A recently released study by a former adviser to President Bill Clinton corroborates findings by the Congressional Budget Office (CBO) and shows that the universal drug entitlement included in Medicare legislation passed by both the House and Senate would effectively dump millions of senior citizens from health coverage they currently hold.

Specifically, findings by Ken Thorpe[1], an Emory University professor specializing in health policy, and research by Heritage health-care analysts reveal that, under the universal prescription entitlement:

• More than 4 million seniors would lose their current employer-sponsored insurance, and
• 4.8 million seniors who now have Medigap plans could lose that coverage as well.

Policymakers should design a targeted prescription drug program to replace the universal entitlement that will cause millions to use the coverage that they currently enjoy and should complete a plan for Medicare reform that would ultimately allow seniors to select the health plan that best meets their needs.

Why Seniors Would Lose Coverage

In broad outline, Professor Thorpe's analysis is compatible with Congressional Budget Office (CBO) estimates that under both the House- and Senate-passed bills, about a third of seniors (roughly 4 million) would lose their current coverage.[2] This is the first independent study to confirm the CBO statistics. ( view Thorpe study in PDF)

Adding to this grim prospect, 4.8 million seniors who have Medigap plans could lose that coverage as well. The Senate bill would eliminate Medigap outright and, although the House bill would keep the Medigap plans, studies show that, "It is not likely that the added benefit for the vast majority of those retirees would be worth the cost, since insurance payments for drugs do not count toward the beneficiary's out-of-pocket limit under either bill."[3]

State-by-State Impact

Professor Thorpe breaks down the number of retirees who would lose their employer-sponsored drug coverage by state in the following table ( click to view) ( click to print Table 3, pages 7-8, from Thorpe study).

Confirming Earlier Analyses of Medicare Bills' Impact

The Thorpe study broadly confirms other analyses of the impact of a universal drug entitlement. Earlier this year, the CBO estimated that 32 percent of seniors would be dumped from employer-based coverage under the provisions of the House drug entitlement and that 37 percent would lose that coverage under the Senate version.[4]

Moreover, a separate analysis by Heritage Visiting Fellow Lanhee Chen shows that a retiree with employer-based coverage not only would forgo several thousand dollars in compensation with only the promise of a future drug benefit in retirement, but also could lose in excess of $100,000 in future drug benefits, depending on the level of the retirement drug benefit. (Click here to view the Chen analysis)

Another major Heritage Foundation analysis by Visiting Research Fellow Edmund F. Haislmaier analyzes the incentives governing employer behavior under the House and Senate Medicare drug provisions and demonstrates how and why retirees with employer-based coverage would either lose that coverage or, in most cases, see that coverage scaled back significantly. (Click here to view the Haislmaier analysis)

The Right Policy: A Targeted Approach

A targeted drug benefit designed to help the neediest of seniors would eliminate most, if not all, of the problems associated with a universal entitlement. A recently published study by K. Tom Xu, an assistant professor of health economics at Texas Tech University Health Sciences Center, included the percentage of seniors' income that is used to pay for their prescription drugs, broken down by income range.[5] As expected, the range of seniors' drug spending varies dramatically.

Poor seniors, those with incomes up to 124 percent of the federal poverty level (FPL), pay a significantly higher percentage of their income for prescription drugs than seniors with incomes 125 percent of FPL and higher.

Seniors with incomes of 100 percent FPL and below pay, on average, 14.08 percent of their income for prescription drugs. For seniors in the 100-124 percent FPL range, the percentage of income for out-of-pocket costs for prescription drugs drops to 5.2 percent. That is a significant portion of their income, though it is significantly lower than the percentage for seniors in the lower income group.

As the income level increases, the percentage of income spent on out-of-pocket expenses and prescription drugs drops significantly. In the 125-199 percent of FPL range, these expenditures amount to only 3.87 percent of income. For those with incomes ranging from 200-399 percent of FPL, the percentage drops to 2.24 percent. For seniors with incomes at or above 400 percent of the FPL, the amount spent on prescription drugs drops to an almost insignificant 0.82 percent of their income. (See Table 1)

No Time to Waste

Instead of displacing millions of senior citizens who currently have solid prescription drug coverage or accelerating the erosion of such coverage in the private sector, Congress could design a program targeted to help those who need it and not hurt those who do not. Meanwhile, policymakers should continue to work on the tough issues related to transforming Medicare into a viable, consumer-driven program that can meet the needs of the baby-boom generation. At the end of this process, seniors should be able to pick a health plan of their choice in which prescription drug coverage is fully integrated into a solid package of benefits, including coordinated care and catastrophic coverage.

Congress still has time to accomplish this, but it has no time to waste. The first wave of the 77 million baby boomers is set to retire in just eight years, nearly doubling the Medicare population.