News Release

February 9, 2005

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Medicare drug benefit could cost twice latest estimate
Bill will fall on children and grandchildren of current beneficiaries

WASHINGTON -- A report released today by the Cato Institute, argues that the Medicare prescription drug benefit could cost twice as much as the 10-year, $720 billion White House estimate, which itself shatters the original Bush administration estimate from 2003, when the program narrowly passed Congress in 2003.

In "Medicare Prescription Drugs: Medical Necessity Meets Fiscal Insanity," Jagadeesh Gokhale of the Cato Institute and Joseph Antos of the American Enterprise Institute list several scenarios for a higher cost: "The new drug plan may be less effective at containing costs than is assumed in making the estimates; more employers than expected may drop retiree drug coverage under their plans; newer drugs may be more expensive than assumed; more retirees may enroll in the drug program than assumed; enrollees may demand more drug treatments than assumed; physicians may begin prescribing more drugs to seniors than assumed; consolidation in the pharmaceutical industry may lead to less competition, greater monopoly power, and higher drug prices."

Additionally, future Congresses are likely to come under considerable pressure from seniors to amend the current benefit to include more coverage.

Antos and Gokhale argue that the new projections from the Bush administration are a result of making long-term policy decisions based on a cost-evaluation over a short time horizon. The drug benefit's cost projections have already jumped 86 percent in two years, and are likely to increase again when the program is fully enacted in 2006.

The authors recommend that Congress revisit the Medicare prescription drug policy with an eye to containing its costs. However, simply introducing constraints on total federal drug outlays is not the right approach because they will lead to little saving in Medicare's overall costs and will limit the availability of new and beneficial drugs that seniors will increasingly rely on in the future. A more comprehensive market-based strategy is needed that ensures cost-effective provision of appropriate medical treatments including drug therapies.

Without reform, Medicare's bill will fall on future generations. Antos and Gokhale estimate that if taxes are increased to cover costs, under official projections, those currently between ages 15 and 40 will each bear an added lifetime burden of $2,500 in present value. Today's children and future generations will pay more than $4,000 (in present value) each over their lifetimes. In contrast, baby-boomers and today's retirees will benefit from the new coverage to the tune of $18,000 and $22,000 respectively.

Briefing Paper No. 91