Commentary

Tough Pill to Swallow

By Peter J. Ferrara
November 19, 1999
President Clinton has proposed expanding Medicare to provide prescription-drug coverage for senior citizens. The president’s plan, however, would substantially harm seniors. There are better ways to proceed.

Under the president’s plan, starting in the year 2002 seniors would pay an additional premium of $24 per month for the proposed drug coverage, which would pay 50 percent of the first $2,000 per year in expenses.

When the plan is fully phased in by 2008, seniors would pay $44 per month for the drug coverage, and the plan would pay 50 percent of the first $5,000 in drug costs. There would be no coverage for costs over $5,000 per year, though some of the latest, most advanced drug therapies would exceed this limit.

Incredibly, most seniors would actually pay more for prescription drugs under the Clinton plan than they do now. According to the National Academy for Social Insurance, 72 percent of all seniors spend less than $500 per year on drugs. More than half spend less than $200 per year. Only 14 percent spend more than $ 1,000 per year, and only 4 percent spend more than $2,000 per year.

If you do the math you will find that all seniors with less than $1,000 per year in prescription drug costs (nearly 87 percent) would see their costs go up. A senior with $500 in drug costs would still pay $250 directly, plus $528 in premiums for a total of $778. A senior with $200 in drug costs would pay $100 directly, plus $528 in premiums for a total of $628. A senior with $900 in costs would pay $450 out of pocket and $528 in premiums for a total cost of $978.

A few seniors would gain. For a senior with $5,000 in drug costs, the Clinton plan would pay $2,500. After the senior pays his $2,500 and the $528 in premiums, his total cost would be reduced by $1,972.

In other words, the Clinton plan would not provide true insurance protection against a catastrophic (i.e., high cost) illness. It does not include the coverage seniors really need, which is a protection against all expenses over a certain level. It is simply a scheme for spreading costs around under which the great majority of seniors would lose.

There is another downside as well. Under Mr. Clinton’s plan the federal government, via the Health Care Financing Administration (HCFA), will decide what drugs you get and how much it is willing to pay for them. As costs increase, HCFA will likely cover fewer and fewer drugs, especially the latest, most advanced and most expensive drugs. While the plan is supposed to be voluntary, that won’t last. And here’s why: The great majority of seniors, who have low drug costs, would not join because they would lose under the plan - especially since they would be free to sign up later if their drug costs rise. Only seniors with high drug costs will choose the plan. As a result, the $44 per month premium will not be nearly enough to help fund the program. Cost pressures will force government to demand that it be mandatory to make it workable.

As a result, many seniors who already have drug coverage (about two-thirds) could lose it. Employers, for example, would have a good excuse for dropping their retirement drug coverage since the government would be providing it through Medicare. The 13 states providing drug coverage for lower income seniors also might drop it for the same reason.

The Clinton plan also would grant the government power to impose price controls on drugs. Any drug deemed too expensive could be labeled not “cost effective” or subject to misuse. Physicians and pharmacists would have to obtain prior approval from the government before prescribing such drugs.

Drug companies are developing hundreds of new drugs to treat crippling and deadly ailments, such as Alzheimer’s, heart disease, stroke and cancer. Government price controls would shut off the funds needed to finance the development of these new drugs.

A far better way to provide seniors with prescription drug coverage has been proposed by Sen. John Breaux, Louisiana Democrat and Rep. Bill Thomas, California Republican, who chaired the National Bipartisan Commission on the Future of Medicare. Their plan, modeled after the Federal Employee Health Benefits Program (which covers 9 million government employees including all members of Congress) addresses the long-term Medicare financing crisis and contains superior prescription-drug coverage at reasonable costs, available to every senior. Their plan would include a cap on direct, out-of-pocket costs for seniors, with the insurer paying all costs above the limit. The government would pay entirely for such coverage for seniors with incomes up to 130 percent of the poverty line.

The president’s plan would increase costs for seniors, increase government control over their health care and limit their choices. The bipartisan congressional plan is a much better alternative for ensuring that our seniors get the quality health care they need and deserve.

Peter J. Ferrara is an associate policy analyst at Cato and general counsel and chief economist for Americans for Tax Reform