Drug Benefits and the Emperor's Clothes

On the surface, the biggest Medicare dispute isn't about drug benefits, it's about "premium support" -- direct competition between Medicare's government-run fee-for-service program and private health plans.

House Republicans won't vote for a big new drug benefit without a new competitive approach too. Senate Democrats don't trust the competitive approach. The dispute over competition is what supposedly threatens the chance of any progress toward drug benefits or reforms in Medicare this year.

But the underlying problem is not competition -- it is the drug benefit itself. Congress and the President insist on trying to squeeze a generous sounding drug benefit into a $400 billion (10-year) budget. It just doesn't fit.

Seniors will only be happy with a generous drug benefit, or at least that's what the political wizards believe. In effect, everybody wants the emperor to get a fancy full-length silk robe with lots of frills and baubles.

But most policymakers don't want to pay the full cost. Liberal Democrats have at least been honest -- they propose lavish robes for the emperor, but they acknowledge it will be very expensive. A generous prescription drug benefit would cost taxpayers as much as $1 trillion over the next ten years.

President Bush and the Congressional leadership haven't been so forthright. They have shied from clearly explaining that a limited budget means a limited benefit.

Instead, they have instructed their long-suffering staffs to stitch together a fancy robe without enough cloth.

The result covers some areas with a bit of finery, but it leaves a couple of the emperor's more sensitive spots out in the bare air.

Seniors with employer-based retiree coverage are worried that they are being left out. Low-income seniors with a little savings or some assets socked away will not get the coverage they need. There is an awkward "doughnut hole" in the benefit design. Because the benefit includes a $35 monthly premium, seniors with low drug expenses might choose not to enroll despite the penalties for late enrollment. If they stay away, the monthly premium could skyrocket in subsequent years.

The emperor's aides are scurrying to patch as many of these holes as possible before the robe is unveiled. They are scouring the palace for spare change, hoping to purchase a few more scraps of cloth.

Ironically, the main stumbling block in the Medicare negotiations -- whether or not to launch a competitive premium support system -- would not be a make or break issue for conservatives if the emperor hadn't been promised such a fancy robe in the first place.

Conservatives rightly believe that if the emperor expects a fine silk robe, he will eventually get one. If at first it is too-shabby or full of holes, it will be fixed over time, at whatever expense is necessary. Knowing that the long-term cost of the robe will be high, they are demanding competitive reforms to save money.

However, if the emperor was being fitted for a simple, frugal, functional set of cotton pajamas -- clothing that covered him safely from head to toe, but was nothing to brag about or show off in public -- conservatives could rest easier. We wouldn't need to enact a premium support system right now. And with a cheaper fabric, liberals could even insist on additional padding in the most sensitive areas (extra drug benefits for low-income seniors) without busting the budget.

In truth, competitive reforms like premium support will indeed be necessary to try to hold down Medicare's costs in the coming decades. Competition would certainly be better than deep benefit cuts, large reductions in payments to health providers, or new taxes on working people.

Democrats are wrong that premium support would necessarily be the end of the world for Medicare. In fact, it could be the beginning of something much better, for both taxpayers and senior citizens.

But they are right that such an important change should be studied very carefully, and that we should have a robust national debate -- led by the President -- on the pros and cons.

If this dispute persists, we may never see the emperor's new silk robe.

On the other hand, if Medicare negotiators can reach a tentative agreement on competition in the coming days, the public will get its first high-profile public viewing.

We expect the tortured staffers (as well as those needing the emperor's favors) to praise the robe's finery and ignore its faults.

Outside observers will mutter that for all the build-up, it's not as nice as they expected.

And some child will say: "Wait, I can see the emperor's [blank]!"

Links:
Centrist Policy Network 2003 Medicare and Prescription Drug Resource Page

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

Arnold the Centrist?

Was Arnold's election as governor of California a fluke, or is it symbolic of a larger trend?

On the one hand, the whole Schwarzenegger phenomenon could come crashing down as the new governor clashes with the hardened partisans in the state legislature over California's budget woes. Continued economic problems and an impasse on the budget could burst the Arnold bubble fairly quickly.

However, there is more to this crazy recall than a disenchanted electorate and a charismatic actor-turned-politician.

While he hasn't specified how he would balance the budget, Schwarzenegger did campaign on some strong themes, which resonated with California voters:

1. A friendlier business climate, especially on issues with which smaller businesses could identify, like workers’ compensation premiums.
2. Social tolerance.
3. Fiscal restraint, with tax increases only a last resort.

One lesson for Democrats is that anti-tax sentiment may not soon dissipate. Voters really don’t seem ready for tax increases to solve budget problems.

Taxpayers aren't stupid. They can see (in California and nationally) that elected officials still aren’t taking the budget problems seriously.

Here’s a test: Scan the news releases on virtually every federal Representative or Senator's website (www.house.gov or www.senate.gov ). A large percentage of the press releases brag about pork barrel spending procured for their state or district. Many tout expensive new initiatives on popular issues, like health care or education or tax breaks. Then go back and tally how many Representatives and Senators explain where all the money would come from. Not very many.

Voters like all that spending, of course. But the larger sense that money still grows on trees, emanating strongly from the President and Congress, makes them resist tax increases, even at the local level. Why should I pay more when it's clear that the federal spigot is still wide open?

For Republicans, the Arnold surprise should teach two lessons: (1) moderate voters favor social inclusion and tolerance (at least for legal residents), and (2) voters are dissatisfied with dysfunctional, ideologically split government that can't resolve basic differences.

This is a two-fold problem for President Bush and the Republican leadership. First, by tacking so far to the right since his election in 2000, President has aligned himself with Congressional Republican party, with its ultra-conservative social policies and unyielding partisanship. This has strengthened his standing with the right-wing Republican base, but it is not in synch with millions of moderate voters -- Arnold voters -- who are socially liberal and want bipartisan solutions.

Democrats took the beating over dysfunctional government in California. But Republicans will take the heat nationally, because they control the presidency and both houses of Congress.

Moreover, President Bush campaigned on a platform of bipartisanship, and “changing the tone” in Washington. He pointed figures at the Clinton-Gore administration for not accomplishing enough, especially on tough issues like entitlement reform. Yet Bush's bipartisanship has mostly been limited to advocacy for more government spending (which is hardly a tough choice).

Arnold’s election is a victory for moderate Republicans, and a warning to partisans and ideologues of both parties.

Expanding the Health Care Tax Credit

The Trade Adjustment Assistance (TAA) Act of 2002 set an important precedent for bipartisan progress on health coverage. It established a tax credit for "transitional" health insurance, the Health Care Tax Credit or HCTC. It mapped out a set of health plans -- including COBRA coverage from ex-employers -- on which the tax credit could be used (and on which Republicans and Democrats could agree).

However, the only people eligible for the HCTC's 65 percent credit were a small group of unemployed workers displaced by foreign trade, and an equally small group of retirees whose pensions were taken over by the government. In total, about 250,000 souls.

Now, Senators Chuck Grassley and Max Baucus have taken the next step: expanding the HCTC to all unemployed workers. Their bill, the "Health Care Tax Credit Expansion Act of 2003" was introduced on October 1.

According to the Joint Committee on Taxation, the Grassley-Baucus proposal would cover an additional 1.6 million people; a modest but important step on the path toward coverage for the 43.6 million uninsured.

Earlier this year, Congress voted to reserve $50 billion over the next ten years for health coverage. At an estimated cost of $34 billion, the Grassley-Baucus bill would fit easily within that budget.

Importantly, the Grassley-Baucus tax credit is refundable, which means that people with low-incomes who otherwise would not face any income tax liability could still get the funds. It is also "advanceable," which means that people wouldn't have to wait until the end of the tax year to file for the credit -- they could receive the funds "in advance" as they paid their health insurance bills on a month-to-month health basis.

There is one technical fix that would make the Grassley-Baucus bill even more attractive. The bill should allow unemployed workers to keep the HCTC for several months after they have found a new job (and stopped receiving unemployment benefits). That way, people would not have to fear immediately losing their health coverage when they took a new job. This would make the bill slightly more expensive, but it would still fit within the $50 billion limit

There may be other changes to the law that members of Congress might wish to see. For example, House Republicans have proposed to make individual health coverage a more prominent coverage option for HCTC users.

However, Congress has only a few weeks left in before it adjourns for the year, and the $50 billion in funding expires. That leaves little time to consider extensive modifications of the HCTC law this year. It might be best to let well enough alone in 2003, and stick with the parameters of the original TAA compromise.

Senators Grassley and Baucus should be commended for their continuing efforts to find bipartisan solutions on the uninsured. Hopefully, Congress will agree to expand the HCTC as an affordable "next step." Additional expansions of eligibility or health plan options under the HCTC can be considered as part of subsequent steps on the path toward health coverage for all Americans.

Links:
Centrists.Org From Transitional to Universal Health Coverage (September 24, 2003)

Internal Revenue Service Health Care Tax Credit (HCTC) Overview

Centrist Policy Network Transitional Coverage Resource Page (contains links to legislative language of the Grassley-Baucus bill and revenue estimates from the Joint Committee on Taxation)

Centrists.Org A Bipartisan Compromise on Transitional Health Coverage (revised 4/28/2003)

Heritage Foundation State Opportunities to Provide Affordable Health Coverage Under the Trade Law by Nina Owcharenko and Edmund Haislmaier (February 25, 2003)

Economic and Social Research Institute Health Insurance for Laid-Off Workers, A Time for Action by Lynn Etheredge and Stan Dorn (February 2003)