WASHINGTON, APRIL 27, 2004 - It's not too late to fix the Medicare Modernization Act of 2003 so that the program avoids a deepening fiscal crisis and helps seniors who can't afford their prescriptions. In three new papers, The Heritage Foundation maps out how Congress can do just that - by building on some of the better features in the legislation.

Left unchecked, the costs of the universal prescription-drug entitlement approved for seniors last year will explode, says Robert Moffit, director of Heritage's Center for Health Policy Studies, in the first paper. "The entitlement alone will add $8.1 trillion to Medicare's unfunded liabilities over the next 75 years, according to the program's trustees," he says. "The added burden on current and future taxpayers will be enormous, to say the least."

Fortunately, the universal drug benefit doesn't go into effect until 2006, so there's still time to remedy the problem, Moffit says. The solution can be found in one provision that does go into effect this year: the prescription-drug discount cards.

In addition to authorizing these cards, which are projected to result in savings of 10 percent to 25 percent on drug costs, the Medicare Modernization Act offers them free - and with a $600 subsidy for drug purchases - for low-income seniors currently lacking drug benefits. Moffit says Congress should make this program permanent, increase the subsidies and abandon the universal benefit for which everyone from Bill Gates to minimum-wage workers would be eligible.

"Making the discount card the foundation of a new, targeted and market-based Medicare drug policy would slow the needless displacement of existing drug coverage and the otherwise inevitable imposition of price controls on drugs," he says.

In the second paper, Joseph Antos of the American Enterprise Institute argues that the Medicare Modernization Act has useful cost-containment provisions built in - if they're handled properly. For example, he notes, the law establishes an early-warning system that reflects the financial activities of all parts of Medicare - as opposed to, in the past, taking into account only Part A, which covers hospital costs.

Part A is funded by the Medicare payroll tax, a tax on Social Security benefits and other sources dedicated specifically to it. In Part B, premiums paid by beneficiaries cover a quarter of the cost, with the rest coming from general tax revenues. (The Act did introduce some means-testing for Part B: Those making more than $80,000 per year will pay higher premiums after 2007). In the new Part D for prescription drugs, all costs are to be paid from general revenues.

General revenue covers about 35 percent of Medicare's costs today. If the Medicare trustees find that general revenue will cover 45 percent of spending at any time in two straight seven-year periods - say 2010 to 2017 and 2011 to 2018 - the president must submit legislation that addresses Medicare financing. But there's no requirement that the president's legislation be passed and nothing to stop Congress from calling for even more spending. Antos recommends that the president's proposal be required to contain a "preponderance of cost-reducing proposals."

Yet he cautions against automatic spending cuts - i.e., a provision that would automatically reduce benefits if Medicare spending reaches the 45 percent threshold. This doesn't bring efficiency and doesn't force Congress to truly address the problems that led to the excessive costs, Antos says.

Finally, he suggests that Congress adopt the payment approach used in the Federal Employees Health Benefits Program, which serves 10 million federal employees, retirees and their families. Instead of setting the amount it will pay for every single medical service or good, FEHBP sets the amount it will contribute to employee premiums. Employees then choose the plan that best meets their health and budget concerns, which means they can pay more if they want "Cadillac" coverage.

The third paper, by Antos and Grace-Marie Turner, president of the Galen Institute, addresses the drug discount cards. Turner and Antos say critics have raised four concerns about the cards:

• A single card may not cover all the drugs a beneficiary uses.
• After seniors sign up for a card, its sponsors may then cease to cover drugs those seniors need.
• Card plans can change drug prices weekly, even though beneficiaries are locked into their plans for a year.
• Rising drug prices may erode the savings from the card.

First, they point out, this is a discount program, not a drug benefit. The card can't cover every drug and still provide savings. Second, drug-card plans are required to cover at least one drug in all therapeutic categories to ensure seniors can get the drugs they need. Third, most of the plans that will offer cards also plan to participate in Medicare Part D in 2006 and beyond. They have reputations to protect and customers to keep. That means they will monitor and limit price hikes to ensure they reflect market costs. Fourth, the early reports are that card sponsors are competing to negotiate the lowest prices on drugs to attract as many enrollees as possible.

All three papers are available online