Over The Fiscal Brink

Volume IX, Number 7 November 21, 2003

For the past few years, Congress has flirted with adding a prescription drug entitlement to Medicare, only to pull back at the last moment. Now, with AARP's blessing, Congress is again rushing toward the fiscal brink.

The responsible approach would be to offer a targeted drug benefit as part of an overall reform package that restrains total Medicare costs. The GOP plan being rushed to the floor, like all the leading alternatives recently debated in Congress, would pass out subsidies to every senior regardless of need while punting on any plan to control costs. Congress' approach may seem like good politics, but it is terrible policy. It represents a total retreat from the kind of facing up that is needed to prepare America for the age wave.

  • The bill does nothing to reduce the long-term cost of the existing Medicare program. According to the Trustees, the cost of Medicare is due to double as a share of GDP over the next thirty years and triple over the next sixty. Congress could have traded a drug benefit for structural reforms that reduce Medicare's long-term burden on the budget and economy. But it didn't. The new drug benefit is simply piled on top of an existing benefit package that is already unaffordable.

  • The bill vastly increases Medicare's total cost. Congress could have minimized the price of the new benefit by targeting it to those with low incomes or high drug costs. Instead, it is preparing to enact the biggest entitlement expansion in thirty years. According to the CBO, the drug benefit will add nearly 20 percent to Medicare's long-term cost. This estimate, moreover, may turn out to be low if a larger-than-expected number of employers drop their retiree drug coverage or if future Congresses fill in the bill's "doughnut hole."

  • The drug benefit is so perversely designed that it begs for further expansion. The bill includes a large gap or "doughnut hole" between its front-end coverage and its catastrophic backstop. The doughnut hole has no policy rationale. Its sole purpose is political: to allow Congress to offer at least some benefit to everyone without exceeding (at least on paper) the budget resolution's $400 billion spending limit. Because the doughnut hole is arbitrary, beneficiaries are likely to view it as unfair and demand that it be filled.

  • The bill does little to make Medicare more efficient. Proponents claim that the bill will make Medicare more efficient by requiring the traditional fee-for-service program to compete with managed care alternatives. Unfortunately, the bill requires nothing of the sort. The competition is limited to a "demonstration project"-and even this isn't scheduled to begin until 2010.

  • The bill contains no effective cost-containment mechanism. To the extent that Congress was unable to introduce greater efficiency into Medicare, one would expect it to fall back on more direct approaches to cost control. During the evolution of the bill, various measures were discussed, including a cap that would have scaled back the drug benefit if the total cost exceeded $400 billion. All that found its it way into the final bill is a bulletless "trigger"-a mere warning flag that Congress is free to ignore. The one bright spot in the bill is the requirement that upper-income seniors pay higher Part B premiums. The "means test," however, only applies to a small number of beneficiaries-and will fully affect even fewer: singles with incomes over $200,000 and couples with incomes over $400,000.

The Medicare bill Congress is considering threatens to balloon the deficit, crowd out other budget priorities, and burden future generations. Yet in a remarkable abdication of stewardship, the Congressional leadership and the White House seem less concerned about the drug benefit's fiscal consequences than who wins political points with America's seniors. This explains the surprising spectacle of Republicans determined to enact the biggest expansion of government in a generation-and of Democrats trying to stop them.