Bush Signs Medicare Reform

Published January 1, 2004

After months of wrangling and sometimes-bitter debate, the U.S. House of Representatives approved H.R. 1, the Medicare Prescription Drug and Modernization Act, on November 22 by a vote of 220-215. The Senate followed suit on November 25 with a 54-44 vote, and President George W. Bush signed the bill, projected to cost $400 billion over 10 years, into law on December 8.

At the signing ceremony, Bush said, “These reforms are the act of a vibrant and compassionate government. We show our concern for the dignity of our seniors by giving them quality health care. We show our respect for seniors by giving them more choices and more control over their decision-making. We’re putting individuals in charge of their health care decisions.

“And as we move to modernize and reform other programs of this government,” Bush pledged, “we will always trust individuals and their decisions, and put personal choice at the heart of our efforts.”

Victory for Consumer-Driven Health Care

For advocates of consumer-driven health care, the most positive part of the new law has little to do with Medicare. It is the section that expands medical savings accounts, renamed Health Savings Accounts (HSAs). Such accounts empower consumers by allowing them and their employers to choose higher-deductible insurance plans, with the savings from lower premiums going into tax-sheltered savings accounts that are the property of the consumer.

Under the new law, which takes effect in 2004, HSAs are made permanent, there are no caps on enrollment, and there is no maximum deductible for the health insurance. Employers and employees up to age 65 may make pre-tax contributions of as much as $2,600 ($5,150 for families), indexed for inflation, to cover medical needs. Individuals age 55 to 65 may make additional contributions of as much as $500 in 2004, increasing by $100 each year until it reaches $1,000 in 2009.

Unlike Flexible Spending Accounts (FSAs), HSAs will be portable and funds in the account can accumulate over the years. Account holders can draw on the funds, tax-free, to cover not only current health care costs, but also health care costs in retirement, including long-term care.

Advocates of consumer-driven health care reforms were divided over whether to support or oppose the Medicare reform legislation, with analysts at the Cato Institute, Heritage Foundation, and National Center for Policy Analysis all opposing it due to its high cost. But most agreed the HSA provision could dramatically improve the nation’s health care finance system in the years ahead. (See “MSAs Unleashed,” page 10 and “Why the Medicare Reform Bill is Bad Legislation,” page 13.)

Other provisions of the law generally viewed favorably by free-market advocates were continuation of the prohibition on importing prescription drugs from Canada and other countries, and a prohibition on the Medicare program negotiating drug prices with pharmaceutical companies. Both provisions, sought by liberal Democrats, would have had the effect of imposing price controls on the prescription drug industry.

Partisan Reactions

Senate Minority Leader Tom Daschle (D-South Dakota) called the bill “a lemon” but was unsuccessful in leading Democratic opposition to the Republican-drafted legislation. Senate Majority Leader Bill Frist (R-Tennessee), by contrast, said “today is an extraordinary day” for seniors, and predicted new services and benefits would be accompanied by expanded consumer choices.

A week before the legislation passed, Senator Edward Kennedy (D-Massachusetts), a long-time foe of market-oriented reforms of any kind, sounded surprisingly conservative when denouncing sections of the legislation that would allow private insurers to compete with Medicare. According to Kennedy, “This program is untested. It’s untried. It’s unworkable. It’s playing roulette with the lives of our senior citizens.”

Democrats lined up the usual liberal advocacy groups to oppose the plan, including Families USA, The Brookings Institution, and the Center on Budget and Policy Priorities. However, AARP, the 35-million member seniors group that often works the Democratic side of the aisle, endorsed the plan and launched a $7 million advertising campaign in support of it. “We have in a way transformed AARP,” said William Novelli, the organization’s CEO. “For many years, or perhaps since our beginning, we have said we are a nonpartisan organization. And now we have proved it.”

Prescription Drug Benefit

The centerpiece of the Medicare overhaul is the first-time prescription drug benefit. The benefit begins as a prescription drug discount card starting in April 2004, remaining in effect until a permanent prescription benefit program is implemented in 2006. Health and Human Services spokespersons estimate the drug card will save beneficiaries 15 to 25 percent per prescription. Medicare beneficiaries earning less than 135 percent of the poverty level will be eligible for additional prescription drug assistance, up to $600 per year, in 2004 and 2005.

When the permanent drug benefit program launches in 2006, Medicare recipients with yearly income less than $12,123 for singles and $16,363 for couples who sign up for the benefit–participation is a choice, not a requirement–will pay no premiums and no deductibles, and only a $2 co-payment for prescriptions for generic drugs and $5 for name-brand drugs. Once annual drug costs reach $3,600, even these co-payments end.

Medicare recipients with higher yearly incomes will pay, typically, a $35 monthly premium and a $250 annual deductible, plus a 25 percent co-payment on drug costs up to $2,250, 100 percent from $2,250 to $5,100, and 5 percent after that.

Figure 1 illustrates how the prescription drug benefit will affect two hypothetical Medicare beneficiaries, assuming they are not at the poverty level and have no supplemental prescription drug coverage from a former employer. The first example is of a Medicare beneficiary with average drug costs in 2006, according to projections by the Congressional Budget Office. The second example presents figures for a beneficiary with much higher-than-average costs.

The senior with average costs would pay $2,024 a year for prescription drugs, or $202 per month, while Medicare would pay the remaining $1,080. The senior with $10,000 a year in drug expenses would pay $4,265 a year, or $355 per month, and Medicare would pay $5,735.

Another way to illustrate the drug benefit is shown in Figure 2. The annual out-of-pocket cost (including deductible and premium) for seniors in three income categories is shown for annual drug expenses ranging from $250 to $15,000.

Medicare Part B

While many seniors will pay less for prescription drugs, some will pay more for Supplemental Medical Insurance Benefits, popularly known as Medicare Part B. Premiums for Medicare Part B insurance will vary based on the recipient’s annual income. Only beneficiaries with annual incomes of more than $80,000 ($160,000 for joint income tax filers) will pay more than they have in the past.

The new premium structure will be introduced in 2007 and phased-in over five years. By 2012, when the phase-in is complete, high-income beneficiaries will pay as much as 80 percent of their Part B premium. Today, all beneficiaries regardless of income pay just 25 percent of the premium. (See Figure 3.)

According to an analysis prepared by Commerce Clearing House, a beneficiary who currently earns $85,000 (single tax-filer) and currently pays the flat $58.70 monthly premium would see his or her premium increase to $82.18. An individual earning more than $200,000 would pay 80 percent of the monthly premium, or $187.84 per month.

While someone earning more than $200,000 a year surely can afford to pay $129.14 a month more for health insurance, a consumer revolt may nevertheless emerge. The Medicare Catastrophic Coverage Act of 1988 also provided for Medicare Part B premiums to increase based on recipient income, with some beneficiaries expected to see an increase of as much as $66 per month. That Act was repealed in 1989 before it went into effect.

Seniors who don’t want to spend more for their insurance benefits are likely to find many liberal and anti-Bush advocacy groups eager to organize their protests and ensure they get press attention in the months leading up to the 2004 Presidential election.

Medicare Competition

Under what has been the most controversial provision of the reform measure, private health plans will be allowed, on a trial basis, to compete directly with the traditional fee-for-service Medicare program.

Beginning in 2010 and lasting six years, a demonstration program will take place in up to six, yet unspecified Standard Metropolitan Statistical Areas (SMSAs) where at least two private plans have enrolled at least 25 percent of Medicare beneficiaries.

Proponents believe open competition can help eliminate the waste they say pervades the current Medicare system. Robert E. Moffit, Ph.D., director of the Center for Health Policy Studies at The Heritage Foundation, questions why a demonstration program is even needed, since the Federal Employees Health Benefits Program has already proven competition works.

“A successful demonstration program of premium support has already been conducted,” wrote Moffit in a November 19 Heritage Foundation Backgrounder. “It is the Federal Employees Health Benefits Program, and it has been in operation for over 43 years.

“The FEHBP is superior to the Medicare program in every way,” he continued. “Members of Congress know these facts about the FEHBP. That is why they have no excuse for retreating from a long-term reform of Medicare by enacting a demonstration program that is doomed to failure.”

Other observers, including Families USA, oppose the demonstration project because they believe it goes too far in the direction of competition. They suggest private health plans will attract healthy, lower-cost beneficiaries, leaving the sicker, more costly individuals in the traditional Medicare program.

Other Provisions

To avoid tempting employers to drop retirees from existing drug benefit plans, the legislation provides employers with a tax-free subsidy of up to $1,330 per individual retiree starting in 2006. Employers will be required to document the expense and request reimbursement from the federal government.

Physicians get increased reimbursements under the new Medicare rules. Before the reform, Medicare called for lowering payments to physicians by 4.5 percent in 2004 and 2005. The reform measure will increase reimbursement for eligible costs to physicians by 1.5 percent in 2004 and 2005.

Hospitals will receive new incentives to improve service. They, too, would have seen reimbursement rates fall under pre-reform Medicare, but the reform measure sets baseline hospital reimbursement rates at the current 2004 levels. Hospitals will be required to provide information showing how they are improving the quality of the service they provide to Medicare patients. Hospitals that do not furnish data may see their Medicare payments reduced by 0.4 percent in 2005, 2006, and 2007.

Congress has finally reformed Medicare, and President Bush got a legislative victory to trumpet during his reelection campaign. Given the complexity and scope of the legislation, however, the debate has not ended. Some provisions of the law are unlikely to stand the test of time, and some may even produce a consumer revolt resulting in reform or repeal before they can be implemented.

Conrad F. Meier is managing editor of Health Care News. His email address is [email protected]. Joseph Bast, president of The Heartland Institute, contributed to this article.