Issue Summary: Medicare Reform and Prescription Drugs (General)
revised 5/14/2004
Detailed Issue Summaries contain a quick reference to Centrists.Org policy ideas. They will be revised and updated periodically for clarity and usefulness, and as events and policy ideas change. Questions or comments? Please contact us at information@centrists.org .
See Also:
Issue Summary: Health (Basics)
Detailed Issue Summary: Medicare Modernization Act of 2003
Outline:
Medicare Reform: Competitive Savings, Benefit Choices, Chronic Care
Competition and Integrated Health Plans -- The Breaux-Thomas Medicare Commission
Chronic Care and Medicare
Prescription Drug Benefits in Medicare
Integrated Drug Benefit as part of Medicare Reform
Stand-Alone Drug Benefit, with Separate Premium
Zero-Premium Catastrophic-Only Drug Benefit
Defined Contribution Drug Benefit
The Reasons for Medicare Reform: Benefit Choices, Competitive Savings, Chronic Care: The modern debate over Medicare reform was preceded by a more general discussion of the future cost of entitlement programs as the baby boom generation retired. In the mid-1990s, a national commission to study the entitlement problem, chaired by Senator Robert Kerrey, set the stage for a specific debate on Medicare reform.
In the late 1990s, the Breaux-Thomas Medicare Commission focused Medicare reforms on two problems: long-term cost control, and inadequate benefit modernization.
In recent years, health care analysts have added a third criterion for Medicare reform: improvements in chronic care. In a sense, this criterion is an extension of benefit modernization: helping seniors with one of more long-term or chronic illnesses find the right kinds of care and services to help them control their conditions and avoid sudden health crises.
As the budget switched from deficit to surplus in the 1998-2001, legislators concentrated less on Medicare reform and more on simply adding benefits to the program.
Now, although the budget has switched back into deep deficits, policymakers are still more intent on popular benefit improvements than contentious reforms.
In 2003, Congress added a drug benefit that could turn out to be both government-run and very expensive, without also adding much in the way of reforms.
The first requirement of Medicare reform is to create a diverse set of private health plan choices, available as an option to most seniors. Allowing seniors to choose from alternative private comprehensive health plans like HMOs and Preferred Provider Organizations (PPOs) could set the stage for a future competition between private health plans and the government-run fee-for-service plan (or plans), which could lead to significant cost savings over time without benefit cuts or tax increases. (PPOs are health insurance plans that allow both in-network services, usually at lower enrollee co-payments, as well as out-of-network services, like many Blue Cross plans.)
The second requirement of Medicare reform is internal reconstitution of the government-run fee-for-service program. It is not only the program's benefits that have grown out of date. The fee-for-service program also has a centralized regulatory system that is not flexible enough to react to new developments in the health sector, or to the potential for localized improvements care of patients with chronic illnesses. Medicare's internal bureaucracy should be radically decentralized, with dozens or even hundreds of local Medicare offices that have budget authority and flexibility to work with local health providers to provide innovative care to beneficiaries. The Congressional role should switch from micro-management to oversight and data collection.
Finally, Congress should return to the Medicare Commission's vision for a system patterned after the Federal Employees Health Benefits (FEHB) program. Only by installing a sense of competition and stable choices is there a chance for the government-run fee-for-service program to free itself from Congressional micromanagement, for seniors to get the dynamic and innovative health plans they deserve, and for taxpayers to get a sense that competition and choice will restrain the growth of costs as the baby boom generation retires.
The drug benefit, which was enacted in law in December 2003, will probably entice some new private health plans back into Medicare. The is a good precursor step toward reform.
However, the 2003 law does very little to change the mind-set and operations of the government-run plan, and its "demonstration" program for FEHB-style competition is scheduled only for 2010. Even then, demonstration programs often are opposed by local authorities, and there is only a limited chance the competition demonstration will even get off the ground.
Competition and Integrated Health Plans -- The Breaux-Thomas Medicare Commission. The Balanced Budget Act of 1997 directly sparked the Medicare reform debate by creating the National Bipartisan Commission on the Future of Medicare, which began work in 1998 and was co-chaired by Senator John Breaux and Representative Bill Thomas. After enacting a multitude of budget cuts to hospitals, physicians, Medicare HMOs and other health providers in 1997, Congress formed the Medicare Commission to devise a better process of keeping Medicare's costs under control.
The majority of commissioners recommended transforming Medicare toward the model of the Federal Employees Health Benefits (FEHB) program. In addition to the potential for long-term cost control, an FEHB-style or premium support system was expected to ease Congress out of the business of micromanaging Medicare's payments and benefits. Instead, a public/private system would allow Medicare to be updated for changes in the health sector -- including benefit improvements and more flexible, adaptable payment systems.
Moreover, the Commission intended the FEHB-style system to un-fragment Medicare’s benefits, replacing “gap” coverage with a menu of all-in-one health options.
The Medicare Commission's website contains cost estimates and other useful information about the Breaux-Thomas proposal. There is an extensive outside literature on the Commission's work and FEHB-style or premium support systems. A summary testimony that also captured some of the arguments for and against the Commission's proposal is available from the Progressive Policy Institute.
The Breaux-Thomas model was laid out in legislation commonly referred to as the Breaux-Frist I proposal, which was introduced in 1999, and has been reintroduced on occasion since then. The Breaux-Frist I proposal would have augmented the government-run fee-for-service program with a "high option," which contained a prescription drug benefit and a combined deductible (superceding the separate hospital and outpatient deductibles in the traditional government-run plan's Part A and Part B). The proposal would have placed the traditional fee-for-service plan and the new government-run fee-for-service high option plan into direct competition with other private plans, including HMOs and PPOs (Preferred Provider Organizations, like many Blue Cross plans), based on a reimbursement and beneficiary premium formula similar to that used in the federal employees' system. (Unlike the FEHB program, the average beneficiary premium would have been 10-12 percent, not the 25-30+ percent that federal employees pay.)
Although the Commission's proposal gained a 10 vote supermajority (out of 17 commissioners), it did not spark a national consensus. The main points of differentiation between advocates for and against the Breaux-Thomas and Breaux-Frist I proposals were the degree of government control over the Medicare program, worries about the government-run fee-for-service programs ability to compete, and the amount of government funding for drug benefits.
1. Government Control vs. Public/Private Partnership. An FEHB-style system involves arms-length negotiation between Medicare as a purchaser and health plans (government-run or private) that provide the coverage. Many supporters of government-run health insurance believed that such a public/private mix would be ineffective, and that by contrast, direct government control of health insurance and the health sector in general would be more efficient and fair than market-based and consumer-oriented systems. This “privatization” debate, and the resulting ideological deadlock was the main reason for lack of legislative action on Medicare reform.
2. Fee-For-Service Worries. Many fair-minded health analysts worried that the government run fee-for-service plan would quickly lose market share and suffer premium increases if it was subjected to a competitive premium system. There were two valid worries: (a) that the government-run plan would not be given sufficient flexibility over its operations to compete effectively, and (b) that the government-run plan would not be sufficiently compensated by the proposed “risk-adjustment” formulas if its enrollment had higher-than-average health costs.
3. Funding for Drug Benefits. As the Medicare Commission deliberated, the federal budget swung from deficit to surplus. As a result, politicians were less willing to take chances on reforms designed to save taxpayers money in the long run, and instead amplified their short-run promises to seniors that a drug benefit would be added.
In retrospect, the worries over an adequate risk adjustment method were valid, but probably overblown. It now appears that some of the poorest and least healthy seniors have stayed in private health plans (especially in urban areas) in order to receive better benefits than those offered in the fee-for-service plan without having to purchase expensive “gap” coverage. So private plans may be the ones most in need of an adequate risk adjuster.
Assuming risk adjustment would be adequate (which is probably true) it seems like a stretch for opponents of competitive reforms to suggest both that a government-run approach would be more efficient, and that the government-run fee-for-service program would lose badly (and suffer premium increases) in a competitive system. Centrists and Medicare reformers agree that the government run program should be granted more flexibility (with much greater accountability for results) in order to compete in an FEHB-style system. However, it seems inappropriate to argue that in theory government-run plans are most efficient, but in practice they would not be able to compete.
Finally, the budget surplus has switched to record deficits, and the fiscal outlook for the 5-7 years preceding the start of the baby boom generation's retirement is now relatively bleak. Congress and the Bush Administration have not turned toward the fiscal discipline, shared sacrifice and tough decision-making that characterized the early- and mid-1990s and led to surpluses. But with each passing month, as the cost estimates for drug benefits grow, and the deficit worsens, it becomes clearer that cost-saving reforms should accompany any expansions of Medicare benefits.
Links:
National Bipartisan Commission on the Future of Medicare
Breaux-Frist I Medicare Reform Proposal
Chronic Care and Medicare. In general, the U.S. health care and health insurance systems are still mostly based on acute care. When a patient suffers a sudden illness or injury, the health care system is excellent at resolving the acute crisis. Then, the U.S. health insurance system -- public or private, fee-for-service or managed care -- generally does a very good job of paying the bills.
However, the systems are starting to crack at the edges, and the creaks and groans result from a system designed for acute care that can't adequately cope with the emerging health care challenge: chronic care, the treatment of and care for patients with on-going or long-term illnesses.
Chronic care takes place between hospitalizations, and even between doctor visits. Ideally, it helps patients and their families prevent sudden health crises altogether, using self-monitoring, remote consultation with doctors and nurses, and home- or community-based care.
The chronic vs. acute care debate is most relevant for Medicare. Medicare covers seniors and workers with long-term disabilities, precisely the people most likely to have chronic or ongoing health problems. Therefore, Medicare beneficiaries have the most to gain from early diagnosis and continuity of monitoring and treatment of chronic illnesses.
Some private health plans are learning how to arrange chronic care, and thereby keep their enrollees out of the hospital. Chronic care tools can range from simple educational programs to specialized programs tailored to help people manage a particular disease, such as diabetes, to comprehensive case management systems for patients with multiple chronic conditions.
Only comprehensive health plans have a sufficient incentive to invest in chronic care. Investments in one area of chronic health care, such as proper patient monitoring or medication, will pay off only if the plan would save money in other areas, such as reduced hospitalizations.
But Medicare has not adapted to chronic care. Its fragmented payment systems and regulations can actually work against coordinated, patient-focused care.
Under the drug benefit proposals that passed the House and Senate in June 2003, many seniors would have hospital coverage from Part A of Medicare, physician and outpatient coverage from Part B (a wholly different system with separate payment systems), a barebones drug benefit from the new Part D of Medicare (yet another separate plan), and supplemental and “wrap-around” coverage from a private Medigap or employer-based retiree plan.
Needless to say, these separate insurance companies and government agencies could never get together to create a coordinated care plan -- including specialty hospital services, physician care, diagnostic and monitoring tests, nursing assistance, medicines, and home-based services -- for a senior with multiple chronic conditions.
However, the Medicare bill enacted in December 2003 contains some helpful initiatives in chronic care. First, the bill creates a national disease management program targeted toward disease management firms or entities dedicated to helping people with particular illnesses. Second, the bill creates a demonstration program for chronic care services provided on more of a fee-for-service basis. These programs fell short in the sense that they didn't create a locally based administration and accountability system. However, they are a start, and if they are not lost in the swirl of larger Medicare initiatives contained in the bill, they might lead to significant progress over the next several years.
Links:
The Progressive Policy Institute and the National Academy for Social Insurance have been leaders in pushing for new health coverage systems that are more amenable to chronic care. See, for example:
Progressive Policy Institute An "ABC" Proposal to Modernize Medicare by Jeff Lemieux, David B. Kendall, Kerry Tremain, and S. Robert Levine, MD (February 14, 2003).
Progressive Policy Institute Healthy Aging v. Chronic Illness: Preparing Medicare for the New Health Care Challenge by David B. Kendall, Kerry Tremain, Jeff Lemieux, and S. Robert Levine, MD (February 14, 2003).
National Academy of Social Insurance Medicare in the 21st Century: Building a Better Chronic Care System edited by June Eichner and David Blumenthal (January 2003).
Prescription Drug Benefits in Medicare: Medicare's benefits are set by Congress, not in a marketplace. As a result, they have been mostly frozen over time. In the late 1980s, Congress voted to add a drug benefit, but that benefit was repealed shortly thereafter, under pressure from public concern about the costs.
Beginning in late 1998 and early 1999, Congress renewed the debate with new proposals to add a drug benefit to Medicare, using funds from budget surplus. Although the budget surplus has quickly switched to record deficits, so many politicians have promised to work for a drug benefit that enactment of a drug benefit in October of 2003 is likely.
There is no firm consensus on how to inject a drug benefit into Medicare. The three main approaches are: (1) an integrated benefit as part of a larger Medicare reform, (2) a stand-alone drug benefit with a separate premium, and (3) a zero-premium catastrophic-only drug benefit.
If integrated benefits as part of Medicare reform as not yet politically possible, a zero-premium catastrophic benefit would be more helpful and less problematic than the sorts of stand-alone drug benefits proposed in Congress. A defined contribution drug benefit would be another workable, if remote possibility.
Integrated Drug Benefit as part of Medicare Reform. The best way to encourage proper care for patients with one or more chronic illnesses (including most Medicare beneficiaries) is to bundle all of their health insurance under one carrier. That way, the carrier can make appropriate trade-offs: drugs or case management programs to prevent hospitalizations, and so on. Separated, stand-alone coverage does not allow health plans to invest in one area in order to improve health and reap savings in other areas.
The House- and Senate-passed drug bills contain some promise of restoring private comprehensive plan options to Medicare. There are additional funds to help HMO plans reestablish themselves in Medicare, and there is a new private PPO program designed to create an in-between HMO and fee-for-service option for seniors.
However, these initiatives are not the main focus of the drug legislation. The main initiative in the drug bills is a stand-alone drug benefit that fee-for-service enrollees could purchase as an add-on or supplemental coverage.
Stand-Alone Drug Benefit, with Separate Premium. The 2003 Medicare law would establish a voluntary, stand-alone, premium-based, drug benefit to accompany seniors' fee-for-service coverage. The benefit would begin in 2006.
There are many reasons to be concerned about this sort of benefit. However, at this point, the drug benefit is one of the least controversial parts of the bill, and its design seems like a foregone conclusion.
The first problem is the premium. On a political level, it seems perfectly fair to ask seniors to pay a part of the cost of any large new benefit. But a premium of $35 a month (and rising over time) forces each senior to make a choice: Is the benefit worth the premium?
Clearly, seniors with high drug expenses will select the new benefit. To them, the premium would be well worth it. However, seniors with low drug expenses may not see the need. The problem is, if seniors with high drug expenses enroll, and seniors with low costs do not, the premium would be forced higher and the whole benefit could unravel. Economists call this problem “adverse selection.”
To avoid adverse selection and compel most seniors to enroll -- not just those with high drug expenses -- Medicare would impose a penalty: seniors choosing not to purchase the drug benefit at their first opportunity would pay a significantly higher premium if they tried to enroll later. But this penalty will cause both confusion and resentment among seniors with little need for additional drug benefits.
A second problem is the cost. To hold federal outlays to the budgeted $400 billion over ten years, the benefits are capped: Above the benefit cap, there would be no coverage -- this is the so-called doughnut hole in the benefit. To ease concerns about the cap, Congress added “catastrophic” coverage for seniors whose out-of-pocket drug spending exceeded $3,600 in a year.
But this particular type of catastrophic coverage would not allow retiree drug benefits from seniors’ ex-employers to count toward the Medicare benefit. That exclusion, in turn, gives firms an incentive to drop their retiree drug benefits.
The Congressional Budget Office (CBO) estimates that employers will cease or modify drug coverage for about 23 percent of their retirees. Other analysts say the number would be lower, at least at first. On the one hand, Medicare would provide subsidies to firms that don’t drop retiree coverage. But with the federal budget already in deep deficit, those subsidies may not last. In any event, many seniors with retiree coverage would risk seeing that coverage dropped or reduced.
The decisions to raise the premium, carve up the benefit, and disqualify retiree coverage were made to satisfy a budget constraint. Politicians wanted to preserve the appearance of a standard, generous drug program, which seniors have come to expect. But to keep the federal cost within the budget, they had to nip and tuck.
The result is a tortured policy, which may be unworkable in practice. This is a recurring problem in health: reasonable sounding political compromises that may not be good policy.
Zero-Premium Catastrophic-Only Drug Benefit. The most plausible solution to both the adverse selection and retiree benefit problems inherent in the Congressional Medicare law would be to scale back the overblown promises to seniors, and radically simplify the benefit.
One obvious solution would be a zero-premium catastrophic plan. With no premium, all seniors would enroll. There would be no need for confusing and politically dubious late enrollment penalties to prop up enrollment. (Those penalties are inherently needed by stand-alone, premium based proposals.)
A proper catastrophic benefit would allow seniors to purchase additional coverage if they wished, without forfeiting Medicare benefits. Because outside coverage would count toward this type of catastrophic benefit, employers would have an incentive to keep retiree coverage.
The best way to arrange a catastrophic benefit of this type would be to allow all sorts of plans to offer the catastrophic benefit: retiree plans, Medigap plans, comprehensive HMO or PPO plans. Medicare would reimburse those plans based on pre-arranged contracts. (Medicare would insist that such plans include co-payments and cost-control measures to protect taxpayers' liability.) Seniors without retiree or other forms of additional coverage would get discount cards with the catastrophic benefit built in.
A zero-premium catastrophic benefit would also have salutary side effects. Because the benefit would be universal, Medicare researchers would have comprehensive data on seniors' drug spending patterns (collected from plans so Medicare would know when to start reimbursing for the catastrophic coverage). That data could be used to target chronic care programs, improve risk adjustment techniques, and otherwise help launch the Medicare program into a new era of results-oriented management and quality improvements.
Defined Contribution Drug Benefit. Another solution would be to switch from a drug entitlement to a defined contribution. Congress could apply an annual government contribution of roughly $700 to the drug plan of each senior’s choice, adjusted only for the health status or “risk” of a plan’s enrollees.
Drug benefits could vary widely, with premiums ranging as high or low as needed. Plans could combine drug benefits with other “gap” coverage seniors often buy. Employers with retiree coverage could qualify as Medicare drug plans, with the same reimbursement as other plans.
The defined contribution could grow over time based on drug costs or budget limits. Even with a growth rate of 10 percent a year, the benefit cost would be less than the 10-year budget of $400 billion for Medicare expansions approved by Congress for 2003.
