A Medicare Prescription Drug Safety Net: Creating A Targeted Benefit for Low‐​Income Seniors

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Good afternoon, Mr. Chairman and Members of the Subcommittee.Thank you for inviting me to testify today. I am director of healthpolicy studies at the Cato Institute. Current proposals to create aMedicare prescription drug benefit do too little to reform theoverall Medicare program to improve the value of the services thatbeneficiaries receive, too little to protect current and futuretaxpayers from runaway budget costs, and too little to targetaffordable and sustainable benefits to those low-income seniorsmost in need. An MSA-like benefit tied to a catastrophic insurancepolicies delivered through private sector competition, withbeneficiary choice, and targeted to seniors with the lowest incomesand largest drug expenses could provide a more cost effectivesolution. However, such a benefit must be structured properly, withfeatures that reduce the inherent dangers of federal pricecontrols, overregulation of private plan options, and escalatingcosts; and with features that improve incentives to maximizeescalating costs; and with features that improve incentives tomaximize value by allowing funds in individual accounts to beportable, personally controlled property that can roll over eachyear without penalties.

In brief, the two bills providing a Medicare prescription drugbenefit that were approved by the House and Senate earlier thisyear squandered scarce resources by focusing on subsidizing thediscretionary, early-dollar drug expenses of upper- andmiddle-income seniors. H.R. 1 and S. 1 also failed to provide acredible and effective route to comprehensive, marketbased reformof the overall Medicare program. Such reform would expand theavailability of a wider variety of competitive, affordable choicesof drug benefits within integrated packages of linked benefits thatwould provide the greatest value by coordinating trade-offs betweendrugs, surgery, hospitalization, and outpatient care options.

Absent serious, sustainable reform provisions within whatever islikely to emerge finally, with much kicking and screaming, from thecurrent House-Senate conference committee later this fall, a betteralternative would be to do more by doing less. A far simplercombination of a limited drugdiscount card, additional financialassistance to low-income seniors, and a very modestcatastrophic-coverage benefit delivered by competing private sectorentities actually would solve the key problems of access tonecessary drugs. It also would avoid causing further damage tofuture Medicare reform efforts, to our overall health care system,and to the deteriorating balance between our available resourcesand the increasingly overstretched commitments to capture more ofthem within the federal budget.

In pursuing such limited and narrowly targeted alternatives, weshould be careful not to undermine market-based incentives tocontrol catastrophic-level drug costs. Instead of providingrelatively open-ended subsidies for such protection and delegatingkey financial and administrative decisions to Medicare programmanagers, we should instead place direct control of subsidizeddollars for limited drug coverage in the hands of eligible Medicarebeneficiaries and then, through open competition, encourage atriskprivate insurers to offer higher-value catastrophic protection tothem.

An MSA-like account, combined with private catastrophic levelprotection against high costs and the price protection ofnegotiated rates for expenses below its deductible and stop-losslevels, could provide the vehicle for eligible seniors to receiveand accumulate funds to afford both the purchase of catastrophicinsurance and essential out-of-pocket spending for prescriptiondrugs.

Straightforward high deductibles are administratively simplerand provide better economizing incentives than multiple tiers ofcoinsurance rates and co-payments. Beneficiaries spending more oftheir own money, of course, could adjust the initial shell of suchcoverage to provide more customized options. Initial deductiblelimits also could be adjusted to target additional layers ofsubsidized insurance coverage to those seniors facing the mostdifficult medical and financial challenges.

We should retain a sense of perspective in the midst of atoo-often overheated Medicare drug-benefit debate. More thantwo-thirds of all Medicare seniors currently have some version ofprescription drug coverage, and perhaps as many as three-fourths ofthem do under the broadest definitions of "coverage." Averageout-of-pocket drug spending costs for all Medicare beneficiariesthis year is estimated to be about $1000. But the skewed nature ofdrug spending among Medicare seniors also means that nearlyone-third of all out-of-pocket drug spending will be incurred by amuch smaller number of beneficiaries - the 5 percent ofbeneficiaries with annual out-of-pocket expenditures above $4000.Subsidizing the earlydollar drug purchases of most Medicarebeneficiaries would leave fewer funds available to assist other,more financially stressed seniors with multiple chronic conditionsthat require more expensive, longer-term drug therapy.

The sustainability of the overall Medicare program, as well asthe future quality of life for younger workers and their families,remains at stake, too. Non-seniors need to finance their own healthinsurance, educate their children, and save for retirement. Inaddition, a generous Medicare drug benefit that overreachesavailable financial resources will surely trigger broadergovernment price controls on drug makers and threaten to choke offaccess to the vast sums of capital and skilled manpower needed forthe next round of lifesaving drug research and development.

In short, we need to walk more slowly and carefully instead ofracing ahead blindly. The fundamental solution is to reform theoverall Medicare program and allow seniors to determine the bestuses of the taxpayer subsidies dedicated to them. Until politiciansdecide to step up to that task, it may well be that the best we cando is provide targeted assistance to those seniors with thegreatest drug expenses, along with more limited financialprotection for uninsured seniors who otherwise would face thehighest list prices for drugs when they purchase them on anout-of-pocket basis.

Tom Miller

Subcommittee on Human Rights and Wellness
Committee on Government Reform
United States House of Representatives