A Drug Benefit Won't Cure What Ails Medicare Cut

Volume VIII, Number 4 August 21, 2002

For a while, it looked as if Congress might commit the folly of enacting a vast expansion in Medicare just nine years before the first Boomers become eligible. With the failure of the Senate to reach agreement on a prescription drug plan, it has stepped back from the fiscal brink.

The Concord Coalition does not dispute that adding prescription drug coverage to Medicare is a worthy goal. Drugs are an integral part of modern health-care -- and often, the most cost effective therapeutic alternative. Rising out-of-pocket spending on drugs is also a growing burden for many seniors.

The simple truth, however, is that Medicare's existing benefit package is unaffordable. Congress shouldn't add new benefits until it ensures that we can afford the ones we already have. And if it does add new benefits, it should at the very least design them to meet the greatest need at the smallest possible expense.

The most widely supported drug plans in Congress did nothing to reduce Medicare's long-term cost. Indeed, they would have greatly added to it. As for design, they offered wasteful front-end coverage to all seniors regardless of financial need.

That may have seemed like good politics, but it was terrible policy. When Congress re-engages the prescription drug issue, it should do so as part of a comprehensive reform that reduces Medicare's total projected cost. That way, it could “do something” for America's seniors without sticking America's children with the bill. And that would be good policy, not just good politics.

Reality Check

Let's begin with a fiscal reality check. The federal budget is in deficit, Medicare spending growth has sharply accelerated, and the Trustees have made a dramatic upward revision in their long-term cost projections. Two years ago, the Trustees projected that the cost of Medicare would double as a share of the economy over the next seventy-five years, from 2.5 to 5.3 percent of GDP. They now project that it will triple to 8.4 percent.

Yet instead of focusing on how to rein in Medicare spending, Congress spent the summer debating which of several costly drug plans to enact. All of the most widely supported bills -- the House Republican plan, the Senate “Tripartisan” plan, and the Senate Democratic plan -- would have paid benefits to all seniors after a low deductible, or, in the case of the Senate Democratic plan, no deductible. All picked up premiums and co-payments for low-income seniors. And all provided a catastrophic cap on out-of-pocket spending.

The cost of the plans wouldn't be an issue if they were self-financing. But they aren't: Beneficiary premiums would cover just a fraction of total costs. The balance would come out of general revenues, which is to say that it would add to the federal deficit.

The House Republican plan is projected by the CBO to cost $320 billion net of premiums from 2005 to 2012, its first eight years in operation, the Tripartisan plan $340 billion. The Senate Democratic plan would cost nearly twice as much: $594 billion. By 2012, it would be adding roughly 25 percent a year to net Medicare spending.

If experience is any guide, even these figures may understate future costs. The history of Medicare cost projections, after all, is one of embarrassing underestimates, starting with the very first projection in 1965. It put spending on Medicare Part A at $9 billion in 1990. Actual spending that year came in at $67 billion.

The current estimates may be low for a number of reasons. “Induced demand” -- the tendency for people to spend more when their purchases are covered by third-party insurance -- may add to costs. Anticipated savings from market competition (in the case of the House Republican and Senate Tripartisan plans) or monopsony power (in the case of the Senate Democratic plan) may not materialize. The estimates also assume that future Congresses will raise beneficiary premiums on schedule. It's worth recalling that Medicare's Part B premiums were originally set by law to cover 50 percent of program costs. They now cover 25 percent.

The Real Problem

To judge by the breadth of congressional support for a universal drug benefit, you might suppose there was a universal need. But this is not the case.

Contrary to what most people assume, lack of prescription drug coverage is not pandemic among the elderly. Fully three-quarters have coverage already. About half have coverage through employer retiree health plans or through other federal and state programs, mainly Medicaid. Another one-quarter have coverage through Medicare HMOs or private Medigap policies. Although these last two sources are not always generous, the coverage they offer is often as good as what the congressional plans would have offered.

Lack of coverage, moreover, is not the same as lack of access. According to HHS, only 2 percent of the elderly report not being able to obtain a needed prescription drug even once during the course of the year. The share ranges from 8 percent among households with incomes under $10,000 to the merest sliver -- one-tenth of one percent -- among those with incomes over $50,000.

This is not to deny that there is a real problem. Some elders have serious medical conditions, require expensive drugs, and spend a lot out-of-pocket. If they live on limited incomes, they face economic ruin. These are the horror stories we hear about in congressional testimony. With drug costs rising faster than incomes, we are going to be hearing more of them in the years to come.

A More Responsible Approach

So yes, there are people in genuine need. But we betray these genuinely needy people by trying to legislate a politically popular bonanza to every senior. Why? Because the plans end up being prohibitively expensive -- or else, in the effort to limit expense, they end up with perverse and self-defeating gaps in coverage.

The House Republican and the Senate Tripartisan plans cost substantially less than the Senate Democratic plan, but they did so mainly because they contained large “doughnut holes” -- gaps between their front-end coverage and their catastrophic caps. The House plan would have paid 80 percent of all drug spending between a $250 deductible and $1,000, 50 percent of all spending between $1,000 and $2,000, and nothing between $2000 and $4,800. What conceivable rationale is there for covering a larger share of drug costs for someone who has spent only $500 out-of-pocket than for someone who has spent $4,500? There is none -- at least not a policy rationale. The purpose of the front-end coverage is purely political: to allow the plan's backers to say that they would give at least something to everyone.

The Concord Coalition urges leaders in both parties to take a more responsible approach. A universal entitlement to prescription drugs is unaffordable and will remain so until Congress enacts comprehensive cost-saving reform of Medicare. Absent such reform, the only workable plan is one that targets benefits entirely to seniors who have low incomes or catastrophic expenses.

To further limit cost, the definition of catastrophic should itself take into account beneficiary income. In other words, the plan should acknowledge the obvious -- that what is a “catastrophic” expense for a low-income widow subsisting solely on her Social Security check may come to nothing more than green fees for the retired business executive. Alternatively, higher income beneficiaries could be charged higher premiums.

The Graham-Smith compromise that was briefly considered in the Senate got rid of front-end coverage except for low-income beneficiaries. But because the low-income threshold was high and the catastrophic cap was low and unrelated to income, this plan actually cost more than the House Republican or Senate Tripartisan plans. The only plan that would have means-tested all benefits was introduced by Senators Hagel and Ensign. It got rid of front-end coverage for all seniors and provided a catastrophic cap that rose along with income. This approach is promising and could be used to design a plan that is much less expensive than the alternatives.

Surplus Hangover

It's a shame that the debate about prescription drug coverage degenerated into a bidding war over how large a subsidy the budget could afford to dole out to every Medicare beneficiary, no matter how healthy or wealthy.

There was, after all, an opportunity to accomplish something important. Congress could have taken advantage of the spotlight on prescription drugs to focus the public's attention on the need for comprehensive Medicare reform. But it missed the opportunity. It could have enacted an economical plan that helped those seniors most in need. But it missed the opportunity.

All of this points to a perilous disconnect at the heart of today‘s fiscal policy. The surpluses have vanished and the Boomers' retirement is fast approaching. Yet Congress doesn't seem to realize that the budget party is over. It's time for the nation's leaders to shake off their surplus hangover and start making some hard choices.