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| Medicare Reform and Prescription Drugs: Ten Principles | |
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Some people argue that the solution is to add a new benefit to the current Medicare program.
Yet this approach would be a major mistake. To accommodate drug coverage and fix a host of other problems
as well, Medicare needs fundamental reform. Gaps in Medicare Coverage. Despite its popularity, Medicare violates almost all the principles of sound insurance. It pays too many small bills the elderly could easily afford on their own, while leaving them exposed to thousands of dollars of potential out-of-pocket expenses, including the cost of most of their drugs. Each year about 750,000 Medicare beneficiaries spend more than $5,000 out of pocket. 4 The primary source of these problems is that Medicare was designed as a program separate from the health plans of nonseniors. This fact did not make much difference in the early years because Medicare's benefit structure largely copied that of a standard Blue Cross Blue Shield plan. As time passed, Blue Cross and other private insurers changed their coverage as medical realities changed. But because Medicare is a creature of politics, special interests thwarted its evolution and led to a program that today is far inferior to the insurance plans of most nonseniors. Filling the Gaps in Medicare with a Second Insurance Plan. To prevent financial devastation from medical expenses, about two-thirds of Medicare beneficiaries acquire supplemental (medigap) insurance, through a former employer or by direct purchase. Although some medigap policies cover prescriptions, most do not, and the coverage that is provided often is incomplete.5 Ironically, the poorest seniors may have the best drug coverage because they qualify for Medicaid, the federal-state health program for the poor. Seniors are the only people in our society who have to buy a second health plan to fill the gaps in the first. But even with Medicare and medigap insurance, most do not have the same drug coverage that nonseniors have. Moreover, as we shall see below, paying two premiums to two plans is wasteful and inefficient. Some proposals would keep the basic structure of Medicare intact but would require seniors to pay a third premium to a third plan for drug coverage. This approach would be even more wasteful and inefficient. Temporary Solutions that Won't Work.While conceding that Medicare needs fundamental restructuring, some argue that such reform takes time and seniors' needs are immediate. Accordingly, they propose stop-gap solutions: imposing federal or state price controls, reimporting U.S.-made drugs shipped to other countries such as Canada, weakening patent protection for brand-name drugs and encouraging government health plans to aggressively bargain down the prices they pay. To the extent that these techniques result in below-market prices, they will have unfortunate side effects. In general, the marginal cost of manufacturing a drug (filling a capsule and packaging it) is only a small fraction of the total cost, including the cost of research and development (R&D). While drug companies are willing to provide drugs to the market so long as they can cover their manufacturing costs, they will not be willing to fund R&D for the next generation of drugs if they cannot charge prices that allow them to recover the cost of that investment Forgoing new drugs in the future in return for cheaper drugs today is a bargain not worth making. A study by Columbia University professor Frank Lichtenberg found that new drugs have increased life expectancy by as much as 1 percent per year. Some of the more conservative estimates imply that a one-time R&D expenditure of about $15 billion subsequently saves 1.6 million life-years per year. In terms of dollars and cents, for every dollar we spend on R&D we get back two dollars - every year, indefinitely into the future.6 Temporary Solutions that Will Work. A number of temporary measures would ease seniors' problems while fundamental reform is underway - without discouraging the development of new drugs in the future.[See Exhibit I.] As a first step, a simple change in the law would unleash solutions in the medigap insurance market. Under the current system, federal law imposes Medicare's insurance philosophy on medigap insurers. Medigap policies must cover small-dollar items such as the Part A and Part B deductibles, but they need not cover the largest bills.7 Coverage for drugs also is an option. Were insurers given more freedom, they could create plans more responsive to the needs of their customers. Specifically, if insurers were free to forgo coverage of many routine expenses, they could offer more generous drug coverage with no increase in premiums. As a second step, federal policy should encourage rather than discourage the Medicare+Choice program. This program was created in 1996 to give seniors the opportunity to join private health plans that function much like the plans nonseniors are enrolled in. In response, about 16 percent of seniors (more than one in six) moved from traditional Medicare into private sector HMOs. These HMOs are required to cover everything that Medicare covers, but most cover much more. A recent survey found that 95 percent of Medicare HMOs provide their enrollees with a prescription drug benefit.8 A third opportunity is presented by Roth IRAs. 9 These accounts permit people to set aside up to $2,000 a year after taxes in retirement accounts that grow tax free. After age 59, the funds can be withdrawn without penalty for any purpose, including medical expenses. Since the elderly by definition satisfy the age test, with minor rule changes Roth IRAs could serve as "backended" Medical Savings Accounts for the elderly.10 A fourth opportunity is to turn to the states. More than half the states have high-risk pools that permit people who have been denied health insurance to obtain coverage for a reasonable premium.11 The states also cover many low-income seniors' drug needs through their Medicaid programs, and 34 currently provide low-income seniors with prescription drug assistance. Other states are considering similar legislation.12 All of these programs require subsidies, but state budgets are extremely tight. So where would the new money come from? A potential source is antipoverty money - unused as a result of a 50 percent drop in the number of welfare recipients. The 1996 welfare reform law gives states great flexibility on how to spend federal and state welfare funds.13 Congress should free the states to use these funds to provide temporary relief to the elderly poor None of these four proposals would impose new taxes or premiums, nor would they cost the government much. These smaller, less expensive, targeted solutions could help seniors while fundamental Medicare reform is under way. |
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