Note:  This article was originally published in The Hill on October 1, 2003 (www.thehill.com)

October 1, 2003

A Better Drug Benefit Charging premium risks discouraging seniors enrollment By Jeff Lemieux

The Medicare drug benefit pending in Congress is flawed. The design was a rare political compromise; however, the result is a tortured policy that may be unworkable in practice. That is a recurring problem in health legislation — reasonable-sounding political compromises that may not be good policy. At this point, the drug benefit is one of the least controversial parts of the bill, and its design seems like a foregone conclusion. House and Senate negotiators preparing the Medicare bill for final passage are bracing for more contentious topics, such as how much Medicare should depend on private health plans. However, Congress should back up and reconsider the central issue — whether or not the drug benefit makes sense.

The first problem is the premium.

On a political level, it seems perfectly fair to ask senior citizens to pay a part of the cost of any large new benefit. But a premium that starts at $35 a month and rises over time forces each senior to make a choice: Is the benefit worth the premium?

Clearly, senior citizens with high drug expenses will select the new benefit. To them, the premium would be well worth it. However, senior citizens with low drug expenses may not see the need.

The problem is, if seniors with high drug expenses enroll and those with low costs do not, the premium would be forced higher and the whole benefit could unravel.

To 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 try to enroll later. But that penalty will cause both confusion and resentment among senior citizens with little need for additional drug benefits.

A second problem is the cost. To hold federal outlays to the budgeted $400 billion over 10 years, the benefits are capped. Above the benefit cap, there would be no coverage. That 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 exceed about $3,500 in a year. But that 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. Why provide a retiree benefit that doesn’t count?

The Congressional Budget Office estimates that employers will cease drug coverage for 32-37 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 do not 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.

Fortunately, there are solutions. One fix would be to scale back the benefit to a zero-premium catastrophic plan. With no premium, all seniors would enroll. There would be no need for late enrollment penalties. The federal cost would be controllable over time by adjusting the catastrophic level.

A proper catastrophic benefit would allow seniors to purchase additional coverage if they wished, without forfeiting Medicare benefits. Since outside coverage would count toward this type of catastrophic benefit, employers would have an incentive to keep retiree coverage.

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 budgeted $400 billion between 2006 and 2013.

Even good political compromises can lead to bad health policy. House and Senate conferees should fix the drug benefit as soon as possible.

Jeff Lemieux is executive director of Centrists.Org and senior economist with the Progressive Policy Institute. He was formerly the staff economist for the Breaux-Thomas Medicare Commission and a principal analyst for healthcare estimates at the Congressional Budget Office.