Rx Plan "A" Is Still Alive and Twitching

Something had to give. The Medicare drug benefit being prepared for final passage in Congress is over-promised. Congress wanted to provide a drug benefit that sounded substantial, and that would give seniors a tangible benefit. No scaled-back insurance plan would do -- legislative leaders wanted as many seniors as possible to get pocketbook relief.

However, the budget of $400 billion over ten years does not really accommodate a full-scale benefit. To make a generous drug benefit work, it would probably take $600 billion, at least.

So legislators took risky steps: First, they designed a benefit that is unappealing to employers who offer retiree drug coverage. That saved money, but it would create incentives for employers to drop their coverage. The second risk was charging a premium (roughly $35 a month to start). Again, the premium helps keep the net cost of the benefit down, but it would force seniors to make a choice. If beneficiaries chose not to pay the premium to get the new drug benefit, the benefit might not even get off the ground.

Either of these problems could sink the drug benefit, politically or practically.

So what is the solution? Tax cuts. No joke. The Bush administration’s solution for every economic or social problem is now poised to solve the prescription drug dilemma.

Senator Chuck Grassley, chairman of the Finance Committee and key Medicare negotiator, implied as much yesterday, according to news reports.

Apparently, the Medicare conferees are discussing substantial tax credits to entice businesses to retain their retiree drug coverage. These tax credits would augment or replace the current subsidies for employers in the House- and Senate-passed bills.

The Medicare budget for drug benefits is limited to $400 billion. But there is plenty of money in the Congressional budget for more tax cuts. (That is how the House was able to tack on a Medical Savings Account proposal costing an estimated $174 billion to its version of the Medicare bill without violating budget limits.)

Here is a possible deal:

1. Drug benefits: closer to the House plan, but maybe a little more generous. (The House plan has larger up-front benefits, which are important if the government is trying to entice seniors to purchase coverage they might not otherwise value. This is wrongheaded social insurance policy, of course, but given that the Medicare negotiators have concluded that the drug benefit must be voluntary and have a substantial premium, larger up-front benefits would help reduce adverse selection. Up-front benefits are a better deal for seniors with low drug expenses.)

2. Subsidies for low-income beneficiaries: closer to the Senate version.

3. Dually eligible (Medicare and Medicaid) beneficiaries: House proposal, modified so that the states don’t save quite as much money.

4. Premium support: watered down version of the already watered down House plan. (The Medicare conferees are likely to retain enough movement toward market pricing and competition after 2010 to allow conservatives to save face, but not enough to scare liberals, who are very worried that the government-run plan would inevitably lose in a competitive situation.)

5. Government fall-back drug benefit: Senate proposal, with government allowed to take as much risk as is necessary to ensure stand-alone drug plans enter the market.

6. Employers: substantial tax credits to ensure retiree drug benefits aren’t dropped.

7. Medical Savings Accounts from the House bill. No.

8. Total Cost: By official scoring, probably about $450-$500 billion over ten years (including the revenue reductions from the tax credits). Unofficially, it will probably cost about $600 billion between 2004 and 2013 (including subsequent legislation to make the benefit work better and increase its political popularity).

One key remaining question: How many members of Congress will refuse to vote for a plan that exceeds the original $400 billion limit, even if the combined drug benefit/tax cut plan passes muster with the budget committees and the parlimentarian? Probably quite a few, on both sides of the aisle.

Therefore, Congressional leaders will probably still have to dangle drug price controls in front of undecided populists or border-state representatives. The price controls wouldn't be explicit; instead they would consist of imports from Canada and other countries, or would amount to unspecified "actions" to be taken by the Medicare program through some sort of "failsafe mechanism," in case the budget targets were breached.

Of course, there would still be plenty of risk that the benefit wouldn't work when it was implemented in 2006. Beneficiaries would still face a tough choice on whether or not to enroll. And late-enrollment penalties designed to compel enrollment might not survive a political firestorm.

But the tax credits for businesses with retiree benefits would solve a very important problem right now -- seniors’ worries that the retiree health coverage they worked for would evaporate.

What’s the downside? First, none of this is paid for. New tax credits for business would just add to the debts that seniors’ grandchildren will eventually have to repay.

Second, if the benefit doesn’t work well or requires large future infusions of taxpayer funds, political support could erode, and bipartisan attempts to modernize Medicare could be discredited once and for all.

Of course, the simpler solution to the prescription drug problem is to promise seniors less in the first place. Concentrate the available funds toward catastrophic coverage -- real insurance to protect seniors with the highest drug costs from financial devastation -- and enhanced, optional benefits for low-income seniors. No premiums; no risk of adverse selection. No incentives for employers to drop coverage; no need for additional tax breaks for business.

But legislators aren’t thinking about promising less -- it’s much more appealing to promise more. For now, a scaled-back, targeted drug benefit remains off the table.

In the longer run, the best first step toward a solution to Medicare's cost problems and benefit limits is a premium-support system, patterned after the Federal Employees Health Benefits (FEHB) program. That could work very well, clinically and economically, and despite liberals' fears, could actually help liberate the government-run program from Congressional micromanagement.

But for now, Congress is having too much fun promising drug benefits to worry about longer-term reforms.

Links:
Draft Text of Employer Tax Credit for Medicare-Eligible Employees and Retirees
Centrist Policy Network 2003 Medicare and Prescription Drug Resource Page

Posted by Jeff Lemieux at October 15, 2003 12:53 PM