Medicare Follow-Up?

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MPDIMA, aka "DIMA" and "MMA") may be the least understood major piece of health care legislation Congress has ever passed. The bill contains dozens of controversial provisions, and there is a great deal of uncertainty about how those provisions will play out over time.

MPDIMA certainly has the potential to be the most far-reaching Medicare legislation since the program was created in 1964. But there is also a good chance that some of the bill’s more ambitious initiatives will fall short of expectations. In that case, the bill might not ultimately transform Medicare’s essential workings very much.

There is also great uncertainty about the bill’s cost. The drug benefit was estimated to cost about $400 billion within the 10-year Congressional budgeting period from 2004-2013. According to Congressional Budget Office (CBO) director Douglas Holtz-Eakin, the cost could swell to $1-2 trillion over the following 10 years. However, other provisions of the bill create at least the potential for significant long-term cost savings.

There are six main sources of uncertainty:

1. The participation of private health plans in Medicare. Will private health plans, responding to the various incentives and initiatives in the bill, dramatically expand their participation in Medicare? Or will private plans be more cautious, forcing the government to run the new drug benefit and leaving most beneficiaries enrolled in the traditional government-run fee-for-service program?

2. The reaction of seniors to the drug benefit. Will beneficiaries flock to the new drug benefit’s insurance features, regardless of their actual or expected drug costs? Or will seniors make a more individualistic decision, calculating their drug costs and enrolling only if the benefit they would likely receive justifies the premium?

3. Medicare’s overall budgetary cost and the impact on payments to health providers and suppliers. Will the cost of the drug benefit swell over time, creating an untenable budget situation when the baby boomer generation enrolls in Medicare after 2010? Will reimbursement levels to health providers and health plans be slashed in an inevitable budgetary crunch? Will incentives for private plans to provide the drug benefit be replaced by government price controls?

4. The reaction of employers and states. Will employers drop or modify drug coverage offered to their retirees? Will states decide that coordinating with Medicare’s new low-income benefits and asset tests is too difficult and that the “clawback” provision (to ensure states don’t receive a financial windfall) is too onerous? Would either reaction cause a political backlash?

5. The impact of “conceptual” provisions, which could have important transforming or political impacts over time. Will the extra benefits for low-income seniors and the extra premium for high-income retirees drain or rebuild political support for Medicare? Will the chronic care demonstrations begin to transform Medicare from its current emphasis on hospitalization and surgery toward home-based chronic care? Will the e-prescribing initiative be a catalyst for a larger movement toward portable electronic medical records throughout the U.S. health system? Will the bill’s Health Savings Accounts (HSAs) -- which apply to the non-Medicare population -- spark a broad shift toward consumer-directed health care or fizzle like medical savings accounts? Will the procedural cost-control provisions be a harmless “red-flag” meant to warn the public about high Medicare spending, or are they the first step toward turning Medicare into a defined contribution program, with beneficiaries put on the hook for excessive cost increases?

6. The question of implementation. In short, can the private sector and the government do what is required of them, in order to make the new law work?

The bill might spark a surge of participation by private health plans, which could come to dominate the Medicare program over time. On the other hand, it’s possible that the various incentives will not appeal to private health plans, and the new drug benefit would become a government-run system that sets pharmaceutical prices nationally.

To some observers, the bill will be a springboard to competition and market forces in Medicare, which would eventually lead to significant privatization of a previously government-run entitlement program. Others believe the greatest impact of the bill would be to accelerate a government takeover of the drug industry, essentially socializing a large sector of the U.S. economy.

Both possibilities have important implications for Medicare’s long-term costs and the shape of the larger U.S. health system.

The degree of privatization in Medicare could lead to greater cost control over time if the program eventually shifted toward the so-called “premium support” or federal employees’ system, with more competitive reimbursement and premium formulas.

The degree of socialization of the prescription drug sector could have important implications for drug costs, as well for innovation and the creation of new medical treatments. Federal drug prices would probably be lower than current market prices for many drugs, and drugmakers would likely reduce their research and investment levels.

Medicare’s payment decisions will affect the whole health sector. If future payments to hospital or physicians are slashed to keep Medicare’s overall spending under control, the impact could spill over to the rest of the health sector, raising the cost of health insurance for the non-Medicare population. Medicare beneficiaries could face limitations in their access to health providers.

Finally, there may be less to MPDIMA than meets the eye. It is possible that the main impact of the bill will be political -- creating a working alliance between Republican lawmakers and AARP, the largest senior citizens’ advocacy group -- and that the Medicare program itself won’t be dramatically changed. In the end, Medicare might just muddle through an extended process of implementation and subsequent legislation without dramatic change.

One big question is: What to do in 2004?

On the one hand, Republican committee staffers have said they would prefer not to do a follow-up bill in 2004, for fear or opening some of those "conceptual" or reform provisions -- like the extra premium for high-income beneficiaries -- to repeal votes.

On the other hand, Democrats will probably force quite of few of those issues to votes anyway, one way or another. And as the Medicare program attempts to write regulations implementing the bill, we may learn that clarifying legislation is needed anyway.

Here are three ideas for a subsequent "Medicare Follow-Up" bill that mostly steer clear of ideological wars, and instead address economic and workability concerns:

1. Allow the "catastrophic" part of the drug benefit to kick in after $5,100 in total drug spending, regardless of how much beneficiaries have actually paid out of their own pockets. The MPDIMA benefit kicks in at $3,600 of out-of-pocket spending -- this modification would be equivalent to that for people with no other drug coverage. However, basing the catastrophic benefit on total spending instead of out-of-pocket spending would help preserve employers' incentives to provide extra retiree drug coverage. It would cost more, but the improved incentives to retain private coverage would be worth it.

2. Get rid of the asset tests for the low-income benefits. Asset tests are just abhorrent to economists, because they create incentives for people either not to save in the first place, or to needlessly divest themselves of assets in order to qualify for benefits.

3. Allow prescription drug plans (PDPs) to provide more than just drug benefits. PDPs should be encouraged to offer Medigap-like benefits (hospital deductible, physician coinsurance etc.) or HMO-like preventive or chronic care benefits, in addition to drug coverage. That would give them a much broader and more attractive product to offer, and could reduce adverse selection problems. (With stand-alone drug benefits, seniors might just tote up their drug costs when deciding whether or not to enroll. If those with high costs purchased coverage, and those with low costs did not, premiums would be driven higher over time and the benefit could unravel.) The rules for this could say that PDPs offering non-drug benefits couldn’t have absolute 100% coverage for those items, leaving seniors to pay at least a small copayment on every health service. That would be economically preferable to current Medigap rules, which often include 100% coverage, leaving beneficiaries with no incentive at all to be careful consumers.

Of course, these changes would cost more, which would be a problem for many fiscal conservatives and deficit-worried moderates.

However, the question is: Is it better to leave the $400 billion Medicare bill alone even if it might not work very well, or start the process of smoothing over the bill's rougher edges so that the drug benefit is as effective as possible, even if it means spending more?

The latter course might be a better value for taxpayers in the long run. It would be worth it to sacrifice a new tax cut or spending program to "pay for" necessary improvements to the drug benefit.

Finally, the MPDIMA drug benefit has become a test case for private-sector participation in Medicare. If it doesn't work, the private sector would be discredited. No one will go back to the 2003 law and point out its flaws -- that a stand-alone drug benefit has inherent actuarial problems, or that the drug benefit design was unfriendly to employer-based retiree coverage -- they will just say the private sector didn't work.

For those who believe that public-private participation and competition in Medicare is ultimately the best way to control the program's budgetary problems (in lieu of benefit cuts or tax increases), a poorly functioning or unpopular drug benefit would be a setback.

Links:
CentristPolicyNetwork.Org 2003 Medicare and Rx Drug Resource Page

Douglas Holtz-Eakin and Jeff Lemieux The Cost of Medicare: What the Future Holds Heritage Foundation Lecture #815 (December 15, 2003)

Posted by Jeff Lemieux at January 4, 2004 12:02 PM