. The private plans will not be able to
survive.
If
Congress and the Administration are serious about "premium support"
competition among plans, including Medicare itself, they can make a
fair test a reality by speeding up and expanding the proposed
competitive demonstration program. This could be done by
establishing the demo program in the 12 largest U.S. metropolitan
areas as early as 2007 and by allowing any new retirees to carry
their private health plans into retirement with them as their
primary coverage. For demonstration purposes, the competition could
be open to all private health plans, including employer-based
health plans, that meet current federal or state regulatory
requirements, as well as all state and local government employee
health plans. Many state employee health plans are private health
plans that provide solid coverage, including prescription drug
coverage.
Of
course, the numerous health plans already offering coverage in the
Federal Employees Health Benefits Program, available in every
locality and every state of the union, should be automatically
qualified to participate, and federal retirees, just like any other
retirees, should get a contribution from Medicare to offset the
cost of the health plan as their primary coverage if they wish to
do so. As federal employees and retirees know, all of the health
plans in the FEHBP, although they differ, are solid plans with good
benefits.
Conclusion
Medicare is facing serious challenges.
Whatever merits one may ascribe to the recently enacted Medicare
law, it has aggravated, not controlled, rapidly rising Medicare
costs. Its major feature is a massive entitlement expansion.
The
new law also embodies some bad health care policy. There is simply
no need for the federal government to displace existing drug
coverage, pre-empt new private-sector options, or accelerate the
loss of employer-based drug coverage.
Government entitlement programs cannot
control cost, except through budgeting mechanisms or price controls
that reduce the supply of services. One can reasonably expect that,
ultimately, the government drug program will do precisely that,
either directly through tightened drug formularies and price
controls on drugs or indirectly through government-monopsony
purchasing of prescription drugs. Moreover, recent survey data
yield no evidence that the senior population appreciates Congress's
handiwork on the prescription drug issue.
There is still time to fashion a superior
Medicare policy. While the Medicare Modernization Act of 2003
creates a universal drug benefit, it does not take effect until
2006. Meanwhile, the new law creates a discount prescription drug
card, effective this year, combined with a $600 subsidy for
low-income seniors. The discount card is projected to secure
savings of between 10 percent and 25 percent. Regrettably, Congress
made this attractive drug provision temporary, and it is set to
expire in 2006.
To
address the real needs of the senior population, Congress should
make the drug discount card permanent and increase the subsidies
for the targeted Medicare population (i.e., low-income seniors who
are without existing coverage). Making the discount card the
foundation of a new market-based Medicare drug policy would avoid
the needless displacement of drug coverage and the otherwise
inevitable access or price controls on pharmaceuticals.
Meanwhile, Congress should ensure that the
new Medicare Advantage program is neither deliberately weakened by
legislation designed to discourage the participation of health
plans nor implemented in a way that discourages continued
participation among health plans. Congress has no excuse to repeat
the failed regulatory and payment policies that undermined
Medicare+Choice.
Finally, Congress should speed up the
competitive demonstration project, scheduled to begin in 2010, and
see that it is implemented fairly and honestly. It should not be
sabotaged by congressional opponents of real consumer choice and
free-market competition.
Congress has a chance to reverse its
flawed Medicare drug policy well before it is implemented and spare
both seniors and taxpayers needless pain and expense.
Robert E. Moffit,
Ph.D., is Director of the Center for Health Policy Studies
at The Heritage Foundation. This is the first of a special series
of Center for Health Policy Studies papers on the new Medicare
law.