A Good Idea Going Bad

Published August 1, 2002

On July 23, the U.S. Senate voted against two rival bills that would have expanded Medicare prescription drug coverage for senior citizens.

This was a good thing, because both bills would have vastly increased the cost of Medicare without first reforming the worn-out senior health care system. The issue will now be debated for another year before action—good or bad—is taken.

Adding benefits without reforming the existing program will hasten the exhaustion of Medicare’s Hospital Insurance (HI) trust fund and further drain general revenues. Expansion of Medicare will also serve to make the long-term fiscal challenges even greater.

With the retirement of 77 million baby boomers, Medicare will face a doubling of beneficiaries … and a dramatic drop in the number of taxpaying workers contributing to the fund. Remember, Medicare is a wealth-transfer program.

Mountains of Paper

In addition to serious financial challenges, Medicare is plagued with costly governance problems characterized by the imposition of tens of thousands of pages of rules, regulations, and related paperwork. Those governance problems will subject a prescription drug benefit to complex administrative procedures and increased micromanagement by bureaucrats.

If prescription drugs become a Medicare benefit, their availability, the conditions regarding their delivery into the hands of consumers, and their pricing will be fixed within the sticky web of Medicare’s legendarily complex rules.

The Lewin Group, a prominent econometrics firm specializing in health policy, reports it takes anywhere from 15 months to more than five years for Medicare to provide seniors with access to new medical technologies. Medicare patients are routinely denied access to newer and advanced medical treatments available to Americans in private-sector health plans. Without substantive Medicare reform, seniors’ access to drug coverage will be similarly compromised by a sluggish bureaucracy.

Faux Pax

One unintended consequence is based on Congressional Budget Office estimates: Three-quarters of all seniors already have access to prescription drug insurance, and about one-third have prescription drug coverage through employer-based retirement plans.

With the Medicare drug benefit, many of those seniors are likely to lose their current coverage. Why? Once employers realize taxpayers are going to be forced to pay for the drug costs of retirees, they will have a powerful incentive to drop retirees from private coverage, shifting the cost to taxpayers.

Adding to Medicare’s current troubles, an expanded population of beneficiaries and an artificially low premium based on government cost control schemes will guarantee a sharp increase in prescription drug utilization. As was the case with the drug benefit included in the repealed Medicare Catastrophic Coverage Act of 1988, the real costs of Medicare’s drug benefits will rise far beyond official projections … and far beyond Congress’ ability to provide funding without additional taxation.

More Taxes Please

According to Robert E. Moffit Ph.D., director of domestic policy studies at The Heritage Foundation, “Unable to deal with an exacerbated fiscal crisis in the Medicare program, Members of Congress will likely respond by holding high-profile hearings that provide them with an opportunity to blame government actuaries or drug companies for the ‘unexpected’ cost increases.”

Moffit also predicts, “Congress will then be forced to choose among unpleasant options: raising seniors’ Medicare premiums or deductibles to cover the soaring drug costs, imposing higher taxes on younger working families, or enacting a combination of premium and tax increases. They may also resort to the worst alternative: reducing the supply of drugs through cuts in drug reimbursement, tightening drug formularies, or instituting some form of price controls.”

Clone the FEHBP

Instead of layering a drug benefit on top of a broken system, Congress should be acting on the 1999 recommendation of the National Bipartisan Commission on the Future of Medicare: Give all senior citizens a financially stable benefits package. The commission’s recommendation is based on the model of the Federal Employees Health Benefits Program (FEHBP).

FEHBP beneficiaries choose from a variety of health plans, all of which cover prescription drugs. Most FEHBP health plans cover between 80 and 90 percent of prescription costs. No one must endure out-of-pocket premiums for supplemental coverage to compensate for the gaps in the current Medicare arrangement.

Seniors should have access to solid prescription drug coverage and a superior health care system in their retirement. The FEHBP is such a system, and it provides an attractive model for addressing benefit needs while reforming the Medicare structure.

The FEHBP provides health care and prescription benefits effectively for Members of Congress, the White House staff, and millions of federal employees and retirees. It has done so, by tapping the free market, for more than four decades.

That brings me to an obvious question: Why can’t Congress clone the FEHBP to meet the needs of today’s seniors and tomorrow’s retiring baby boomers? If you can explain it to me, please write me at [email protected].