1.  The drug benefit, private health plan system, and low-income benefits.  This includes the various options for drug coverage, incentives and initiatives for private health plans, low-income benefits, and the interim discount card program.  Although the drug benefit, private plan system and low-income benefits are very complicated, they are best described as an interrelated whole, whose parts are difficult to evaluate in isolation.

2.  “Conceptual” reforms or initiatives.  These include income-related premiums and benefits within Medicare, the chronic care demonstration programs, HSAs, procedural cost control provisions, and the 2010 “premium support” competition demonstration.  At one extreme, these provisions have the potential to fundamentally change Medicare and, in some cases, the U.S. health system.  On the other hand, their impacts are not guaranteed.  The various conceptual provisions also have the potential to fade into obscurity with little transforming impact.

These main elements are explained in detail below.

MMA also contains a myriad of changes in Medicare’s detailed system of payments to health providers.  These payment changes are not the main focus of this analysis.  However, they are important to understanding MMA in the following way.  Congress has switched its method of legislating payment changes.  Before 1997, Congress had scheduled more or less “normal” payment increases or updates into Medicare law.  Occasionally, when the budgetary need arose, Congress would trim those payment increases.  But in most years, no change in Medicare law was needed to keep payments flowing to health providers at the expected pace. 

However, beginning in Balanced Budget Act of 1997, Congress has switched to a different system.  Now, Congress routinely schedules deep payment cuts or very slow increases in payments within the permanent Medicare law.  That means legislators must pass frequent (almost annual) Medicare payment bills to rescue health providers from the ultra-low rates that would otherwise have been implemented automatically.  The cuts in current law are sometimes so onerous that some health providers doing business with Medicare (and members of Congress concerned with their financial well-being) were forced to subordinate their positions on MMA’s drug benefit complex and its conceptual reforms in the interest of ensuring appropriate payment increases. 

The Drug Benefit, Private Health Plan System, and Low-Income Benefits.  MMA's main drug and low-income benefits are scheduled to begin in 2006.  Prior to that time, Medicare will offer discount cards, which also include an interim low-income benefit program. 

In general, the main prescription drug benefit would be provided by stand-alone prescription drug plans (PDPs), by private comprehensive health plans like HMOs or PPOs, or by employers with retiree benefits.  MMA changes the name of Medicare’s program for private comprehensive health plans from Medicare+Choice to Medicare Advantage (MA).  Medicare Advantage plans that include the prescription drug benefit would be called Medicare Advantage-Prescription Drug (MA-PD) plans.

Low-income benefits would be provided by PDPs or MA-PD plans.  Eligibility determinations would be made by state welfare offices or federal Social Security offices.  Medicare would subsidize PDPs or MA-PD plans to account for low-income benefits provided. 

The federal government would require that seniors eligible for full Medicaid benefits in their state get their drug benefits via Medicare.  This would save some money for state budgets, although most of the savings would be returned to the federal government via a “claw-back” provision, which would essentially cut federal matching funds owed to states.

Employers providing drug benefits to the Medicare eligible retirees would have a choice.  They could apply for status as a PDP and receive subsidies, or they could receive a special subsidy payment (provided that had benefits at least as good as a PDP), or they could require their enrollees to sign up for the Medicare drug benefit (and possibly "wrap around" Medicare's coverage with additional benefits).

The Interim Discount Cards and Low-Income Assistance.  The discount card program is targeted to begin in June of 2004, and expires when the main drug benefit begins on Jan. 1, 2006. 

The discount cards would be offered by a wide variety of health plans, drug companies, pharmacies, pharmaceutical benefit managers (PBMs), or other qualified firms.  Firms could charge a nominal annual fee for the cards.  Seniors could continue to use other non-Medicare discount cards or programs offered by drug companies, but they could enroll in only one official Medicare card.

Beneficiaries with low-incomes (and no other drug coverage) would qualify for up to $600 in annual subsidies for drugs purchased via their discount cards.  For beneficiaries with incomes below 100 percent of poverty, the card would provide a 95 percent subsidy drug purchases up to the limit of $600.  Beneficiaries with incomes between 100 and 135 percent of poverty could use the card for a 90 percent subsidy up to $600.

The discount card plans would determine eligibility for the low-income benefits, based on beneficiaries’ self-attested levels of income.  Medicare would reimburse card plans that provided low-income assistance on their cards.

In a departure from usual insurance practice, unused low-income benefits from 2004 could be rolled over to 2005.  However, unused benefits could not be converted into cash in 2006, even if a beneficiary chose not to enroll in the main drug benefit.

The 2006 Drug Benefit.  MMA's primary drug benefit is very complicated.  Beginning in 2006, beneficiaries would be entitled to enroll in a drug coverage plan.  The benefit is divided into two parts:  an "up-front" benefit consisting of 75 percent coverage for annual drug costs between $250 and $2,250, and a "catastrophic" benefit, which would pay 95 percent of drug costs after a beneficiary had paid $3,600 in a year in out-of-pocket drug costs.  There is no coverage between the up-front and catastrophic coverage -- this coverage gap is commonly referred to as the "doughnut hole."  Beneficiaries would be eligible for discounted prices through their plan for applicable drug purchases, whether they are covered or not.

The spending thresholds for both the up-front and catastrophic benefits would be indexed higher after 2006 by the rate of increase in per-capita drug spending (estimated to be about 8 percent a year).  Therefore, the up-front benefit would apply for drug spending between $445 and $4,000 in the year 2013, and the catastrophic benefit would begin after a beneficiary’s out-of-pocket spending exceeded $6,400.  (See Congressional Budget Office Letter to Sen. Don Nickles , November 20, 2003, Table 1,  Table 2, Table 3,  Table 4.)

CBO estimates that beneficiaries’ premiums for this coverage would average about $35 a month, starting in 2006.  However, the premium could vary higher or lower than the average depending on which drug plan the beneficiary chose. 

Beneficiary premiums would be determined by drug coverage plans.  Over time, the premiums would be roughly equal to the difference between a drug plan’s costs and the amount of government subsidy to the plan.  CBO expects beneficiary premiums to grow by about 8 percent a year.  Therefore, CBO estimates that the average premium would be about $58 in 2013.

Beneficiaries who didn’t enroll in a drug plan at the first opportunity would be charged an extra premium penalty for late enrollment.

"PDP" Stand-Alone Drug Plans.  For most beneficiaries in the traditional fee-for-service Medicare plan, drug benefits would be provided through a separate prescription drug plan, a new drug-only policy provided by private health insurance companies in cooperation with PBMs, pharmacies, or drug companies.

PDPs could have national or regional coverage areas.  Generally, the minimum coverage area would be a state.

PDPs could offer standard coverage, with the coinsurance and benefit levels specified in the law.  Alternatively, they could offer coverage with alternative but financially equivalent coinsurance levels or methods of cost containment, including formularies with specific lists of covered drugs and varying coinsurance amounts for preferred and non-preferred drugs.  PDPs could offer extra drug benefits, but those benefits would not be accompanied by extra government subsidies.  PDPs could not offer non-drug benefits.

PDPs would submit bids to Medicare, including the specifics of their coverage policies, formularies, and costs.  Medicare would require detailed information on discounts arranged by PDPs, and would prod plans to make those discounts available to enrollees.  Most of the basic rules for PDP plans would also apply to MA-PD plans.

Risk Assumption, Payments to PDP Plans, and Government “Fall-Back” Coverage. 
PDP plans would be required to accept some of the financial risk of offering the stand-alone drug benefit according to formulas specified in the law.  However, the government would be instructed to accept PDP plans with more limited risk exposure to ensure that at least two plans were available in each area.  (The available plans could be one PDP plan and one MA-PD plan).  In the event that no PDP plans were available in an area, even with limited risk exposure, Medicare would offer a government-run “fall-back” option.

In general, Medicare would subsidize 74 percent of the cost of the standard drug coverage.  Subsidies would consist of direct per-enrollee subsidies payments to PDP or MA-PD plans, as well as “reinsurance” for 80 percent of the cost of coverage after an enrollee had reached the out-of-pocket limit and triggered the catastrophic coverage. 

Finally, PDP plans would enter into to a risk-corridor arrangement with Medicare.  In general, risk corridor arrangements limit the potential losses and profits associated with entering or serving a health insurance market.  In this case, Medicare would absorb unexpectedly large losses (but also accrue unforeseen profits) in an attempt to encourage PDP plans to enter the Medicare market.
 
Medicare Advantage (MA) Health Plans.  MMA would attempt to resuscitate Medicare’s HMO program and expand its fledgling PPO program.  The first step would be to increase payments to HMOs back toward parity with fee-for-service costs in a service area, beginning in 2004.  This will probably halt the downward trend in HMO coverage in Medicare.

Beginning in 2006, insurance companies offering MA plans would be required to have at least one option that included standard drug benefits or the equivalent, under the same basic rules as PDPs.  Government subsidies for drug coverage would also be the same as those for PDPs. 

In 2006, Medicare Advantage would switch toward a rudimentary bidding system.  Medicare’s fee-for-service program would not be part of the bidding system, and its regular premium -- the so-called Part B premium -- would not be affected by the bids submitted by MA plans.

Under the bidding system, beneficiary premiums would be based on how a MA plan’s costs compared with a benchmark amount.  Enrollees in low-cost plans could get partial rebates of their Medicare Part B premium.  Enrollees in high-cost plans would pay the difference between the cost of those plans and the average. 

Beginning in 2006, PPOs entering the Medicare program would be required to include all counties in a region in their service areas.  However, HMOs and PPOs operating on a county-by-county basis prior to 2006 would be allowed to continue operating as before.

In 2006 and 2007, new regional PPO plans would be eligible for a risk corridor arrangement with Medicare.  This would help plans avoid large losses as they entered a regional Medicare market -- it would also mean that any large profits would accrue to the government, not the plan. 

In addition, a “stabilization fund” totaling approximately $10 billion between 2007 and 2013 would be available to encourage regional PPOs to serve to rural areas.  Many rural health providers either natural monopolies, or they don’t charge much in the first place.  Natural monopolies aren’t dependant on health plans to steer patients their way, and therefore don’t have to bargain with PPOs and accept lower rates.  Rural health providers that don’t charge much anyway don’t give PPOs a competitive advantage either, because any insurer -- including Medicare’s traditional program -- no matter how efficient or lenient, will not be overcharged. 

Coordination with Employer, Medigap, Medicaid, and State Pharmaceutical Assistance Coverage.  MMA’a catastrophic drug benefit is based on drug spending paid directly out of an enrollee’s pocket.  Therefore, third-party coverage of the deductible, coinsurance, or doughnut hole generally does not “count” toward Medicare’s catastrophic benefit.

Employer plans.  Employers with retiree drug benefits would face a choice.  They could apply for qualification as a PDP and receive the relevant subsidies, or they could receive a subsidy from Medicare equal to 28 percent of their drug benefits paid between $250 and $5,000 per enrollee in 2006 if their benefits were equivalent to the standard drug benefit.  (Those dollar amounts would be indexed higher at roughly 10 percent a year.)

Importantly, the law allows companies to receive the 28 percent subsidy regardless of size of the premium they charge retirees for coverage.  So some employers may expand their drug coverage, charge a correspondingly higher premium, and still collect the 28 percent government subsidy.  (Medicare officials have stated that this situation would not be allowed, but it would be very difficult to monitor and prevent.)

Alternatively, firms could drop their retiree coverage, and (possibly) subsidize their retirees’ purchase of Medicare’s drug benefit by paying the premium.

It would make less financial sense for employers to “wrap-around” Medicare's drug coverage.  (In that case, the employer would cover the deductible and fill the doughnut hole in Medicare’s drug coverage.)  Such wrap-around coverage would not count toward Medicare’s catastrophic drug benefit for an enrollee with high drug costs -- instead, it would simply postpone Medicare’s catastrophic benefit.  Finally, the legal ramifications of providing special wrap-around coverage for Medicare eligible retirees remain murky.  A court decision that saying that providing different drug benefits to retirees who are above and below the age of Medicare eligibility is age discrimination was not repealed (as many employers had hoped) in MMA.

Medigap.  Enrollees in PDP plans would not be allowed to hold Medigap coverage that included drug benefits.  In fact, Medigap plans offering drug benefits would be prohibited.  Medicare would be given enforcement authority to ensure that seniors did not hold illegal gap coverage.

Medicaid and the “Clawback” Provision.  Seniors eligible for full Medicaid benefits would receive their drug benefits through the new Medicare program instead.  A so-called “clawback” provision would require that states pay the federal government 90 percent of the amount they spent for drug benefits to Medicaid-eligible seniors in a base year (2003), indexed higher each year by the national rate of increase in drug spending, beginning in 2006.  (That percentage falls to 75 percent by 2015.) 

The clawback provision is intended to prevent states from getting a financial windfall as drug benefits are shifted from the joint federal-state Medicaid program to all-federal Medicare program.  However, since it is based on a forecast or extrapolation of what states otherwise would have spent on Medicaid drug benefits, the amounts states are required to pay will become very uncertain and contentious by the end of the decade.

State Pharmaceutical Assistance Programs.  State pharmaceutical assistance programs would be exempt from the out-of-pocket rule.  Therefore, drug benefits provided by state programs would count toward Medicare's catastrophic drug coverage, just as if it had been out-of-pocket spending.  This means that state programs would not have an incentive to stop providing coverage, and could wrap-around the Medicare benefit without penalty.  However, low-income seniors who had limited assets would be eligible for extra Medicare benefits, including reduced premiums and coinsurance, and no doughnut hole in the coverage.  Therefore, the state programs might be considered duplicative, or even unnecessary, at least for seniors with few assets.

Low-Income Subsidies and Asset Tests.  Beneficiaries with incomes below certain percentages of poverty and asset levels would qualify for improved benefits and reduced premiums.  There are two tiers of eligibility:

1. Tier 1 subsidies for beneficiaries with incomes below 135 percent of poverty and assets worth less than $6,000 ($9,000 for a couple applying jointly), or who are dually eligible for Medicaid and Medicare.

2. Tier 2 subsidies for beneficiaries with incomes below 150 percent of poverty and assets less than $10,000 ($20,000 for couples applying jointly).

Beneficiaries qualifying for Tier 1 subsidies are eligible for full coverage without an up-front deductible or doughnut hole.  Premiums would be reduced to zero for beneficiaries choosing a drug plan with average or lower-than-average costs in an area.  For plans with higher-than-average premiums, beneficiaries would pay only the amount by which the plan’s premium exceeded the average cost in a region.  Coinsurance would be limited to $2 for a generic prescription or preferred drug and $5 for any other drug.  (Institutionalized or dual Medicare-Medicaid enrollees qualifying for full Medicaid benefits would be eligible for further reductions in coinsurance.)

Tier 2 benefits would include a $50 deductible but no doughnut hole in the coverage.  The coinsurance rate would be 15 percent.  Premium reductions would phase out on a sliding scale for beneficiaries between 135 and 150 percent of poverty.  Therefore a Tier 2 beneficiary with an income below 135 percent of poverty would receive the full premium reduction available to Tier 1 enrollees.  But that subsidy would be zero for a Tier 2 beneficiary with an income approaching 150 percent of poverty.

Eligibility determinations would be made by states (through Medicaid offices) or by Medicare (through local Social Security offices).  Asset tests would be handled either using current state systems or federal system for supplemental security income (SSI) enrollees.  The Medicare program would be allowed to design a simplified, universal asset testing form.

Low-income benefits would be provided by PDPs and MA-PD plans.  Medicare would notify those plans when their enrollees qualified for low-income benefits, and would reimburse the plans for the extra benefits provided.

"Conceptual" Reform Provisions and Their Likelihood of Transforming Medicare:  MMA contains several provisions that have the potential to transform Medicare.  However, many of them step up to the edge of the reform precipice, but don’t necessarily jump.  This makes sense, because some of these provisions are highly controversial, and prudence dictates a careful, studied approach.  However, by not actually requiring the Medicare take a leap into the unknown, it begs the question:  Did Congress really want Medicare to take these steps at all? 

Competitive "Premium Support" Demonstration Program in 2010.  The bidding system that begins in 2006 would make if easier for Medicare Advantage plans to offer premium rebates, which could effectively reduce Medicare's Part B premium toward zero for plans with very low costs.  However, it is a step short of competition that could really transform Medicare, because the bidding and premium computation system does not include the traditional fee-for-service program, which currently enrolls almost 90 percent of Medicare beneficiaries.

In 2010, Medicare would initiate a larger competitive demonstration program.  This demonstration would be a local version of the national “premium support” idea developed by the 1998-1999 Bipartisan Medicare Commission.  However, MMA does not use the term premium support, but instead changes the name to “comparative cost adjustment.”

There are several problems with this demonstration.  First, localities generally do not want to host demonstration programs based in austerity, where the local health plans and health providers may be paid less than neighboring areas because of the demonstration.

Second, the comparative cost adjustment demonstration does not make provide for the fee-for-service program to escape Congressional micromanagement and actively compete like a private health plan.

Third, this version of localized premium support is largely unstudied, and might not be very stable.  Beneficiary premiums could fluctuate considerably from year to year if the fee-for-service program’s “bid” (or the bid of a dominant local MA plan) jumped or dropped by a large amount.  (By contrast, a national premium support system would probably be more stable and have more predictable beneficiary premiums.)

On balance, it seems very unlikely that the comparative cost adjustment demonstration will greatly affect Medicare spending in the long run.  The larger question is whether or not the payment improvements for MA plans, and the bidding system set to begin in 2006 encourage sufficient private plan enrollment to make a larger competitive system feasible.

Income Related Premium and Low-Income Benefits.  Traditionally Medicare has provided equivalent benefits to all seniors, regardless of their incomes.  MMA would break that longstanding custom.  

First, Medicare’s Part B premium (currently $67 a month) would be increased for beneficiaries whose incomes were above $80,000 a year ($160,000 for couples). 

Second, Medicare would create separate tiers of benefits for beneficiaries with low incomes.

There is some question whether these changes will improve or detract from Medicare’s political support.  Liberals generally believe in uniform benefits for all, fearing that reduced benefits for high-income seniors would gradually weaken their political support and turn Medicare into more of a welfare program.

However, there is also considerable public fear that the long-term costs of Medicare and Medicaid will overwhelm the future budget, forcing large tax increases or spending cuts in other government programs.  (See, for example, Congressional Budget Office The Long-Term Budget Outlook, December 2003.)

Therefore, attempts to reduce Medicare’s costs through means testing could actually improve public confidence that the program is being run efficiently, without “wasting” too much funding on affluent seniors.

Chronic Care Initiatives and Demonstrations.  A very high percentage of annual Medicare costs stem from a small percentage of beneficiaries who are very sick.  Sometime these costs stem from intensive end-of-life care.  But often the high costs stem from avoidable complications of long-term or chronic illnesses.  The best chronic care takes place between hospitalizations of physician visits, and helps patients manage their illnesses in a way that prevents sudden, and expensive, flare-ups or crises.

MMA creates several new initiatives and demonstrations intended to improve chronic care.  First, disease management firms would be invited to contract with Medicare on an on-going basis.  Second, Medicare would launch demonstration programs on quality improvement and payments to individual health providers providing in-home or specialized chronic care services.

However, these demonstrations will probably fall well short of transforming Medicare’s traditional acute care focus.  In fact, the new stand-alone PDP drug plans could actually thwart coordinated chronic care by further fragmenting seniors’ sources of insurance coverage.

Electronic Prescribing.  MMA instructs the Medicare program to develop standards for electronic prescribing.  Ideally, the standards would encourage all prescription drug benefit plans and health care providers to use technology to reduce transcription and dispensing errors, and to prevent adverse drug interactions. 

Ultimately, a national e-prescribing system could be a first step toward widespread electronic medical records, which have the potential to greatly improve health quality, especially for patients with severe or multiple chronic illnesses.

However, there is no guarantee that Medicare's modest e-prescribing initiative will take hold among PDPs and MA plans, let alone across the U.S. health system.  And even if e-prescribing becomes the norm, we don’t know that would be a sufficient catalyst for full electronic medical records.

Procedural Funding or Cost Control Measures.  MMA sets in place expedited legislative procedures for Medicare funding or cost control proposals if the overall general revenue subsidy to Medicare is estimated to exceed 45 percent of the program’s total costs.

Without going into the details of the legislative procedures, this measure is sure to cause controversy.  On the one hand, Congress could simply ignore the various warnings, Presidential submissions of funding or cost control ideas, and expedited legislative processes. 

On the other hand, these procedures will no doubt escalate political rhetoric regarding Medicare’s sustainability.  A cynic would say these procedures -- like the premium support demonstration -- were intended as a palliative for conservatives who wanted to be able to claim some fealty to cost control while voting for a very expensive Medicare bill.

Health Savings Accounts.  Intended for the under-65 population, health savings accounts (HSAs) would give consumers a tax incentive to purchase high-deductible health insurance.  Unused funds in the account would accumulate tax free. 

HSAs are really a broad expansion of the medical savings account (MSA) provision in current law.  HSAs would be allowed to accompany coverage with lower deductibles than the MSA law, and would be available for purchase by more people. 

The purpose of HSAs is to satisfy a conservative belief that to the extent possible, patients should spend their own money -- not that of their third-party insurer -- when making routine or less intensive health care purchases.  In theory, this would reduce health costs, because people will be more prudent purchasers at the doctor’s office or pharmacy.

However, in practice MSAs did not prove to very popular.  Although HSAs are more attractive, and there is a movement among businesses to entice employees to join high-deductible health plans with spending accounts, there is little indication that people are willing or able to negotiate prices for individual health items with their clinicians.  Given the complexity of the health system and its often-crazy prices, consumers seem hesitant to venture out of the security zone of fixed co-payments, at least if they can help it.  To entice them, HSA plans will probably have to assume considerable agency and managed care responsibilities, so that enrollees will be assure someone is helping them get fair prices and will offer specialized or chronic care services if needed.

Political Evolution of the Drug Benefit:  Congressional leaders didn’t intend for people to know very much about the new Medicare drug and reform law before it passed.  It is clear that policymakers were worried that overmuch analysis could hurt the bill’s prospects, especially in the House of Representatives.  Many of the details of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 were closely held by top negotiators, right up until its final passage.  Cost estimates were delayed or suppressed. 

This lesson was learned during the health reform debate of the early 1990s, when Congress, the Administration and many outside experts produced volumes of analysis of the proposals by President Clinton and various members of Congress, long before any Congressional action.  Of course, these analyses showed that any major health reform proposal creates winners and losers, and could upset the health insurance arrangements of many people.  Rightly or wrongly, these analyses were assumed to have slowed the Clinton bill’s progress, which allowed alternative proposals to gain favor and stymie the legislative process.

MMA was crafted with a very close eye on the budget.  Congress voted not to exceed $400 billion in additional Medicare spending (net of premiums) over the 10-year budget period between 2004 and 2013.  There was no possibility of exceeding that budget and also securing the required number of votes for the bill.  (Most members of Congress did not know the Administration was contemporaneously estimating that the cost of the bill would be $100-$150 billion higher.)

The second legislative imperative was private sector participation in the benefit.  Most liberals thought the $400 billion budget was insufficient to the task of creating a Medicare drug benefit, and therefore resisted the legislative effort from the start.  As a result, the bill’s passage required mostly conservative votes, and conservatives were not interested in a government-run drug benefit and direct government price setting for drugs.

Congress also needed AARP's endorsement.  AARP’s main concern was expandability.  AARP’s leaders were willing to support an initial benefit -- even if it was less generous than they had hoped -- as long as there was a good chance the benefit would be expanded in subsequent years. 

AARP didn’t particularly care whether the benefit was provided by the government or private health plans, as long as it was available in full to seniors enrolled in Medicare’s traditional fee-for-service program.  Conservatives would not agree to simply adding a drug benefit to the fee-for-service program, because that would imply government price controls right from the start.  Therefore, Congress had to design a drug benefit to stand alongside the fee-for-service program, but it had to be delivered by private health plans.

The MMA solution was to invent a generous sounding, stand-alone, private-sector drug benefit, which had sufficient gaps or conditions to keep the apparent cost within the budget. 

Here is how the various gaps and constraints came together.  Once the decision was made to provide a generous sounding drug benefit on a limited budget, Congress had to find some savings.

First, beneficiaries would have to pay a substantial premium.  But anytime beneficiaries have a choice on whether or not to purchase coverage at a premium, insurers run the risk of “adverse selection” -- that is, beneficiaries with higher-than-average drug needs would enroll, but seniors with low drug spending would not.  Less healthy beneficiaries, who know they are likely to receive substantial benefits from the drug coverage, would get a bargain.  On the other hand, healthy seniors, who are less likely to need drug benefits, may not see the value of the coverage.  Adverse selection can drive up premiums and make insurance markets unstable or even untenable. 

Once the decision was made to require a beneficiary premium, Congress had to find ways to reduce adverse selection.  Here, there were two solutions:  up-front benefits and late enrollment penalties.  The up-front coverage will be the “carrot” -- it will attract healthy seniors to the drug benefit.  The inevitable “stick” is the late-enrollment penalty.  Seniors may know they don’t need a drug benefit now, but they can’t forecast their future drug spending with much precision.  Therefore, the late enrollment penalty will compel many seniors to sign up right away, even if they would not otherwise need the drug benefit.

Despite these provisions, private health plans made it clear that the risk of adverse selection remained high, and that Medicare would have to provide substantial additional incentives for both beneficiaries and plans.  That is why the MMA drug benefit includes risk corridors and reinsurance subsidies.  Risk corridors and reinsurance reduce the risk for health plans; reinsurance subsidies also reduce the premium for beneficiaries.

Second, Congress saved money through the design of the catastrophic drug benefit.  The main reason for basing the catastrophic benefit on out-of-pocket spending (rather than total drug spending, regardless of the source) was budgetary.  Congress decided to subsidize employers for keeping their drug coverage, rather than structuring the catastrophic benefit so that retiree coverage “counted” and employers had no extra incentive to drop coverage in the first place.

The clawback provision is a third money saving feature.  Once the decision was made to use a generous sounding drug benefit, and to include Medicaid beneficiaries in the benefit, Congress could not afford to create any financial windfalls for the states. 

The asset test for low-income beneficiaries creates incentives for seniors to divest themselves of assets (or fail to save in the first place) in order to qualify for government benefits.  This sort of incentive is usually associated with pre-reform welfare programs, which most conservatives loath.  Nevertheless, the asset test was included in MMA to help satisfy the budget constraint.

No one can really predict whether or the MMA drug benefit will be plagued by adverse selection.  If adverse selection is not a problem, then the MMA drug benefit will probably proceed as envisioned in the law, with private plans providing the benefit without undue difficulty. 

However, if adverse selection becomes a problem, then the government has a choice.  Congress could pour money into the drug benefit to bolster the coverage and keep premiums down, thus keeping the benefit attractive to seniors with low drug costs.  Or, if selection problems were severe and private plans could not feasibly provide the benefit, then Medicare could take over, holding down drug costs and beneficiary premiums by imposing strict price controls on drugs.

Alternatively, Congress may decide to modify the drug benefit in 2005.  One reasonable approach would be to extend and expand the "interim" discount card benefit and delay the main drug benefit (perhaps indefinitely).

Since the discount cards have only nominal premiums, universal enrollment could be assured.  (The restrictions on enrollment in the MMA could be lifted.)  This would eliminate adverse selection worries and the need for late enrollment penalties.  The discount cards could be made to synch with employer-sponsored retiree coverage in a less confusing way.

The advantages and disadvantages of modifying the MMA drug benefit prior to its full implementation will be the subject of future Centrists.Org research.