The Politics of Medicare and Prescription Drug Costs
By Reginald Hislop III
Congress and President Bush remain under considerable pressure, principally resulting from the contentious campaign cycle, to expand the Medicare program to provide a prescription drug benefit. Within this heated policy debate is a bifurcated dispute: whether to add coverage to the existing program or to reform Medicare to include a drug benefit.
According to the Office of Management and Budget (OMB), Medicare presently covers an average of 53 percent of a beneficiary's annual medical expenses. Although it is accurate that the hospital trust fund component of Medicare shows a surplus, figures from 2001 show the total Medicare program operates at deficit. When the two components of the Medicare trust fund (Part A, hospital, and Part B, physician and outpatient) are combined, spending for FY 2000 exceeded the total of tax receipts and other incoming payments by $51 billion. The consolidated deficit is projected by the OMB to increase to $216 billion in 2020 and to $368 billion in 2030.
This compounding effect is attributable primarily to demographics. Between 2010 and 2030, the number of people over age 65 will increase from 39.7 million to 69.1 million. During the same time, the number of workers per Medicare beneficiary will decline from 4 to 2.3.
The prescription drug benefit proposals target financial assistance for outpatient (retail) drugs. This is logical because Part A essentially covers drug costs related to inpatient care.
Problems arise when the Part B (outpatient) component is analyzed. Presently, premiums attached to Part B cover only 25 percent of its benefit costs. This funding structure will produce a deficit of nearly $1.171 trillion (aggregate) between 2002 and 2010. (Annual Report of the Board of Trustees of the Federal Hospital Insurance and Supplemental Medical Insurance Trust Funds, 2000.) Any proposal that establishes outpatient coverage for drug costs must be funded by new money. In such an equation, the government will have to infuse funding to the Medicare program or draw from deficit payments, thus expanding the present deficit.
Viewed through this framework, the policy proposals for a new Medicare drug benefit become easier to dissect. Flawed as they may be, stand-alone proposals such as that initially espoused by Senator Edward Kennedy and Representative Pete Stark have the greatest likelihood of survival. Matched against the president's budget proposal to add a coverage benefit within an overall reform process, stand-alone benefit legislation segments the issue so that political consensus can be achieved. But the driving agenda is not whether a benefit is needed but how the benefit will be implemented logistically and financially.
A classic example of good intent and flawed execution is the failed Medicare Catastrophic Coverage Act (MCCA). Both Houses of Congress passed this legislation by a wide margin, adding benefits that included outpatient prescription drugs. Within less than two years, the law was repealed because of economic reality. The law required states to pay the Medicare premiums and deductibles of low-income seniors. Other beneficiaries not classified within the low-income definition were subject to higher premiums and taxes. Specifically, for drug coverage, seniors paid a new monthly drug premium of $1.94, a deductible of $550, and a copayment of 50 percent. (Robert E. Moffit, The Last Time Congress Reformed Health Care: A Lawmaker's Guide to the Medicare Catastrophic Debacle, Heritage Foundation BACKGROUNDER, No. 996 (Aug. 1994).)
When the MCCA was passed in 1988, the Congressional Budget Office (CBO) estimated the drug cost component would be $5.7 billion over five years. A revised estimate by the CBO in 1989 pegged the cost at $11.8 billion. Running scared, several legislators began to back away from the original intent, urged on by irritated seniors and their interest groups. One such group, the National Committee to Preserve Social Security and Medicare, stated that the changes would impact almost half of all seniors-24 percent more than Congress had estimated.
During the nineties, the debate over how and for whom to provide Medicare drug benefits escalated. Spending for pharmaceuticals doubled (since 1983, in fact, prescription drug costs have inflated by 273 percent). Despite these increases, the average senior in 1997 spent less than 3 percent of the average $24,413 income on drugs, and even the poorest seniors reported spending less on drugs than on restaurant purchases. (U.S. Department of Labor, Bureau of Labor Statistics, Consumer Expenditure Survey (Dec. 1998).) The National Academy of Social Insurance estimates that only 10 percent of seniors have out-of-pocket drug costs between $1,000 and $2,000, and only 4 percent spend more than $2,000. (Michael E. Gluck, A Medicare Prescription Drug Benefit, National Academy of Social Insurance Medicare Brief No.1 (Apr. 1999).)
At the crux of the drug coverage debate, however, is the reality that some seniors spend a disproportionate share of their income on prescription drugs. The difficulty with setting policy is deciding how to assist seniors who truly cannot afford adequate drug coverage or costs without replicating the legislative disaster of the MCCA. This is in addition to the grim reality that policy initiatives in this arena will require new money.
Despite an overabundance of press coverage and campaign rhetoric concerning the cost of prescription drugs for seniors, a global approach to targeted policy is required. The economics of Medicare, combined with lessons from other attempts, imply a need for policy that is fundamentally 180 degrees from a pure prescription indemnity benefit. The issue is at the forefront of policy discussions; it is time to revamp Medicare and build more relevant benefit options for how healthcare is delivered to seniors in America.
Reginald Hislop III, Ph.D., is president and CEO of the Village at Manor Park, West Allis, Wisconsin.
