Commentary

Preventive Medicine, Placebo, or Poison Pill?

By Tom Miller
July 17, 2000
Two rival gangs want to sell cheap drugs to older Americans, hoping to hook them as regular customers. They’re fighting to control the market — armed with opinion polls, sound bites and swelling budget surpluses.

Welcome to the Medicare drug war.

The House of Representatives recently bickered over how (not whether) to pay senior citizens’ drug bills. The Republicans narrowly won out as the political low bidder. House Democrats proposed a more generous drug benefit that would operate within the government-run Medicare program itself. The House GOP plan would guarantee seniors the “availability” of private insurance coverage for outpatient drugs by offering subsidies to insurers who provide stand-alone drug coverage.

House Republicans have been anxious to provide themselves with political cover for the fall elections, and so they proposed the Medicare Rx 2000 Act, which establishes a new, voluntary prescription drug benefit. The bill’s standard drug plan offers subsidized monthly premiums with a very low $250 deductible, pays half of the next $2,100 in prescription drug expenses, and also provides “stop-loss” protection to cover all costs after annual out-of-pocket expenses reach $6000. One clear political goal is to conspicuously give a small amount of subsidies to all Medicare beneficiaries, regardless of need.

Those subsidies for initial levels of drug spending will only increase incentives to over-use Medicare benefits and increase the cost of prescription drugs. It’s the same old dead-end path to the Medicare Money Pit: Stimulate demand with irresponsible promises; trigger an explosion of benefit costs; resort to price controls and regulations that ration the supply of medical treatment; chill future innovative research; snuff out the next round of life-saving drugs.

Another problem is that most private health insurers don’t want to offer the kind of stand-alone drug insurance favored by House Republicans. In a voluntary market, seniors expecting to face steady, and higher, drug costs are more likely to sign up for the bill’s subsidized benefits package. Seniors expecting low costs will pass up a bad bargain, particularly when standard drug plans must charge everyone the same price. Those “adverse selection” factors will drive up costs and premiums.

Moreover, the House Republican bill provides drug benefits wastefully and ineffectively. Steering Medicare seniors toward stand-alone drug insurance squanders the potential savings and consumer benefits from integrated insurance that provides comprehensive health care benefits.

Thus, the Medicare Rx 2000 Act has to set up phony insurance markets, supported by massive taxpayer subsidies and controlled by rigid regulations. Federal reinsurance subsidies will have to climb higher to ensure the ubiquitous availability of “private” insurance options. But the federal government, upon going into business with private insurers, won’t remain a silent partner for long. Restrictive regulation and political pressure will hamper efforts to offer different drug benefits that remain “actuarially equivalent” to standard coverage.

The House Republican bill sets off another desperate bidding contest for the votes of seniors and conscripts younger workers to finance future rounds of escalating Medicare costs. After today’s budget surplus projections fade away, this legislation’s false promises will jeopardize the sustainability of other Medicare benefits and crowd out funding for other national commitments.

If Congress cannot resist the impulse to “do something” short of fundamental Medicare reform that expands private competitive insurance choices, in the interim it should at least consider less harmful prescription drug plans — emphasizing higher deductibles, targeted assistance to low-income seniors not eligible for Medicaid, reformed private Medigap coverage, and a deregulated Medicare+Choice program.

Even if the Republican bill fails to become law, it sets a floor of flawed premises beneath future rounds of Medicare reform. Hill Republicans may believe they’re in a political hole on this issue, but they should stop digging until they can find a better way out.

Tom Miller is director of health policy studies at the Cato Institute, a nonpartisan public policy research foundation based in Washington, D.C.