Wrong Rx For Medicare

Volume V, Number 8 August 30, 1999

After repudiating the reform plan of the recent Medicare Commission on the grounds that it did too little to ensure the program's long-term sustain-ability, the White House has come up with a plan that would do nothing to ensure it. Indeed, the White House plan would make the problem worse by adding a costly new entitlement for prescription drugs.

The Concord Coalition believes that Congress shouldn't enact new entitlements until it is confident that America can afford the ones it already has. And if Congress does enact a new entitlement, it should at the very least ensure that the benefit is designed to meet the greatest need at the smallest possible cost.

The White House plan barely nicks the projected growth in current-law Medicare spending, and would actually increase Medicare's total cost. Yes, the plan claims to shore up the program's long-term finances by crediting nearly a trillion dollars in future budget surpluses to its HI trust fund. But, as both the CBO and GAO point out, this accounting gimmick does nothing to make Medicare more fiscally sustainable.

As for the design of the new entitlement, it could hardly be more wasteful. Because it is a universal, first-dollar subsidy, it will be very costly. Yet at the same time, because the maximum benefit is capped, the elderly will not get what they need most: a back-end safety net against catastrophic out-of-pocket costs. Every senior will get something (which may seem like good politics). But it won't protect those few seniors who are in dire straits (which is surely bad policy).

The President is right that we must "modernize" Medicare. His drug plan, however, is the wrong Rx.

A Huge Spending Hike

What exactly does the President propose? Starting in 2002, all Medicare beneficiaries would be eligible to enroll in a new prescription drug program. Those who do would be required to pay a monthly premium. There would be no deductible: The government would pay 50 percent of enrollees' drug expenses from the first dollar up to an annual benefit cap. The cap would be set at $1,000 in 2002, rise to $2,500 in 2008 when the plan is fully phased-in, and be indexed thereafter to the CPI.

The White House expects that the new benefit would cost $230 billion over the next ten years (or $118 billion net of premiums). But this assumes that the rate of growth in drug spending will abruptly slow. According to the CBO, which assumes no slowdown, the benefit would cost $290 billion over the next ten years (or $168 billion net of premiums). This is a huge spending hike, even on an annual basis: By 2009, the benefit would be adding roughly 10 percent per year to total Medicare outlays.

If past experience is any guide, even the more prudent CBO estimate may err on the low side. The history of Medicare cost projections, after all, is a history of embarrassing underestimates, starting with the very first projection in 1965. It put Medicare HI spending at $9 billion in 1990. Actual spending that year: $67 billion.

One uncertainty is how many Medicare beneficiaries will opt to enroll. The CBO assumes that only one-quarter of those who now have a drug benefit from a former employer will do so. But if most employers cancel their plans (why should they pay anything when government is offering to pick up the check?), enrollment could be higher than CBO projects.

Another uncertainty is what health experts call "induced demand"-the tendency for people to spend more when their costs are covered by third-party insurers. The vast majority of Medicare beneficiaries do not now have first-dollar coverage for drugs. Under the White House plan, their spending will rise. The CBO looked carefully at those beneficiaries who have little or no coverage at all and estimated that their spending would increase by 25 percent. It could go up more.

Then there's the expectation that cost growth will be constrained through regulation (price controls, say critics). Much of the public may applaud this. But any near-term savings to today's seniors or taxpayers should be weighed against the longer-term cost: reduced incentives for research and innovation in an industry experts believe is poised on the edge of breathtaking biomedical discoveries. These discoveries could improve the health of tomorrow's seniors-and result in large future Medicare savings.

The cost issue wouldn't be so worrisome if the benefit were self-financing. But it's not. The CBO projects that beneficiary premiums would cover only 42 percent of total costs. And this assumes that premiums will keep pace with rising per-enrollee spending-a doubtful proposition. It's worth recalling that Medicare's SMI premiums were originally set by law to cover 50 percent of costs. They now cover 25 percent.

What about the cost of the drug benefit that's not covered by premiums? A portion is supposed to be offset by a new round of screw-tightening in the rest of Medicare. But most of the funding, the CBO calculates, would depend on future budget surpluses. Unfortunately, the White House provides for no credible mechanism to ensure that these surpluses are saved. And even if it did, we need them to pay for the funding shortfall in the existing Medicare program-a cumulative cash deficit totaling $12.6 trillion in today's dollars over the next seventy-five years.

The Wrong Approach

The President's approach is clearly not affordable. But even if it were, it is the wrong approach. For all of its cost, the White House plan would do little to help those who need assistance the most.

According to the President, lack of access to prescription drugs is pandemic among America's elderly. To support the argument that the need is as universal as the proposed benefit, the White House says that only one-quarter of Medicare beneficiaries have "decent, dependable, private-sector coverage." This is disingenuous. While only 24 percent have generous private coverage paid for by a former employer, 17 percent have generous public coverage paid for by Medicaid, the Veterans' Administration, or other government sources. Another 17 percent, moreover, have coverage through a Medicare managed care plan, and 8 percent have coverage through a private Medigap plan. While coverage under these plans is not always generous, it is often as good was what the President is offering.

Lack of coverage, moreover, is not the same as lack of access. In a recent HHS National Health Interview Survey, only 2 percent of the elderly reported not being able to obtain a needed prescription drug even once during the year. The share ranged from 8 percent among households with incomes under $10,000 to one-tenth of one percent among those with incomes over $50,000.

In the end, most of what the White House plan would accomplish is to dole out money to people who don't really need it. Perhaps its most perverse feature is the subsidy, equal to two-thirds of per-enrollee costs, that would be paid to employers who agree not to cancel existing retiree drug coverage. What could be better proof of the sheer redundancy of the White House plan than having taxpayers pay employers to maintain the coverage that they're now paying for on their own?

To be sure, there is a minority of the elderly who get very sick, need expensive drugs, and spend a lot out of pocket. These are the people the White House would fail to protect. The White House claims that fewer than 10 percent of enrollees would exceed the maximum benefit when its plan is fully phased-in. But the CBO says that the figure is 25 percent-a share that would steadily rise over time because the benefit cap is indexed to the CPI rather than to per-capita drug costs, which will surely grow faster. Why should we be less generous-in fact, refuse any payment at all-to those who have already paid $2,500 out of pocket than to those who have as yet paid nothing? Some who exceed the cap, moreover, will far exceed it. Theirs are the horror stories we hear about in congressional testimony. With or without the White House plan, their lives will be ruined.

How can we protect the truly needy at affordable cost to the taxpayer? The obvious solution is to design a drug benefit with a large deductible and no benefit cap. To even better target those in need, we could income-relate the premiums or explicitly means-test the benefit.

A Disaster in the Making

In truth, we should look beyond prescription drugs and think about improving back-end coverage in all of Medicare. For years, health experts and senior advocates alike have agreed that the program's failure to protect beneficiaries against catastrophic out-of-pockets costs is an unconscionable oversight that cries out for correction.

The irony is that the President might have been able to accomplish this if he had been more willing to work with the Medicare Commission. Indeed, over time, the kind of premium support plan that the Commission envisioned would naturally have shifted the Medicare benefit package toward greater back-end coverage.

As it stands, the White House plan is a disaster in the making. If it becomes law, one of two things will happen. Either we will be stuck with a large new entitlement we cannot afford. Or else seniors will repudiate it, realizing that a potentially valuable new benefit has been transformed by politics into a costly boondoggle. In that case, we will have squandered an opportunity to do something important for America's elderly.