Health Action In Depth

December 2003

The Medicare Drug Bill: Who Wins?

In his 2003 State of the Union address, the President listed the achievement of high-quality, affordable health care as his Administration's second goal. Regarding Medicare specifically, he said that "Health care reform must begin with Medicare; Medicare is the binding commitment of a caring society. We must renew that commitment by giving seniors access to . new drugs that are transforming health care in America." And the Administration has eagerly taken full credit for the passage of the Medicare prescription drug bill.

In truth, though, we don't know how enactment of the Medicare bill will play out with America's seniors and people with disabilities. So we must step back and ask several key questions about who will reap the rewards conferred by passage of this legislation: Will the Administration be credited with passing a bill that will help lots of seniors or a confusing piece of legislation that helps very few? Who most benefits from this legislation-41 million Medicare beneficiaries or a handful of drug companies and private health plans? Will Medicare beneficiaries be able to understand this benefit, and if so, will they like it? Does the benefit offered by this bill represent "the binding commitment of a caring society"?

Who stands to gain the most from passage of this legislation? Part of the answer to this question will depend on who succeeds in framing the terms of the ongoing debate about the bill. And because the drug benefit will not take effect until 2006, supporters and critics will have to shape public opinion through reasoned arguments about the bill's provisions in lieu of being able to point to the real-life experiences of beneficiaries.

Good Bill? Bad Bill?
One question everybody seems to have is whether, from the standpoint of Medicare's millions of enrollees, this is a good bill or a bad bill. The answer to this question largely depends on who you're asking. As expected, opinion leaders have vastly different opinions, ranging from "good start but needs improvement" to "awful-they should have scrapped it and started over." Perhaps the one point all agree on is that this is a very complicated piece of legislation.

On the day the Senate voted to approve the bill, Families USA executive director Ron Pollack released a statement that read, in part, "The Medicare legislation will cause deep disappointment for America's seniors and people with disabilities. It provides very limited drug coverage; fails to moderate skyrocketing drug costs; and spends lavishly to push seniors into managed care plans." This article will examine these points in detail. We'll begin with the failure to contain drug costs and the "lavish spending"-money that was used not to create a more generous drug benefit but instead to induce various industries to participate in what some have predicted will be a great Medicare "experiment."

Christmas Comes Early. . .
A couple of powerful industries stood to benefit from passage of a Medicare drug bill, and those groups lobbied hard to bend the legislation to their desires (a move that did not elude the attention of the media). We discuss the groups that got the goodies below.

The Pharmaceutical Industry
For years, the pharmaceutical industry, represented by PhRMA (the Pharmaceutical Research and Manufacturers of America), vehemently opposed the creation of a prescription drug benefit within the Medicare program, and it lobbied aggressively to prevent such a program expansion. The industry opposed a drug benefit because drug makers feared it would lead to government price controls, which are found almost everywhere else in the world. This time around, however, things were very different. This time, PhRMA actually pushed for the creation of a prescription drug benefit.

What explains this about-face? The drug lobby decided to shift positions for two big reasons:

1. Especially over the last few years, the drug industry has faced overwhelming criticism about its drug pricing practices. Everyone-from those covered by employer plans to seniors with no drug coverage-has criticized America's rapidly rising drug prices, the highest drug prices in the world. Seniors have been especially forthright in expressing their anger at having to pay such high prices. The drug industry felt that if Medicare drug legislation were passed, it would enable them to head off at least some of this criticism, especially that coming from seniors.
2. The drug industry also felt that it could work with the White House and Republican leaders to craft legislation that would avoid one of the industry's biggest fears: the federal government stepping in and establishing price controls or negotiating drug prices. The President needed to follow through on his campaign promise to deliver a drug benefit to seniors, and congressional Republicans also recognized what they stood to gain from handing the President such a victory. The industry saw its best opportunity to work with a friendly administration that would do all it could to protect it against price moderation. Not wanting to miss the chance to defend their turf by shaping the legislation, PhRMA shifted positions and decided it would support the creation of a drug benefit so long as it was provided through private plans, figuring that such plans wouldn't be able to moderate drug prices as effectively as the federal government. Drug makers decided to push for this legislation because, as Gardiner Harris of The New York Times said, "most executives believe that a Medicare drug benefit will forestall efforts to ... control drug prices."

The pharmaceutical lobby poured enormous resources into influencing lawmakers and this legislation, making $60 million in political donations since the 2000 election cycle and spending $37.7 million in lobbying in the first six months of 2003.  According to Ceci Connolly of The Washington Post, analysts inside and outside the industry commented that, "No industry in negotiations over the $400 billion Medicare prescription drug bill . outpaced the pharmaceutical lobby in securing a favorable program design and defeating proposals most likely to cut into profits. . . ."

Those lobbying efforts paid off in a big way -- the Medicare drug bill actually prohibits the federal government from using the leverage of 41 million Medicare beneficiaries to negotiate lower drug prices. While the private health plans that choose to participate will seek discounts for those they enroll, they won't have Medicare's huge purchasing power, so they'll have less leverage. Many critics say private drug plans have not been as successful as some government programs -- such as the Veterans Administration-at negotiating drug prices.

The drug industry also headed off what has been an extraordinarily popular movement-the reimportation of lower-priced, U.S.-made prescription drugs from Canada. While the new bill does not establish an outright ban on the process, it allows Americans to reimport drugs only if the Secretary of the Department of Health and Human Services (HHS) certifies that reimported drugs are safe and that importing them would reduce drug costs. Time and again, HHS Secretary Tommy Thompson has adamantly refused to allow drug reimportation from any country, citing safety concerns.

Not only has the drug industry averted any meaningful efforts to curb rising prices as well as competition from other nations, two hot-button issues, but it also stands to see an increase in the volume of drug sales generated by millions of new customers who currently lack drug coverage. The clearest indication that the bill offers a bright future for drug industry sales came from the stock market, where pharmaceutical stock prices rose steadily over the last week of negotiations as the legislation's prospects for passage improved. One Wall Street analyst estimated that, under the new benefit, prescription drug sales could increase by as much as $13 billion a year.

All consumers won a significant victory over the drug industry with regard to one provision: The bill will speed market entry of lower-priced generic drugs by closing some patent law loopholes used by brand-name drug companies to block generic drug competition.

Private Insurance Companies
Private insurance companies, not the Medicare program, will deliver the new drug benefit to enrollees. However, many of these same companies already have a lousy track record when it comes to the Medicare program. Over the years, the private plans that have participated in the Medicare+Choice (M+C) program have scaled back the drug coverage they provided or simply left the program in droves. Under the bill, these companies will receive an immediate cash infusion of billions of dollars that would boost their reimbursements in 2004 and 2005 so long as they remain in the Medicare program. In addition, under a renamed program called Medicare Advantage, private firms that provide health insurance that includes drug coverage could receive up to $12 billion in subsidies beginning in 2007. Such firms include Preferred Provider Organizations (PPOs), which limit the choice of providers by encouraging the use of certain doctors but allowing patients to see non-preferred providers if they pay extra. Medicare beneficiaries who were dumped by plans that bailed out of the M+C program may well be skeptical about signing up with private plans again.

In addition, the subsidies these private plans will receive actually amount to overpayments. Here's why: Insurance companies that already operate in the Medicare program "cherry pick"-enroll the youngest and healthiest seniors-to keep their costs as low as possible. Numerous studies have shown that these companies are, therefore, overpaid because, despite the fact that their costs are lower, they are paid about the same per enrollee as the traditional Medicare program, which has higher costs since it serves older and sicker enrollees. So, now these companies, which have already proven that they are not effective at keeping costs down, will be able to line their pockets even more.

Aside from the many presents the bill doles out to industry, there are several other aspects of the legislation that beneficiaries will find problematic.

The "Doughnut Hole"
After a consumer pays the premium ($35 a month-$420 a year) and satisfies the deductible ($250 a year), the plan will pay for 75 percent of drug costs (beneficiaries must pay 25 percent) until drug expenses reach $2,250. Once a beneficiary reaches this coverage limit, coverage stops. Program participants must then pay for the next $2,850 in drug expenses completely out-of-pocket. This gap in coverage is called the "doughnut hole." Drug coverage doesn't resume until a participant has spent a total of $3,600 out-of-pocket (for drug expenses totaling $5,100) -- not including the $420 premium. Then "catastrophic" coverage begins. (Note: The size of the doughnut hole will double about every eight years!)

Many low-income beneficiaries will be spared from paying premiums, the deductible, and will have no gap in coverage (doughnut hole). Middle-class beneficiaries, on the other hand, will not receive these subsidies, and while they're in the doughnut hole, those with high drug costs will still be paying their monthly premiums, even though they won't be receiving any help with drug expenses. What if these seniors don't have the resources to get them to the point when catastrophic coverage begins-what if they don't have $3,600 to pay out of their own pockets? One health policy analyst maintains that the drug benefit will be of little help to the 6 to 7 million beneficiaries whose incomes exceed low-income subsidy levels but who still make less than $18,000 a year. And Bob Blendon, a Harvard expert on public opinion and health, argues that "middle-income elderly will feel the bill is extremely inadequate."

Problems with the Low-Income Provisions
As we noted above, many low-income Medicare beneficiaries will not have to pay premiums or deductibles and will not have gaps in drug coverage. While this will help many low-income enrollees, a couple of significant problems with the low-income provisions in the bill will significantly worsen-or eliminate-coverage for those who most need help paying their drug bills.

1. Some low-income Medicare beneficiaries-generally those with incomes no higher than the federal poverty level ($8,980 for an individual and $12,120 for a couple)-are also eligible for Medicaid in most states. Those "dual eligibles" who have been receiving drug coverage through their state's Medicaid program will now be covered under the new Medicare drug bill, and the drug coverage offered by the new Medicare bill will be more sparse and will cost more. It will be more sparse because the formularies created by the private plans will likely exclude more drugs than Medicaid programs do. It will be more expensive because many Medicaid beneficiaries currently pay nothing for their prescription drugs. Under the new bill, they will have copays that, while small, could be a financial hardship for the very low-income.
2. For those low-income Medicare beneficiaries who are not enrolled in Medicaid but who have incomes under 150 percent of poverty ($13,470 for an individual, $18,180 for a couple), assets tests will be imposed that could prevent about 2 million participants from obtaining subsidies. These assets can include modest savings accounts, life insurance policies, and even money to cover burial expenses. So, if disqualified by an assets test, a beneficiary with high drug costs and an annual income of $12,000 would have to pay $3,600 out-of-pocket plus the $420 premium-about one-third of his or her income-before catastrophic drug coverage kicked in.

The Competition Provision, a.k.a. "Premium Support"
The bill establishes what are called "demonstration projects" in six metropolitan areas around the country that could radically alter Medicare as we know it, abandoning Medicare's tradition of paying the full cost of a specific list of services to everyone who is eligible. Beginning in 2010, the traditional fee-for-service Medicare program will have to compete against private plans that choose to operate in those six areas. The premiums charged by these plans could vary depending on the region and insurer.

As noted earlier, because Medicare serves an older and sicker-and therefore more expensive-population, its costs are and will continue to be greater. The legislation requires that these "extra" costs be passed on to Medicare beneficiaries. On the other hand, seniors and other beneficiaries will get rebates if they choose cheaper private plans. Over time, as the population served by traditional Medicare program grows older and sicker, program costs will skyrocket, and fewer seniors will be able to afford to stay in the program. As a result, more and more seniors will be forced to join private plans where their choice of physicians will be limited. Note: Some Senators who promoted this provision on ideological grounds made a point of ensuring that their own constituents would be exempt from this provision.

Health Savings Accounts (HSAs)
The bill provides for HSAs, advertised by the Republican-controlled House Ways and Means Committee as "tax-free asset accumulation," which will primarily benefit the healthy and wealthy by allowing them to establish a tax shelter. (It also sets a precedent for the creation of other accounts in the future that will let affluent families avoid paying taxes.) It will allow people with high-deductible insurance plans-those with deductibles of $1,000 a year for individual coverage or $2,000 a year for a family-to shelter income from taxes. Individuals, their families, or employers could sock away the amount of the annual deductible, up to $2,600 for individuals and $5,150 for families. People nearing retirement-those ages 55 to 65-could make even larger contributions to build a "medical nest egg."

If a person with an HSA does not spend all of the money in his or her account, he or she can roll it over from year to year. In addition, participants may invest unspent money and will not have to pay any taxes on the investment or on earnings when money in the accounts is withdrawn, provided the money is used only for health expenses such as insurance premiums, prescription drugs, and long-term care services. If a beneficiary dies with money in his or her HSA, those funds can be transferred to a spouse tax-free. Opponents argue that such accounts will draw young, healthy, and affluent people out of the general insurance pool and into high-deductible plans, gradually increasing costs for the older, sicker enrollees who remain in traditional insurance plans. Some critics also warn that the creation of these accounts could result in employers raising deductibles to $1,000-thus raising employees' out-of-pocket costs even further-or dropping insurance coverage altogether and offering only HSAs.

Artificial Spending Cap
In an unprecedented move, the bill establishes an artificial and arbitrary cap on Medicare that Congress has not imposed on any other federal program. Under this legislation, when general revenue constitutes at least 45 percent of Medicare spending, Congress and the Administration will have to review Medicare's finances. This review will be triggered in 2010 as that 45 percent mark approaches. The irony of this provision is that, while Republicans call it a "cost containment" measure, it doesn't really do anything to contain costs, it just attempts to set an arbitrary limit on the amount of money the government will spend on the program.

Conclusion
How will seniors and people with disabilities react to the biggest change in Medicare since its creation 38 year ago? It's too early to tell. Some observers predict a political backlash from beneficiaries when they discover that the drug benefit is far less than what they expected, want, or need. Many point out that a smaller-than-needed benefit was almost inevitable-because of the Administration's enormous, repeated tax cuts and huge amounts of spending on various defense programs, only $400 billion was allocated over the next 10 years to cover drug costs that are estimated to be at least $1.8 trillion.

And while polls have found that Medicare beneficiaries overwhelmingly support the idea of expanding Medicare to cover prescription drugs, the more they learn about the bill's specifics, the less they like it. For example, an early December Washington Post/ABC News Poll found that, among those ages 65 and older, 47 percent disapproved of the bill's changes to Medicare and 26 percent supported the legislation.

Seniors and other beneficiaries may also revolt if they feel they are being pushed into private health plans and out of the traditional Medicare program. Ever since the idea of delivering the benefit through private plans was first broached by the Administration, Medicare beneficiaries have repeatedly expressed their opposition to being pushed into private plans and their desire to stay in the traditional Medicare program.

Some analysts have suggested that this bill is really a Trojan Horse-under the guise of providing a drug benefit, conservatives have pursued a single-minded drive to privatize the Medicare program. Perhaps in an effort to sell the bill or disguise the involvement of private plans, supporters have cloaked their discussions of this move by using words such as "choice" and "modernization." Our message to current and future beneficiaries: Study this plan carefully before making your decision.