Less than a year ago, in the heat of the Presidential campaign, it seemed almost certain that Medicare would undergo a major transformation that would add prescription drug coverage to the national medical program that serves 40 million seniors.

But that was before an economic slowdown turned the federal budget surplus into a looming deficit, and before a full-scale terrorist attack on the United States reduced the World Trade Center to rubble and ash.

Now, with those problems vying for attention and tax dollars from the Bush Administration and Congress, a debate over Medicare suddenly seems like a luxury. “The discussion about adding a prescription drug benefit to Medicare will be put on hold,” said Mark Pauly, Wharton professor of health care systems. “The ability to pay for that was questionable before Sept. 11. Now it is even more so.”

But while the issue may take a back-seat in the short-run, analysts and healthcare activists say demands for prescription drug coverage and other changes in the federal medical-care program will no doubt resurface with millions of baby-boomers nearing retirement. The question is when.

Nancy-Ann DeParle, the nation’s top Medicare official from 1997 to 2000, agreed the Medicare debate will be hushed for now. “People are focused, appropriately, on getting the economy back on track and stepping up our readiness for terrorism,” said DeParle, a Washington healthcare consultant who is currently teaching a course at Wharton with Pauly.

DeParle said any delays in coming up with a prescription drug program are especially unfortunate these days because the Medicare Trust Fund, which was near bankruptcy in 1997, is now projected to be solvent through 2029 (largely because of painful cuts experienced by the nation’s healthcare system under the Balanced Budget Act of 1997.) That financial stability provided enough breathing room to conduct a measured debate about how to reshape Medicare. “I’m disappointed because it seemed to me that we had, very briefly, a real opportunity to try to work through some of the difficult issues,” she said.

It is now unclear when the subject will be addressed again. “Is it going to be a year or two years?” asked DeParle. “Or will it be 2004 or 2005 before we can turn to these issues?”

And when the debate resumes, what shape will it take? Wharton professors and healthcare analysts say the discussion will center on how to pay for the addition of prescription drug coverage to the program and whether Medicare payments should continue to be set by government formulas or competitive market forces.

Medicare policy, according to DeParle, is complicated by goals that are inconsistent: providing new technologies and better care to a growing pool of beneficiaries while keeping a rein on spending. She said there appears to be broad agreement in Washington that some form of competition should be injected into Medicare. The program, created in 1965, remains largely a traditional fee-for-service program paid for at a reimbursement rate set by the government.

But since Medicare was created, healthcare has evolved from a few simple treatments for chronic illnesses to hundreds of complex regimens for treatment and prevention of disease, including the use of prescription drugs which are not covered under Medicare.

DeParle said a prescription drug benefit is now viewed as essential, but will be difficult to finance without the once-expected surplus. Estimates last year, she added, were that the country would spend $1.3 trillion over 10 years to provide a drug benefit for Medicare.

Last spring, the Congressional Budge Office forecast a $300 billion surplus for next year. Now, it says, the country is likely to enter deficit spending. “I think there is still a 50-50 chance that something could be enacted before 2002,” DeParle said. “More likely this will be an election issue again in 2004.”

Kristen Sloan, acting director of the federal affairs health team at AARP, the national lobbying group of seniors, said the earliest Congress and the Bush Administration are expected to turn again to a domestic policy agenda is at the State of the Union address in January.

She identified two Medicare-reform camps in Washington. Each believes a drug benefit is necessary, but one side thinks that can be grafted onto the existing program. The other side believes a drug benefit should come as part of a sweeping overhaul of Medicare.

President Bush had already proposed a discount-drug program called “immediate helping hand” that would give seniors a prescription card good for discounts of up to 10% on drugs not covered by Medicare. The program was to begin in January but last month a federal judge granted an injunction against the plan. The judge sided with a pharmacy trade group that complained the drug plan was to be subsidized by its members. Pauly called the Bush plan a “stop-gap.”

Sloan, however, said AARP expects the Bush Administration’s drug discount-card plan to take effect next year, but the group is also hoping for a broader drug benefit. “Over the short run we still want to see a prescription drug benefit. We’re not going to give up on that, but we’re also realistic.”

In addition, according to DeParle, there seems to be consensus that Medicare beneficiaries need to be more conscious of the costs of the healthcare choices they make. She said analysts agree the system should reward Medicare enrollees who help keep costs down, but not penalize those who do not. “Beyond that,” she said, “the agreement breaks down.”

Pauly said one outcome of the declining budget surplus will be renewed calls for cost-containment within Medicare. “Longer term, the loss of the budget surplus will put more stress on Medicare which may add more fuel to the fire saying we need some thorough-going reform.” Those arguing for cost-containment are likely to point to HMOs as a way to put a lid on Medicare spending, he added.

Since 1997 Medicare has offered an HMO program, Medicare + Choice, which at its peak enrolled about 14% of the nation’s Medicare beneficiaries. Many of the programs offered some prescription drug coverage in return for trade-offs in flexibility over the choice of doctor or hospital.

But Medicare HMOs have recently dropped out of many markets in the U.S. claiming federal reimbursements were too low to make a profit. In the past two years, for example, nearly 1.5 million Medicare beneficiaries were forced back into traditional Medicare programs.

“That’s because the government was paying too little and the plans voted with their feet,” said Rob Burns, Wharton professor of health care systems. Efforts are underway now, he added, to adjust the rates. “There’s going to be a need for cost-containment and managed care is sitting out there.”

At the same time, Burns added, Medicare beneficiaries may have soured on HMOs. The Bush administration will try to get seniors to return to HMOs, “but I don’t know how successful that will be. They’ve been burned now; I don’t know if they’ll want to go back.”

Diane Archer, president of the Medicare Rights Center in New York, agreed, noting that there are some HMOs that provide quality care, but for the most part private insurers have failed Medicare beneficiaries. “What we’ve seen in the Medicare private marketplace to date is an inability of HMOs to offer reliable coverage, continuity of care, and guaranteed benefits that include prescription drugs to most people with Medicare.”

Healthcare costs rose 7.2% last year in the United States with hospital costs accounting for nearly half the increase, according to the Center for Studying Health System Change, a policy group funded by the Robert Wood Johnson Foundation. After several years of leading the medical cost increases, the study noted, prescription-drug spending accounted for 27% of the overall increase in 2000, down from 41% in 1999.

Archer and Sloan said that if Congress and the Administration push for a greater role for private firms in Medicare, they should also make sure the traditional fee-for-service plan remains in place, especially for people in rural areas where there are no large healthcare networks. They also noted that Congressional reports indicate Medicare HMOs are not any better at keeping prices down than traditional Medicare plans.

Pauly, however, said that data might be skewed by the market-share advantage held by the traditional fee-for-service program compared to Medicare HMOs. “The traditional Medicare plan may be cheaper,” he said, “but may not be intrinsically more efficient.” He pointed out that hospitals can simply choose not to renew the contract of an HMO that may be offering efficient care but at a lower contract rate. Hospitals could not afford to reject the traditional Medicare plan even if they don’t like the reimbursement formula. “I still think in the long-term the solution for Medicare is some form of integrated competition,” Pauly added.

According to Burns, even without a sudden economic reversal and the terrorist attacks in New York and Washington, the pace of Medicare change would still probably be gradual. With Congress elected every two years, the possibility of a far-reaching revision of the complex Medicare system is unlikely. He noted that most change in the program has come through regulatory action, not sweeping legislation. “Any change will be incremental,” he predicted.

And over the long-term, DeParle said it is possible that government and consumers will conclude they must pay a greater percentage of the nation’s gross domestic product for rapidly improving healthcare technologies and treatments. “We’ve been disingenuous to suggest we can do all these things for the same amount,” she said. “Maybe beneficiaries will spend more out of pocket and maybe the taxpayers will too.

“But that’s another reason what’s happening now is of grave importance,” said DeParle. “It is less likely we will [increase federal spending for health care] if we are spending more on rearming ourselves and upgrading security.”