Commentary

Quick Fixes Are Toxins

By Tom Miller
This article originally appeared in The World & I on March 12, 2003.

Any plan that Congress passes will only make matters worse. A full-scale overhaul of Medicare is needed.

After three years of unsuccessful attempts to enact various unaffordable and unworkable versions of a Medicare prescription drug benefit, Congress is back at work again. Substantial political momentum remains behind the drive to “do something” to make prescription drugs more affordable for senior voters.

Many Medicare drug proposals still threaten to create a new runaway entitlement program, impose unsustainable stress on an already shaky Medicare program, and jeopardize future medical progress. Congress should refocus its priorities to emphasize greater overall structural reform of Medicare and, in the interim, target more assistance to those seniors most in need of improved drug coverage.

When in a Hole, Stop Digging

The House is likely to return to consideration of a more expensive version of what it narrowly approved last summer, a Republican-backed bill that proposed the largest expansion of Medicare in the program’s 37-year history. Its complex medley of taxpayer subsidies for private insurers and benefits managers hopes to induce them to sell stand-alone drug-benefits coverage to Medicare seniors.

Heading off implementation of a prohibitively expensive drug benefit within an unreformed traditional Medicare program remains a worthwhile political objective, but each time the House cobbles together narrow majority support for a compromise measure, the price tag climbs higher and the signs of real reform grow even dimmer. The structural contortions and complex subsidies involved in trying to steer the delivery of stand-alone drug benefits through private-sector intermediaries rather than the traditional Medicare program’s bureaucracy have become more convoluted with each new version of House legislation. Confused members keep trying either to square political circles or move in opposite directions simultaneously.

In recent years, the Senate has lagged behind the House in moving a Medicare drug-benefit bill through Congress. On the bright side, its failure to muster sufficient support to approve any one of several competing proposals has prevented the final adoption of flawed legislation. But it also has fallen short in advancing necessary structural reforms of Medicare that were neglected in House-passed bills.

An updated version of the Medicare Rx Drug Discount and Security Act, proposed by Sens. Chuck Hagel (R-Nebraska) and John Ensign (R-Nevada), offers some modest potential to do the least harm, but only because it limits the scope of its legislative ambition. The Hagel-Ensign measure combines a discount drug card for routine expenses with heavily subsidized catastrophic coverage for much-larger drug costs. Catastrophic insurance protection would kick in at three different tiers of annual out-of-pocket drug spending for Medicare beneficiaries, based on their annual income levels.

On the Democratic side of the aisle in both houses of Congress, the general approach will be to advocate a more comprehensive and much more expensive benefit. Democratic proposals would impose much less cost-sharing on beneficiaries and add more taxpayer subsidies. They generally try to keep a lid on future budget costs by relying on Medicare bureaucrats to apply tighter price controls (euphemistically labeled negotiated discounts) and regulatory restrictions on coverage.

Current congressional proposals also fail to emphasize delivery of an integrated, as opposed to stand-alone, drug benefit. Encouraging insurers to assemble packages of linked benefits would provide the greatest value by coordinating trade-offs between drugs, surgery, hospitalization, and outpatient care options. Various Medicare drug bills nevertheless drill another deep but narrow silo of separately financed benefits for a new Medicare Part D program, because they want to dodge the political bullet of more comprehensive reform.

Members of Congress keep straining to preserve the superficial facade of competition in privately managed Medicare drug insurance. Their efforts inevitably entail imposing a substantial load of regulatory requirements for any such “qualified” coverage and then trying to counteract them—by offering participating insurers and benefits managers ever-more generous subsidies and protections against risk exposure. Moreover, the unfortunate fact of political life is that 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—particularly when vote-hungry politicians offer such deals.

Comprehensive Reform the Real Answer

It is time to confront the bottom line and come up with something better. We simply cannot afford more empty promises of blank checks. The old ones have already riddled the traditional Medicare program with unsustainable future deficits, onerous price controls, and heavy-handed regulations that threaten future access to quality health care for American seniors.

The Medicare program’s share of our economy 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 (for Part A hospital coverage) and monthly premiums (for Part B outpatient coverage). According to the latest U.S. government financial report, the net present value of negative cash flow (funds needed to cover projected shortfalls) was $4.7 trillion for Part A and an additional $8.1 trillion for Part B.

Simply adding another layer of underfunded Medicare benefits will only feed growing political appetites for “cheap drugs” and accelerate the fiscal stress foreseeable ahead. With each passing year, soaring budget estimates for even modest versions of broad-based Medicare drug benefits strain the bounds of political credulity. If we really cannot get from here to there with politics as usual, what can we do?

The honest answer is that adding prescription drug benefits to Medicare must accompany, not precede, more fundamental structural reform of the entire program. Creation of a sustainable framework for Medicare modernization requires moving from an antiquated defined-benefit structure (which covers a specific set of health services) to a defined contribution model, under which seniors could choose among competing packages of health benefits (including prescription drugs) with taxpayers’ costs capped at preset levels.

It is crucial that the traditional Medicare fee-for-service program be required to improve by competing for market share with private-plan alternatives on a level playing field. Defined-contribution payments must be determined by competitive market prices. Competitive bidding mechanisms would provide the most transparent way to discover the real cost of a baseline package of Medicare benefits that all competing plans must offer. Then, Medicare beneficiaries choosing less-costly plan options could capture their savings for other uses, and seniors seeking additional supplemental benefits would pay higher premiums for them.

If a deregulated version of the faltering Medicare+Choice program for private-plan options and a restructured version of traditional Medicare could operate under market-based ground rules, both could offer a range of enhanced drug options to beneficiaries willing to pay for them, perhaps through greater cost sharing for other covered benefits.

Limit Incremental Changes

Should Congress nevertheless insist on adding a drug benefit to Medicare without tackling fundamental reform, applying several second-best limits and safeguards still could limit, if not avoid, the overall harm to both Medicare and the rest of our health-care system. Under no circumstances should the door be opened to universal subsidies to seniors for routine, manageable drug expenses. Except for targeted assistance to lower-income seniors just beyond the eligibility limits, any new Medicare drug benefits should be limited to catastrophic loss protection. In most private insurance options, the price protection of negotiated discount rates could be passed down to out-of-pocket purchases remaining below the catastrophic stop-loss level. Straightforward high deductibles are administratively simpler and provide better cost-constraining incentives than multiple tiers of coinsurance rates and co-payments. They can be adjusted to target subsidized insurance coverage to those seniors facing the most difficult medical and financial challenges, and they can also help hold off political impulses to impose far-reaching price controls.

We should be careful not to undermine market-based incentives to control even catastrophic drug costs. Instead of providing relatively open-ended subsidies for such protection and delegating key financial and administrative decisions to Medicare program managers (like Hagel-Ensign), we should instead place direct control of subsidized dollars for limited drug coverage in the hands of Medicare beneficiaries and then, through open competition, encourage at-risk private insurers to offer higher-value catastrophic protection to them.

Finally, it’s important to retain a sense of perspective in the midst of an overheated Medicare drug-benefit debate. More than two-thirds of all Medicare seniors currently have some version of prescription drug coverage. In 2001, the average out-of-pocket drug expenditure for Medicare enrollees was $646, and just over 8 percent of all beneficiaries incurred out-of-pocket drug expenses greater than $2,000. Although Medicare beneficiaries without drug coverage use fewer prescription drugs, they still had an average of 25 prescriptions filled in 1999 (the latest year for which data are available), compared to about 32 prescriptions filled for Medicare seniors with drug coverage.

Over the next decade, prescription drug spending by seniors is predicted to increase at more than twice the rate of economic growth, far outstripping the projected growth rate of spending for current Medicare benefits. Even the most generous drug benefit proposals before Congress would subsidize only a small fraction of total drug costs for Medicare seniors.

Moreover, drug spending by Medicare seniors is highly skewed; the Congressional Budget Office estimates that only 17 percent of Medicare beneficiaries will spend more than $5,000 on prescription drugs in 2005, but they will account for nearly 54 percent of drug spending by Medicare seniors that year. Subsidizing the early drug purchases of most Medicare beneficiaries will leave fewer funds available to assist other, more financially stressed seniors with multiple chronic conditions that require more expensive, longer-term drug therapy.

The sustainability of the overall Medicare program, as well as the future quality of life for younger workers and their families, remains at stake, too. Nonseniors need to finance their own health insurance, educate their children, and save for retirement. In addition, a generous Medicare drug benefit that overreaches available financial resources will surely trigger broader government price controls on drugmakers and threaten to choke off access to the vast sums of capital and skilled manpower needed for the next round of lifesaving drug research and development.

In short, we need to walk more slowly and carefully instead of racing ahead blindly. The fundamental solution is to reform the overall Medicare program and allow seniors to determine the best uses of the taxpayer subsidies dedicated to them. Until politicians decide to step up to that task, it may well be that the best we can do is provide limited assistance to those seniors with the greatest drug expenses, along with more limited financial protection for uninsured seniors who otherwise will face the highest list prices for drugs purchased on an out-of-pocket basis.

Tom Miller is director of health policy studies at the Cato Institute in Washington, D.C.