Commentary

The Medicare Drug Benefit War

By Tom Miller
July 18, 2002

Last week it was the Senate’s turn to consider its own unaffordable and unworkable version of a Medicare prescription drug benefit. Last month, the House narrowly approved the largest expansion of Medicare in 37 years.

Few Capitol Hill observers expect any final measure to be enacted into law this year, but this latest round of biannual pandering to seniors threatens to deliver more than a quick fix for incumbents seeking reelection this fall. It sets the stage for a new runaway entitlement program, unsustainable stress on an already-shaky Medicare program, and serious threats to future medical progress.

Sooner or later, it could be déjà vu(doo) all over again — for taxpayers, younger workers and patients awaiting new cures for deadly illnesses.

In last month’s House debate, Republicans succeeded “tactically” while surrendering strategically. Under their complex measure that was narrowly approved, federal taxpayers would toss hefty subsidies (averaging 65 percent of covered drug costs) at private insurers and benefits managers to induce them to sell stand-alone drug benefits coverage to Medicare seniors. Those subsidies also were designed to entice many seniors with low drug bills to participate in a new Medicare (Part D) drug benefits program.

Although House Republicans boasted that their bill provided a “permanent entitlement” to seniors, they still hoped to set a few fiscal limits on new Medicare drug spending ($320 billion over 10 years) and to steer the delivery of drug benefits through private sector intermediaries.

House Democrats upped the political ante by proposing lower monthly premiums, a smaller annual deductible, even more generous co-insurance, and a lower cap on out-of-pocket drug spending. House Republicans were stuck with an unsightly “doughnut” of uncovered drug expenses in their bill, while House Democrats promised to add jelly filling to the doughnut hole.

The Democrat-controlled Senate will consider a more costly drug benefit proposal by Sens. Bob Graham, D-Fla., and Zell Miller, D-Ga. It would charge seniors lower monthly premiums — with no deductible at all — and rely instead on relatively modest co-payments per purchase ($10 for generic drugs, $ 40 for brand-name drugs). A competing measure from the so-called Tripartisan Group, led by Sen. Charles Grassley, R-Iowa, is likely to provide drug benefits similar to the House measure, but with somewhat less generous coinsurance rates.

All the above measures share the political imperative to spread taxpayer subsidies wide and thin — so that almost all seniors get a “taste” of new benefits — rather than to target them more narrowly to support more generously those seniors most in need of assistance. “Feeding the middle class” (of seniors) remains the pillar of Medicare politics as usual.

Most of the proposals also fail to provide an integrated, as opposed to stand-alone, drug benefit. Encouraging insurers to assemble packages of linked benefits would provide the greatest value by coordinating tradeoffs among drugs, surgery, hospitalization and outpatient care options. Instead, the various Medicare drug bills simply drill another deep but narrow silo of separately financed benefits for a new Medicare Part D program, to accompany our old, failing friends — Part A, Part B, and Part C.

The House measure strained to preserve the superficial facade of competition in privately managed Medicare drug insurance, but it imposed a substantial load of regulatory requirements for any such “qualified” coverage. When taxpayers pick up 65 percent of the costs of drug coverage, it guarantees a growing federal role in closely monitoring and regulating both drug prices and benefits options.

Most Medicare beneficiaries are more interested in getting someone else to guarantee them lower drug prices (or pay most of their bills) than in purchasing “insurance” protection at market-based prices. A recent survey of seniors conducted by Harvard’s Kennedy School of Government found that seven out of 10 seniors would personally be willing to pay no more than $30 a month ($360 a year) for prescription drug coverage that paid for at least half of their prescription drug bills (roughly a $640 net subsidy, given that the survey assumed the average senior’s annual prescription drug costs are $2000). Thirty percent said they would not be willing to pay anything at all for such subsidized drug coverage.

Feeding this sort of political appetite will only worsen Medicare’s fiscal stress down the road. The current Medicare program’s share of our economy already is expected to double between now and 2035. Last year, the average amount of Medicare benefits per enrollee (without any outpatient drug coverage) was $6,200. In future decades, Medicare will rely more and more on general revenue financing and less on payroll taxes and monthly premiums.

Simply adding another layer of underfunded, irresponsible promises to Medicare will stimulate beneficiary demand for “cheap” drugs and over-use of those benefits. It is sure to be followed by exploding budgetary costs and increases in the “unsubsidized” price of Medicare’s prescription drugs. Up next will be later waves of drug coverage rollbacks, regulatory restrictions, tighter drug formularies, and price controls that chill future innovative research and snuff out the next round of life-saving drugs.

It’s the same old dead-end path to the Medicare Money Pit that we’ve already traveled down for hospital and physician services. As fiscal pressures mount, the federal government does not “negotiate” with medical providers for lower prices for covered services; it dictates below-market reimbursements as a monopsonist purchaser. The full costs of such price discounts eventually include reduced access to quality care and destabilized health care markets.

It’s a simple fact that people with greater insurance coverage for prescription drugs will buy more of them, at higher overall costs. The Medicare Payment Advisory Commission concluded that a steep decline in patients’ out-of-pocket liability for drug costs (from 87 percent in 1968 to 28 percent in 1998) was one of the key factors that contributed to a 200 percent increase in total real drug spending per person over a 30-year period.

Two weeks ago, the Bush administration issued a study extolling the many benefits to seniors from current drug therapies and future medical innovation. It warned that too much government regulation of drug prices and drug coverage could jeopardize the development and availability of medical breakthroughs. But neither President Bush nor congressional leaders have invested hardly any political capital to advance long-overdue fundamental Medicare reforms.

Instead of merely competing to hand out other (younger) people’s money to seniors to buy lower-priced drugs, they need to expand private competitive insurance choices that incorporate affordable prescription drug options into integrated benefits packages.

The recent House legislation does contain a few morsels of overall reform (limited competitive bidding, cash rebates, short-term payment fixes for Medicare+Choice, regulatory reduction and contract reform in traditional Medicare, and a very limited stab at new Medigap choices). The proposed Senate tripartisan bill toys with an option that consolidates Medicare Part A and Part B into a single, higher deductible and adds overall catastrophic loss protection to traditional Medicare services. But these proposals fall well short of comprehensive Medicare restructuring based on a true defined contribution system, vigorous competition between private plans and traditional Medicare on a level playing field, and deregulated benefits options that reward value-maximizing choices.

If Congress cannot resist the impulse to “do something” short of fundamental reform, it should at least do less harm by emphasizing higher deductibles, catastrophic loss protection, targeted assistance to lower income seniors, reformed individual Medigap coverage and a deregulated Medicare+Choice program. Under no circumstances should the door be opened to universal subsidies to seniors for routine, manageable drug expenses.

Last year, the average out-of-pocket drug expenditure for all Medicare enrollees was about $650.

Let’s first deal effectively with the small slice of Medicare beneficiaries (less than 10 percent) that faces more than $2,000 a year in out-of-pocket drug expenses, as well as with lower-income beneficiaries just beyond the eligibility limits for Medicaid drug assistance. Implementing a catastrophic prescription drug benefit would provide some breathing room for decision makers to get a better fix on future program costs, while targeting necessary relief to those seniors most in need.

It would also head off far greater threats to the future quality of life for younger workers and their families. Medicare’s growing claims on their future earnings already will limit their ability to purchase their own health insurance, educate their children and save for retirement. Strip-mining today’s on-the-shelf inventory of drugs through political price controls will undermine incentives to provide the capital and skilled manpower to develop future rounds of blockbuster drugs in the decades ahead.

Let’s call a cease-fire to renegotiate the terms of this current drug war before lots of bystanders get hurt.

Tom Miller is director of health policy studies at the Cato Institute.