Why The Medicare Drug Benefit Is Bad Policy

Volume IX, Number 4 June 20, 2003

Last year, Congress stepped back from the fiscal brink just as it was poised to pass a vast new Medicare prescription drug entitlement. This year, Congress seems determined to take the leap. The drug legislation now gathering momentum in the Senate and House represents the biggest benefit expansion in Medicare's history. It is unaccompanied by any effective cost control. And it is bound to cost far more than its official--and already unaffordable--$400 billion price tag.

In fact, to keep projected costs within the limits established by the budget resolution, Congress is resorting to the same kind of gimmickry as it did in the recent tax cut. In the case of the tax cut, it concealed the true cost with “sunsets” that everyone understands future Congresses will repeal. In the case of the drug benefit, the gimmick is “doughnut holes”--gaps in coverage that everyone understands future Congresses will fill. The responsible approach would be to offer a targeted prescription drug benefit as part of an overall reform package that restrains total Medicare costs. The approach favored by Congress is to pass out politically popular subsidies to all seniors regardless of need while punting on any plan to control costs. While this may seem like good politics, it is surely bad policy.

No Policy Rationale

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. Three years ago, the Trustees projected that the cost of Medicare would double as a share of GDP over the next seventy-five years, from 2.6 to 5.3 percent. They now project that it will triple to 9.1 percent.

Yet instead of focusing on how to restrain the cost of the existing program, Congress is rushing to expand it. The cost of the Senate and House drug 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 have to come out of general revenues, which is to say that it would add to the deficit. The Senate drug plan is projected by the CBO to cost $402 billion net of premiums over the next ten years. The House plan is expected to cost roughly the same. By 2013, either one would be adding nearly 20 percent per year to total Medicare spending.

These projections may be low for a variety of reasons. Prescription drug costs may rise faster than anticipated. A larger-than-expected number of employers may drop their retiree drug coverage, leaving government to pick up the tab. Such substitution should be a big concern. In the long run, a large share of the new Medicare drug benefits may simply replace existing public and private insurance. Not surprisingly, large corporations with aging workforces and generous retiree health plans have been lobbying vigorously for the bills.

The projections also make the politically dubious assumption that future Congresses will raise beneficiary premiums in line with per capita drug spending. 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.

Then there are the so-called doughnut holes--gaps between the plans' front-end coverage and catastrophic backstops. The Senate plan would pay 50 percent of all spending between a $275 deductible and $4,500, then nothing between $4,500 and $5,800--the doughnut hole. The House plan would pay 80 percent of all drug spending between a $250 deductible and $2,000, then nothing between $2,000 and $5,100.

The doughnut holes have no policy rationale. Their sole purpose is to keep spending from exceeding the $400 billion limit established in the budget resolution. Because the holes are arbitrary, beneficiaries will view them as unfair--and demand that they be filled in. Speaking of the drug plan, Senator Edward Kennedy predicts that “We'll expand it over a period of time.”

Horror Stories

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. Today, in fact, fully three-quarters of the elderly already have prescription drug coverage. 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. According to the Kaiser Family Foundation, 70 percent of Medicare beneficiaries spend less than $1,000 out of pocket each year on prescription drugs; less than 5 percent spend more than $5,000.

Yes, there are people in genuine need. Some elders have serious medical conditions, require expensive drugs, and have poor insurance coverage or no insurance coverage. 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.

The genuinely needy could be helped at a fraction of the cost of the universal entitlement that Congress is now debating. But apparently, Congress' goal is to do something for most seniors, not to help those seniors who are most in need. Or, as House Ways and Means Chairman Bill Thomas describes it, the purpose is “to put the money where the people are.”

Both the Senate and House plans would subsidize drug spending for everyone above a low deductible. True, the House plan means tests its catastrophic backstop, meaning that the doughnut hole is larger for higher-income beneficiaries. But the means test doesn't begin to apply until such a high income--$120,000 for a couple--that it affects very few people and saves very little money. Besides, the means test is perversely designed. A sensible test would pare back front-end rather than catastrophic coverage, not the other way around.

A Better Medicare System

It's a shame that the debate about prescription drug coverage has degenerated into a rush to hand out favors to every senior, no matter how healthy or wealthy.

After all, Congress has the chance to accomplish something more important--namely, to make Medicare fiscally sustainable. Some have suggested a grand bargain in which Congress trades drug coverage for long-term cost control. One possibility is to link the generosity of the coverage to participation in managed-care plans. Congress, however, is passing up this opportunity. In the current bills, beneficiaries will get the same coverage even if they stay in fee-for-service Medicare.

Although the bills are supposed to introduce more market incentives into Medicare, CBO projects that they would do little or nothing to reduce costs. The Senate bill does not even require fee-for-service Medicare to compete with Medicare managed-care plans. The House bill does require competition. The measure, however, isn't scheduled to go into effect until 2010. It provides for no mechanism to guarantee cost savings. And, in any case, the whole idea of market competition is meeting considerable ideological opposition and is unlikely to survive in the final legislation. If Congress wanted to do the job right it could create a better Medicare system without increasing total spending--just as it could have created a better tax system without reducing total revenue. In the case of the tax system, Congress could have chosen to close loopholes and broaden the tax base in order to pay for marginal rate cuts. In the case of Medicare, it could choose to scale back front-end coverage to pay for what people really need: reliable catastrophic coverage, not just for prescription drugs, but for doctors and hospitals as well.

In an era when private insurance plans for workers are steadily raising co-payments and deductibles, Congress' insistence on front-end coverage for seniors is not only fiscally irresponsible, but generationally inequitable. Many in Congress profess outrage at the idea of forcing seniors into managed care. Says Representative Billy Tauzin, “You couldn't move my mother out of Medicare with a bulldozer.” Yet some 40 million younger Americans lack any insurance at all. And of those with insurance, only a tiny minority have the kind of unrestricted fee-for-service coverage that Medicare beneficiaries take for granted.

The Simple Truth

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 option. 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.

You'd think all of this would be self-evident. The surpluses have vanished and the Boomers' retirement is fast approaching. But whether it's a question of tax cuts or benefit hikes, Congress doesn't seem to realize that the budget party is over. It's time for leaders to wake up to reality--and step back from the fiscal brink.