THE NEW MEDICARE LAW: POLICY AND POLITICS

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THE NEW MEDICARE LAW POLICY AND
POLITICS   BY     ROBERT E.MOFFIT PH D. DIRECTOR
OF THE CENTER FOR HEALTH POLICY STUDIES THE
HERITAGE FOUNDATION              2004 Health Care
Forecast Conference     Held at Irvine,
California   February 19-20, 2004  
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• THE ORIGINAL GOALS OF MEDICARE REFORM
•  
• THE KEY REFORM WAS THE ADOPTION OF A SYSTEM OF
  PREMIUM SUPPORT FINANCING, AND DIRECT
  COMPETITION AMONG ALL PLANS, INCLUDING THE
  TRADITIONAL MEDICARE PROGRAM. GOALS INCLUDED
•  
•         THE MAXIMIZATION OF PERSONAL CHOICE OF
  PLANS, OPTIONS AND BENEFITS THROUGH A NEW SYSTEM
  OF CONSUMER CHOICE AND FREE MARKET COMPETITION.
•         A MARKET BASED PAYMENT SYSTEM FOR PRIVATE
  PLANS.
•         THE MODERNIZATION OF HEALTH BENEFITS
  OFFERINGS, INCLUDING A TARGETED, INCOME- RELATED,
  PRESCRIPTION DRUG BENEFIT DELIVERED THROUGH
  PRIVATE HEALTH PLANS.
•         TRANSFORMATION IN MEDICARE GOVERNANCE,
  FLEXIBILITY IN ADMINISTRATION, AND A REDUCTION IN
  CONGRESSIONAL MICRO-MANAGEMENT.
• CONTROL OF FUTURE MEDICARE COSTS.

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THE BIPARTISAN COMMISSION MAJORITY PROPOSAL FOR
MEDICARE REFORM The National Bipartisan
Commission on the Future of Medicare secured
(March 1999) a majority 17 to 10 for a proposal
(Breaux-Thomas) that would transform Medicare
into a program like the Federal Employees Health
Benefits program (FEHBP)         Wide
Choice of Private Health Plans. At the heart of
the Commissions majority proposal is personal
choice of plans and benefits. Retirees would be
able to enroll in either the traditional Medicare
program or a private health insurance plan of
their choice. Every retiree would be guaranteed a
core benefits package.         Premium Support
Financing. Retirees would get direct government
financial support for payment to the health plan
of their choice, just like federal employees and
retirees. The Medicare premium support would
average 88 percent of the total premium.
Government support would not fall below the
amount that retirees needed to buy the approved
core package of health care benefits. Annual
adjustments would be based on a formula that
tracks the changing health insurance market. If
health insurance costs increased, the
governments premium support would also
automatically increase.
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THE BIPARTISAN COMMISSION MAJORITY PROPOSAL FOR
MEDICARE REFORM      Integration of Subsidized
Prescription Drug Coverage. The Commission
majority proposal would provide subsidized,
comprehensive prescription drug coverage to
low-income retirees.         A Board or
Independent Agency To Set The Rules of The Game.
A Medicare Board, appointed by the President and
confirmed by the Senate, would set the ground
rules of market competition among private plans.
The Board would negotiate premiums with private
plans, approve the benefits package, ensure
consumer protection, fiscal solvency and quality
standards, establish a risk adjustment mechanism
to safeguard against adverse selection, and
provide comparative information to beneficiaries.
   Medicare Part A and Part B Trust
Funds Would be Combined. There would henceforth
be a single Medicare trust fund financed by
payroll taxes and general revenues.
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• THE 2001 BUSH PROPOSAL
•  The initial Bush plan would have increased
  Medicare spending by about 158 billion over a
  ten- year period. Of that amount, 110 billion
  would go for Medicare modernization and 48
  billion would be dedicated to fast track state
  assistance for low- income elderly without
  prescription drugs. Most of the original Bush
  provisions were lifted from the Bipartisan
  Medicare Proposal of 1999
• -         Every senior would remain entitled to
  current Medicare benefits. Bush used Medicares
  benefit package as a base. This was in accord
  with the Bipartisan Commission majority
  recommendations.
• -         Retirees would have access to a broad
  choice of health plans, including prescription
  drug packages. This was similar to the Bipartisan
  Commission proposal. The model was the federal
  employees program.
• Retirees would get coverage for
  catastrophic costs for all seniors at 6000 for
  all medical expenses. The requirement was similar
  to that found in plans competing for the dollars
  of federal employees and retirees.
• Low-income retirees would be fully
  funded for the costs of the average premium. The
  full costs of Medicare premiums for all seniors
  at 135 percent of poverty (i.e. individuals with
  incomes at or below 11,300 and couples with
  incomes at or below 15,200 in 2001 dollars)
  would be completely covered. It would have
  affected an estimated 6 million seniors
  nationwide. This was in accord with the
  Bipartisan Commission proposal.

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THE 2001 BUSH PROPOSAL -         Sliding scale
subsidies for the drug costs of near poor
families. The Bush plan would subsidize the
cost of drugs on a sliding scale of subsidies
between 135 percent and 175 percent of poverty-
between 14,600 and 19,700 for couples in 2001
dollars). This would have affected an estimated 5
million people. -         Drug discounts for
all retirees. The Bush plan called for a 25
percent discount of premium costs for all seniors
at or above 175 percent of poverty. -        
Immediate Assistance to State Elderly Programs.
There was a provision for direct and immediate
assistance to the several states to help low
income seniors get access to prescription drugs.
The 48 billion would also be used to cover all
costs of prescription drugs for those at or below
135 percent of poverty, and part of the cost for
those who have incomes between 135 and 175
percent of poverty, and catastrophic costs over
6000. This was not proposed by the Bipartisan
Commission. -         A Unified Medicare Trust
fund. The plan would combine the trust funds of
Medicare part A, the hospitalization Trust fund
and Medicare part B, the supplemental insurance
trust fund into a unified fund. This provision is
similar to that of the Bipartisan
Commission. -         Retained the age of
eligibility at 65. This is a break with the
majority recommendations of the Bipartisan
Commission, which would have raised the
eligibility to age 67.
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THE FINAL PRODUCT THE NEW MEDICARE LAW  THE KEY
ELEMENTS          PREMIUM SUPPORT IS GUTTED.
IT WAS REPLACED WITH A PREMIUM SUPPORT
DEMONSTRATION PROJECT IN SIX GEOGRAPHIC SITES
BEGINNING IN 2010.         A PRESCRIPTION DRUG
DISCOUNT CARD SYSTEM FOR 2004-2006. THE
DEPARTMENT OF HEALTH AND HUMAN SERVICES TO
IMPLEMENT A NEW PROGRAM OF MEDICARE-APPROVED
PRESCRIPTION DRUG DISCOUNT CARDS, WITH AN ANNUAL
ENROLLMENT FEE UP TO 30.   -CARD SPONSORS CAN
BE PHARMACEUTICAL BENEFIT MANAGERS, WHOLESALE OR
RETAIL PHARMACIES, INSURERS, MEDICARECHOICE
HEALTH PLANS. -A 600 A YEAR SUBSIDY FOR PERSONS
WITH INCOME LESS THAN 135 OF POVERTY (12,124
EACH YEAR OR LESS THAN 16,363 FOR MARRIED
COUPLES)          A MEDICARE ADVANTAGE
SYSTEM REPLACES MEDICARE CHOICE IN
2006.  -         REGIONALLY BASED PLAN SERVICE
AREAS (BETWEEN 10 AND 50).    
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• THE FINAL PRODUCT THE NEW MEDICARE LAW
• -         PLANS EXEMPTED FROM STATE PREMIUM
  TAXES, AND BENEFIT MANDATES, BUT SUBJECT TO STATE
  LICENSURE AND SOLVENCY RULES.
• PLAN PAYMENT BASED ON COMPETITIVE
  BIDDING.
• BENEFICIARY SAVINGS FOR PURCHASES BELOW
  THE BENCHMARK PLAN PAYMENT, SPLIT AT 75 PERCENT
  FOR THE BENEFICIARY AND 25 PERCENT FOR THE
  GOVERNMENT.
•  
• - 10 BILLION STABILIZATION FUND FOR
  PAYMENTS BEYOND REGULAR ANNUAL PLAN PAYMENT TO
  ATTRACT OR RETAIN HEALTH PLANS.
• - STANDARDIZATION OF PLAN BENEFITS
  LIMITED FLEXIBILITY ON COST-SHARING.
•  
•         A UNIVERSAL DRUG ENTITLEMENT IN 2006.
•  
• -RESEMBLES THE STRUCTURE OF EARLIER DEMOCRATIC
  PROPOSALS (INCLUDING EMPLOYER-SUBSIDIES TO
  RETAIN RETIREE COVERAGE.)
•  
•  

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THE FINAL PRODUCT THE NEW MEDICARE LAW -PUBLIC
SECTOR ENTITLEMENT DELIVERED BY PRIVATE PLANS,
INCLUDING DRUG ONLY PLANS, UNDER THE TERMS AND
CONDITIONS OF LAW AND REGULATION.   -FINANCED
THROUGH PREMIUMS (35 PER MONTH), DEDUCTIBLES
(250 PER YEAR) AND GENERAL REVENUES LIKE
MEDICARE PART B.         BENEFIT ADDITIONS AND
PAYMENT CHANGES IN TRADITIONAL MEDICARE. NEW
HEART DISEASE AND DIABETES TESTS INCREASED RURAL
PROVIDER PAYMENTS INCREASES IN PHYSICIAN
PAYMENT.           LIMITED REGULATORY REFORM AND
RETENTION OF TRADITIONAL MEDICARE GOVERNANCE. THE
PROPOSED MEDICARE BENEFITS ADMINISTRATION,
OUTSIDE OF CIVIL SERVICE RULES, AS AN INDEPENDENT
ENTITY WAS DROPPED, AND A CENTER WITHIN THE HHS,
UNDER CIVIL SERVICE RULES, WILL ISSUE REGULATIONS
FOR PART C AND PART D.         COST CONTROL IS
BASED ON A NEW CONGRESSIONAL PROCESS. THE
CURRENT TRUST FUND DIVISION IS RETAINED.MEDICARE
TRUSTEES DETERMINE WHETHER GENERAL REVENUES
EXCEED 45 PERCENT OF TOTAL MEDICARE OUTLAYS.
EXCESS GENERAL REVENUE FUNDING DETERMINED IN TWO
CONSECUTIVE ANNUAL REPORTS CONSTITUTES A WARNING
THAT REQUIRES THE PRESIDENT TO SUBMIT LEGISLATION
TO CONGRESS. CONGRESS IS URGED TO ACT, WITH NEW
PROVISIONS FOR DISCHARGE PETITIONS.  
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POLICY IMPACT THE NEW DRUG PROGRAM.          
IT WILL ACCELERATE MEDICARE SPENDING. CBO
ESTIMATES THE TEN-YEAR COST OF THE BILL AT 395
BILLION. OMB PROJECTS 534 BILLION. THE UNFUNDED
LIABILITY IS 7 TRILLION OVER THE ACTUARIAL LIFE
OF THE MEDICARE PROGRAM. CBO SAYS SPENDING COULD
REACH 1.7 OR 2 TRILLION IN THE SECOND DECADE.
        IT WILL ACCELERATE THE DECLINE OF
PRIVATE RETIREE COVERAGE. CBO SAYS THAT ROUGHLY
ONE OUT OF THREE SENIORS WITH EMPLOYER- BASED
COVERAGE ARE GOING TO LOSE IT. PROFESSOR KEN
THORPE OF EMORY UNIVERSITY CONFIRMS THIS
ASSESSMENT. IT WILL BLOCK MEDI-GAP
COVERAGE OF OUT OF POCKET DRUG COSTS. MOREOVER,
IF A MEDICARE PATIENT WANTED TO USE A DRUG NOT ON
A HEALTH PLANS FORMULARY, THEY COULD NOT BUY
ADDITIONAL PRIVATE COVERAGE TO COVER THE COST OF
THE NON-FORMULARY DRUG.         IT WILL LAY
THE GROUNDWORK FOR GOVERNMENT PRICING. JUNE 11,
2003 REPORT OF THE INTERNATIONAL STRATEGY AND
INVESTMENT GROUP (ISI GROUP) EVEN THOUGH THE
FEDERAL GOVERNMENT WOULD NOT ACT AS A MONOPSONY
PURCHASER OF DRUGS INITIALLY, WE BELIEVE THAT
OUTCOME IS ALMOST INEVITABLE. MEDICARE IS ALREADY
A FISCAL TRAIN WRECK WAITING TO HAPPEN. ADD A
DRUG BENEFIT, THE COST OF WHICH IS EXPECTED TO
INCREASE BY 12 PERCENT PER YEAR, AND CONGRESS
WILL HAVE LITTLE CHOICE BUT TO PAY FAR LESS FOR
DRUGS IN THE FUTURE. THE LONG RUN THREAT TO
INDUSTRY IS SIGNIFICANT BECAUSE WITH A UNIVERSAL
DRUG BENEFIT IN PLACE, GOVERNMENT WILL BE
PURCHASING MORE THAN HALF THE DRUGS CONSUMED IN
THE US."
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Projected Medicare Spending 2003 2009
Information from Presidents 2005 budget, Table
S-12, P 386
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• THE POLITICS DEEPENING DIVISIVENESS
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• THE WINNERS
• Poor seniors without drug coverage
• Big companies that can scale back or drop
  existing retiree coverage
• Big companies eligible for billions of tax-free
  subsidies for retaining retiree drugs
• Rural health care providers with billions in
  additional Medicare payments
• Doctors escaping an impending 4.5 percent in
  Medicare payment cuts
• Drug companies with increased sales volume.
• Advocates of Medicare entitlement expansion.
• The MedicareIndustrial--Complex
• Republicans (?)
•  

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• THE LOSERS
• Middle class retirees, including union
  households, with employer based drug coverage
• Government retirees with state and local
  government employee drug plans
• Federal Retirees (?)
• Taxpayers, particularly those under the age of 30
• Fiscal conservatives.
• Advocates of PremiumSupport Medicare Reform
• Drug Companies facing future price controls.
• Democrats (?)
• Republicans (?)
• THE PROCESS Deepened divisions both between and
  within the political parties on the Medicare
  issue.
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• THE POLLS Demonstrate confusion, skepticism and
  hostility. EG. The December 2003 National
  Annenberg Election survey finds that most
  respondents overwhelmingly approve of the
  Medicare drug law until they find out about the
  details. When they do, support for the new law
  drops from 61 to 21 percent.
•  

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NO POLITICAL SLAM DUNK FOR THE WHITE HOUSE  
Source January 2004 WSJ/NBC News poll Dept. of
Health and Human Services.
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• A PRESCRIPTION FOR AMENDMENT
•  REPLACE THE DRUG ENTITLEMENT WITH A CATASTROPHIC
  COVERAGE REQUIREMENT COMBINED WITH DRUG DEBIT
  CARDS. 
• Federal subsidies would be delivered through a
  debit card, issued by the plans. Every plan
  would have an incentive to manage drug benefit to
  minimize the number of beneficiaries who reach
  the catastrophic trigger.  
• A qualified plan would be any plan that meets
  current insurance regulations (either state law,
  or ERISA if an employer or union sponsored
  plan). 
• Total out-of-pocket costs to the beneficiaries
  could be no more than the level permitted under
  the new Medicare law.
•  The debit card with the income-related subsidy
  could only be issued through a qualified plan,
  thus giving beneficiaries a strong incentive to
  obtain coverage and minimizing adverse
  selection. 
• National or regional stand-alone drug plans would
  be permitted. When the beneficiary signed up for
  a stand-alone drug plan the plan would issue the
  debit/discount card to the beneficiary with the
  annual premium pre-debited. Also, publishing the
  loss-ratios of stand-alone plans would both allow
  for appropriate consumer comparisons.

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MORE PRESCRIPTIONS FOR CHANGE          
Accelerate the Premium Support Demo Project for
new Retirees, effective in 2007. Establish the
demo in the 12 largest metropolitan areas of the
nation, and allow any retiree with employer or
private coverage - public or private sector- to
carry their plans into retirement with them as
their primary coverage, and get the government
contribution to offset its cost.          Make
the Drug Card Permanent. Seniors should have
the choice to continue to use it, subsidies for
low income seniors should be retained or
increased, seniors dropped from retiree coverage
could also be eligible for subsidies, and the
card program can be an option for those who might
prefer it to the new Medicare drug entitlement
due to start in 2006.            Integrate The
Drug Card Into the Medicare Advantage Program. In
2006, the new Medicare Advantage (MA) health
plans can incorporate the prescription drug
coverage into their benefit structure. They
should also be able to integrate the drug card
and drug assistance program, if they wish to do
so. Unspent funds for those who are subsidized
could be rolled over tax free, year to year, much
like a Health Savings Account (HSA).         .
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CONCLUSIONS 1. THE NEW LAW IS A MAJOR
RETREAT FROM MEDICARE REFORM           The
premium support system is relegated to a
Demonstration Project and traditional Medicare
is insulated from direct competition.         
MA Plans are not under the same type of flexible
regulatory regime as private plans in
FEHBP.           For doctors and hospitals,
Medicares traditional system of administrative
pricing and central planning is likely to remain
unchanged for the treatment of the vast majority
of Medicare patients.           Congressional
micro-management is likely to increase, not
decrease.           Cost control, as a goal,
has disappeared.  
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2. THE NEW LAW HAS ENLARGED THE MEDICARE
INDUSTRIAL COMPLEX 3. THE NEW DRUG
ENTITLEMENT IS LIKELY TO BACKFIRE ON THE WHITE
HOUSE AND THE REPUBLICANS          Surveys do
not show public confidence in the new drug
benefit          Liberals want more         
Conservatives want less   4. THE DEBATE OVER
THE FUTURE OF MEDICARE IS JUST BEGINNING
         Drug pricing, doughnut holes and
delivery mechanisms          Medicare cost
containment          The Implementation and
Regulation of the Medicare Advantage Program