After years of promises, Congress is finally weighing House and Senate bills that would restructure Medicare to provide prescription drug coverage to 40 million elderly, but could also shift management of the program to private insurers as America’s baby boomers reach retirement.


Hailed as a bipartisan success when passed in late June, the two bills are losing some of their luster as they face closer scrutiny by a conference committee made up of members of both chambers charged with reconciling the legislation this fall.


From the time it was created in 1965, critics have complained that Medicare does not provide prescription drug coverage. This year, the average Medicare recipient, including those with coverage from their former employers or Medigap plans, will pay $999 in out-of-pocket drug expenses. That is expected to rise to $1,454 in 2006, according to The Kaiser Family Foundation. For those on Medicare with no drug coverage, the average yearly bill is expected to be $1,356.


The biggest sticking point in the current legislation is the amount of coverage it provides. “The problem, of course, is there’s not enough money to pay for a very generous or comprehensive Medicare drug benefit,” says Mark Pauly, chairman of Wharton’s Health Care Systems department.


Both bills would require seniors to pay a $35 monthly premium in 2006 and make staggered co-payments for spending over that, although the House plan leaves a larger “hole in the doughnut,” or the amount which the beneficiary must pay for all drug expenses.


The Senate plan has a $275 annual deductible, then calls for 50% coinsurance for drug spending that falls between $275 and $4,500 a year. Beneficiaries would pay all their drug costs between $4,500 and $5,812.50 a year. Above that, the Medicare recipient’s share drops back to 10% under the Senate proposal.


The House bill would set a 20% coinsurance between the $250 annual deductible and $2,000 in drug spending, with Medicare picking up 80% of the costs. The beneficiary then pays 100% of their drug costs between $2,000 and $4,900, and 10% for costs above that. The House legislation also restricts eligibility for people earning more than $60,000 a year.


“It’s not a great benefit. It’s barely a decent benefit. It is half of what members of Congress and the President have, but the truth is, it’s expensive to provide a drug benefit to this population because this population uses drugs more,” said Nancy-Ann DeParle, adjunct professor of health care systems at Wharton and former administrator of the Health Care Financing Administration (HCFA), the agency that oversaw Medicare during the Clinton administration. The agency has since been renamed the Centers for Medicare and Medicaid Services (CMS).


DeParle said she could not endorse the House plan, but can support the more generous Senate proposal. “It is worth getting this on the books,” she suggested, “but there are a lot of people who think it’s a mistake.”


Her bigger concern is the House’s emphasis on shifting control of the program to the private sector by 2010 as a means of introducing competition to reduce costs. She noted that during the late 1990s, when Medicare encouraged creation of private HMO plans through its Medicare + Choice program, only 15% of Medicare beneficiaries signed up. “This population is more risk-adverse and what they are saying is they want security and certainty. They want to be able to choose their doctor and don’t want to be constrained by an HMO.” 


Beyond that, she is not sure private insurers will reduce costs. “What is it that makes us think that for less money we can really attract people to private plans?” she asked.


Pauly, too, has doubts about whether the competitive plans laid out by the House, and to a lesser degree by the Senate, will rein in spending. “The view that we will create magical cost-containment by moving [Medicare] to the private sector is overstated,” he said. “It could help a little, but compared to the size of the long-run financial problems, [the amount saved would be] a drop in the bucket.”


DeParle would be more comfortable if the legislation included a provision for a pilot program to see if the ideas at their core will work. The Senate bill calls for spending $12 billion over 10 years for two five-year demonstration projects. One program would implement a new competitive bidding payment system for private plans in certain regions while the other would pay for preventive and chronic care services.


Medicare + Choice has lost steam in recent years after Congress cut reimbursement rates in 1997, leading many of the plans to withdraw from entire markets or cut back sharply on benefit packages. Enrollment in these plans has now dropped to five million.


Concerns About Cherry-picking

The powerful AARP, which has 35 million members and lobbies on behalf of older Americans, has been pushing for a Medicare drug benefit for years, but has reservations about the current legislation.


According to John Rother, director of policy at AARP, the amount of the benefit is the AARP membership’s biggest concern, but the group is also growing increasingly worried about the emphasis on private-sector insurers. “The experience with Medicare + Choice has been quite negative,” he said. “That left many people stranded. There is a lot of anxiety that private plans are going to come in and cherry-pick, i.e. sign up the healthy people and go only in the areas where they can make a lot of money and not really try to serve the people who need care the most.”


Pauly pointed out that a hallmark of Medicare has been that it is universally available to all those eligible and guaranteed by the government. “One of the ideological fault lines is whether fundamentally this should be a government activity. That’s hard for politicians to agree on.”


Ideally, Pauly would like to see a plan that is less of a pass-through for reimbursing drug costs and more of a true insurance plan balancing risk across a broad pool of people to protect those who face truly catastrophic drug costs. “I think there’s a good case to be made for catastrophic coverage – for really big bills. It could be modest in cost and relatively simple to run.”


According to Karen Ignagni, chief executive of the American Association of Health Plans, the 1000 members of her organization, which provides health care coverage to 180 million Americans, are eager to be involved in providing Medicare.


But they, too, have a level of distrust following the collapse of Medicare + Choice. As a result, Ignagni said, the industry is working closely with legislators to add provisions to the current bills that would avoid the problems that led to massive withdrawals from Medicare + Choice.


“What happened is not something our members did,” she said. “It was because Congress put its head in the sand and refused to fix the [mistakes] that were made in 1997.” The industry wants to stabilize the current programs through 2005 and build on that when the drug benefit becomes widely available in 2006.


The legislation, she noted, outlines the parameters of how competition will be structured in 2010 when, under the House plan, private plans would be in direct competition with traditional Medicare service in which beneficiaries can go to any doctor or hospital and receive fee-for-service care.


Private insurers, she said, have brought experts on health care operations to Washington to devise effective plans and ensure long-term competition.


Hyundai vs. Cadillac

Another issue that has raised concern is the legislation’s reliance on stand-alone drug programs. It calls for the drug benefit to be administered by private firms parallel to the current Medicare program, rather than integrating drugs into a plan that includes physician and hospital care the way most private-employer plans operate.


“From an economic perspective, the danger with the proposals now is they are stand-alone,” said Sean Nicholson, professor of health care systems at Wharton. “Anyone managing the drug benefit could care less what happens to hospital spending or physician spending. You want an insurer who is thinking about the big picture. It might be okay to spend more on drugs if you can reduce hospital spending. That’s what a fully integrated plan does and neither of these proposals offers that.”


According to Nicholson, the Medicare drug benefit could result in private employers dropping drug coverage for their retirees, leaving retired workers with a lesser Medicare benefit. “There is a very real possibility that employers will drop the Cadillac plan and leave the Hyundai,” he said.


About a third of the nation’s 40 million Medicare beneficiaries also receive employer health benefits. The Congressional Budget Office has estimated about 37% of them will lose benefits if the Medicare drug program is enacted.


Pauly noted that the legislation does have provisions to subsidize employers who continue to offer benefits, but that amounts to simply moving money from one pot to another.


Meanwhile, drug companies have long been concerned that if government became involved in financing a drug benefit it could result in de facto price controls, Nicholson pointed out; low prices could lead to less money for research and innovation. However, he added, the current proposals do not appear to limit drug price increases and may improve drug-makers’ prospects, because extending drug coverage through Medicare will increase use of prescription drugs.


The same thing happened when Medicare was introduced, Nicholson said. Doctors feared the government would control prices, but by expanding the number of people able to receive treatment, physicians’ income grew. “There is precedent for people lobbying aggressively against a policy and later asking ‘What were we thinking?’”


Pauly has recently done an analysis that found the legislation would increase drug usage about 5-6%. “Since [the proposed benefits are] so stingy it is not going to increase sales all that much,” he said, but added that because the costs of manufacturing drugs are minute compared to the costs of research and development, any increase in sales “is all gravy.”


Even with the drug benefits laid out in the legislation, it will be difficult to finance the proposed changes, Pauly noted. “If you look at the long-term prospects for Medicare, what they have promised is fiscally irresponsible. I don’t see how they can expect to raise that amount of money in 10 or 15 years.”


In its 2004 budget, Congress set aside $400 billion for the new Medicare reforms over the next 10 years. The Congressional Budget Office already has revised the costs of the proposed drug benefit to $408 billion if the House bill is accepted as written and $422 billion if the Senate bill becomes law.


Re-examining Costs

According to Kent Smetters, professor of insurance and risk management at Wharton, a Medicare drug benefit could cost a lot more than originally predicted. A more accurate economic approach to assessing the true cost would be to use present-value accounting that includes the government’s costs of borrowing over time.


Smetters said an analysis of the president’s proposals for the 2004 budget show current plans to subsidize Medicare drug spending, including a national discount card, would amount to $6 trillion using present-value accounting. Add the Senate and House proposals and the Medicare drug benefit would cost $12 trillion. That comes on top of $30 trillion in present-value debt for the current Medicare program. “I think people are starting to appreciate that these plans are much more expensive,” said Smetters.


DeParle and Pauly noted that despite the optimism about Medicare reform when the bills first passed, there are now serious concerns that the legislation will never make it out of the conference committee. “If the AARP has taken the position it doesn’t find either coverage satisfactory, that’s pretty discouraging,” Pauly said, adding that if the legislation fails to get out of committee, it would be more damaging to the Republicans. “If it were to pass, that would take a major Democratic issue off the table.” Even if a compromise can be reached and President Bush signs a new Medicare law, it will likely undergo major revisions in the near future.


Despite the concerns, the legislation would bring Medicare drug coverage farther than it has ever come before. “If it failed today I don’t think it would be the royal fiasco the Clinton health plan was. That paralyzed everybody for a period,” said Nicholson. “I think it sends the message that we can almost come up with a solution when so many people didn’t think we could. What would be worse for everybody is if one of the parties gets slammed in the election” because of a failure to get legislation passed.