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The Republican leadership and Medicare conferees appear to be in the final stages of hammering out an agreement on a Medicare prescription drug benefit and other significant changes to the Medicare system. Much is at stake. Significant federal dollars to provide a long-overdue Medicare prescription drug benefit are just a vote away. Yet the plan that has emerged is seriously flawed, and its costs may well outweigh its benefits — for both Medicare beneficiaries and the system as a whole.

Flaws in the prescription drug benefit

The prescription drug benefits passed by the House and Senate had flaws that, in some respects, have worsened. The conference agreement, like both bills, adopts a complicated cost sharing structure that cuts off assistance after drug spending exceeds a certain amount – only to resume it if out-of-pocket spending exceeds a catastrophic level. This gap in coverage is wider in the conference agreement than in the Senate bill and is a benefit design that does not exist in Congressional health plans. Further complicating matters, it would allow private plans administering the drug benefit to dictate which drugs are covered and how much seniors must pay for them — in effect, permitting insures to ration access for chronically ill seniors and people with disabilities who need prescription drug coverage the most.

How the Medicare system would pay for prescription drugs is even more troubling. Given the sheer size of its investment, Medicare should, one would think, adopt the best private-sector practice – pooled purchasing for negotiated prices. Instead, the bill invents a private insurance system to cover only prescription drugs. Multiple insurers would compete for a fraction of Medicare’s 41 million beneficiaries and would assume considerable financial risk for enrollees’ prescription drug costs. This untested system poses particular risks to sicker beneficiaries and those in rural areas. Private insurers could discourage enrollment of high-cost seniors, such as patients with diabetes, through high co-payments and a restrictive formulary for their medications. Moreover, rural America is now, and always has been, underserved by private insurers and this is unlikely to change. The conference agreement weakens the Senate bill’s “fallback” provision that would have allowed Medicare to offer a drug benefit directly in areas where private plans fail to do so.

A third problem with the conference bill is that it could leave millions of Medicare beneficiaries with less, not more, prescription drug coverage. Even with attempts to improve it, the emerging bill would discourage employers from continuing to offer prescription drug coverage to their retirees by providing less Medicare assistance to such retirees than to other beneficiaries. This could eliminate coverage for as many as 2 to 3 million retirees – over half of whom have incomes below $30,000. In addition, a cost-savings provision added to the conference bill would reduce drug coverage for the lowest-income and sickest Medicare beneficiaries – those dually eligible for Medicare and Medicaid. It would actually prohibit the use of federal Medicaid dollars to pay for prescription drugs not covered by the new Medicare drug plan – a departure from the practice for all other Medicare benefit gaps which Medicaid fills in for eligible beneficiaries. Thus, prescription drug coverage could be scaled back for 6 million nursing home residents, people with disabilities, and truly indigent seniors.

Additional funding would ameliorate some of these problems, but even without such funding, these flaws in the prescription drug benefit could have been avoided. Congress could have allocated the $400 billion investment so that seniors pay the same cost sharing at all levels of spending, with extra assistance only for those with the lowest income or highest costs. It could have adopted a well-tested system for delivering prescription drugs that ensures equal access for rural and sicker beneficiaries. And it could have avoided policies that penalize people with Medicaid and employer coverage. After all, any Medicare benefit that covers only a quarter of its beneficiaries’ costs cannot be considered a true substitute for existing sources of drug coverage. Instead, the conferees made a set of decisions about the use of $400 billion that leaves most wondering how – and if – these problems can be fixed.

Damaging policies that promote private plans and cap funding

Beyond the $400 billion price tag, there is another cost to the Medicare prescription drug benefit: structural changes to Medicare that promote enrollment in private plans and cap government funding in the name of “choice,” “competition,” and “cost containment.” The conference agreement promotes private plan enrollment in three ways. First, it significantly increases payment rates to current Medicare+Choice health maintenance organizations (HMOs) and other private plans. Second, it creates an even more generous preferred provider organization (PPO) system that includes a $12 billion discretionary “stabilization” fund to entice and keep these plans in Medicare. Third, the conference bill appears to include a time-limited “premium support” demonstration in a number of urban and possibly some rural areas. Premium support is a policy that generally caps the government’s contribution to traditional Medicare as well as private plans, so that beneficiaries pay for any excess costs through higher premiums. In addition, the plan would merge Medicare’s two trust funds – in so doing, capping the general revenue contribution to the program and advancing the projected date of the system’s insolvency by 10 years.

These policies have been advanced in the name of choice, competition and cost containment. Yet they would likely achieve none of these goals. Rather than offering meaningful and fair choices, these policies would financially coerce Medicare beneficiaries into joining private plans. The “choice” would not be between two equally-financed systems, but between two levels of Medicare support. Medicare would use taxpayer dollars to lower premiums, cost sharing and improve benefits – but only for beneficiaries that join private plans. This would not be considered a “choice” for seniors with low income or rural beneficiaries, most of whom lack access to such plans now.

Nor would the new system foster competition and efficiency. Few economists would argue that there is genuine competition when some competitors play by different rules, receive greater compensation for the same services, offer different, insurer-designed benefits with no restrictions, and have limited responsibility for information and marketing. Already, Medicare pays private plans 19 percent more for the same services; the base House bill would increase this amount significantly. In California, for example, some HMOs could be paid 30 percent more than traditional Medicare, according to the Medicare Office of the Actuary. In addition, the conference agreement creates a $12 billion “stabilization fund” which would distort market competition further by allowing for selective “bribes” to private insurers to serve certain areas of the country. The Congressional Budget Office does not estimate Medicare savings from these proposals – in contrast, these features will add billions of dollars to Medicare’s cost, worsening the program’s long-term fiscal outlook.

Finally, fiscal conservatives should criticize claims that this bill includes cost containment. The so-called cost containment provision – the merging of the trust funds and capping of government funding – does absolutely nothing to reduce overall Medicare costs. Instead, it punts the hard decisions about Medicare’s cost and financing to the next generation of policy makers. Worse yet, the bill as a whole increases rather than decreases Medicare costs, even putting the drug benefit aside. The only reason this does not show up on the budget tables is because increased payments to private plans and providers are offset by increased cost sharing and premiums from beneficiaries. Stated simply, this legislation shifts government costs to beneficiaries; it does not contain overall costs.

As with the drug benefit, alternative policies to achieve the stated goals of choice, competition, and cost containment exist. The Medicare Payment Advisory Commission recommends that a financial level playing field be created to promote choice between traditional Medicare and private plans based on price and quality, not financial coercion. Different levels of competition could also be explored such as allowing durable medical equipment providers to compete for Medicare’s business – a policy rejected by the conferees. Additional policies to address Medicare overpayments could be pursued.

Is a flawed bill better than none at all?

It is not surprising that the bill emerging from the Medicare conference includes serious compromises. Most major legislation does – and this one has more at stake than most. Billions of taxpayer dollars and millions of our most vulnerable citizens will be affected if this bill becomes law. In addition, policies not mentioned here – like unprecedented new tax shelters in the form of health saving accounts and general prescription drug cost containment policies – extend the reach of the legislation beyond the Medicare population. As such, the question turns to the balance between benefits and costs. The benefit is obvious: an opportunity to add a long-overdue drug benefit to Medicare. The costs, however, are steep, even for those who try to discount them.

Some argue that Congress should pass the flawed drug benefit now and fix it later, but they may underestimate the task. Imagine the first open enrollment period. Seniors will have to choose among plans with variable premiums, different co-payments for each medication, and benefit gaps that begin at different levels of total spending. Rural beneficiaries may have only one plan option if they stay in traditional Medicare, forcing them to consider joining a private plan and trade access to their doctor for reasonable cost sharing for drugs. Once locked into a plan, seniors may see their coverage change and be forced to pay higher co-payments for their medications. Given their spending patterns, up to one-half of seniors could fall into the coverage gap towards the end of each year. Congress could fix each of these problems, but each comes at a cost. The burgeoning budget deficit and competing priorities will likely preclude near-term improvements to the drug benefit.

Others argue that the structural changes in the conference agreement are contained and controversial enough that they may never get implemented. Yet, history suggests that once funding is granted and programs are created, they are hard to retrieve or rescind. In the late 1990s, private plans lobbied vociferously to eliminate the “fairness gap” to get paid at the same level as traditional Medicare. Now, even though they are paid well above traditional Medicare, private plans continue to demand – and receive – additional funding. In addition, some claim that the premium support demonstration is too controversial to implement let alone expand to apply to all of Medicare. That is what was said of the original “experiment” of managed care in Medicare and medical savings accounts demonstrations. Both have lived on, primarily due to policy preferences and government subsidies. As such, there can be no denying that the legislation, if passed, sets Medicare on a path toward privatization and capped government funding.

Given that the nation would be stuck with this legislation—flaws and all—for a considerable period of time, the question is not whether it can be fixed, but whether its benefit is worth the price. Undoubtedly, $400 billion is a significant investment in Medicare that would help millions of the nation’s seniors. Yet, as it stands, the conference bill could mean lower drug coverage for 6 million of the poorest and sickest beneficiaries; significantly reduced drug coverage for up to 2 to 3 million seniors who could lose good retiree health benefits; and higher premiums for up to 10 million beneficiaries now in traditional Medicare who would pay a price to stay there. More fundamentally, the bill would alter the fabric of Medicare as a social insurance program by undermining its guaranteed benefit and capping its government funding. And by simultaneously increasing costs and limiting financing, the conference agreement jeopardizes Medicare for future retirees.

America’s seniors deserve a strong, well-designed prescription drug benefit and reforms that strengthen and protect Medicare. They deserve better than what the emerging legislation would provide.

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