The path to a Medicare drug benefit is impeded by an assortment of secrets to be revealed and confronted. Only then can fiscal, political and demographic realities be aligned to produce a viable program.
The first task is to expose the Big Secret: If Medicare were a corporation, it would already be in Chapter 11 bankruptcy. Its Part A trust fund is solvent for now, but its Part B fund has for years borrowed without repayment from general revenue, recently at a rate of $50 billion per year. Further, faced with a seismic demographic shift, Medicare would be forced, before emerging from bankruptcy, to reform its dysfunctional and archaic financing mechanisms, benefit structure and cost controls.
The demographic challenge is daunting. Medicare was designed in 1965 to be financed almost exclusively by payroll taxes paid by active workers who back then outnumbered beneficiaries by more than 5 to 1. Today the worker-to-beneficiary ratio has decreased to a little more than 3 to 1, and the average 65-year-old lives longer. Meanwhile, Medicare is today forced to draw a fifth of its revenue from income taxes and beneficiary premiums.
Yet to come in 2011 is the double whammy of the baby boomers. Today Medicare enrollment is in near steady state with 2 million Americans per year turning 65 (and no longer paying payroll taxes) while only a quarter of a million fewer die. Starting in 2011, and for each of the following 19 years, growth will accelerate with 4 million people turning 65 offset by only 2 million projected deaths. Meanwhile, payroll tax collections will decelerate from additional annual losses of 2 million payers.
Adding a prescription-drug benefit to current annual Medicare spending of $225 billion would exacerbate the program's fiscal problems. Current proposals ranging from $330 billion to $560 billion for the preboomer years 2003 to 2010 all neglect Murphy's Law of New Entitlements-every cost estimate is an underestimate.
The choices for change are limited, and each is fraught with political complications.
Payroll tax increases face resistance from active workers already skeptical that the program will be there for them when they retire, while beneficiary premium increases and benefit cuts are limited by political reality. Congress, therefore, must undertake two difficult changes: means testing via a sliding scale premium for a new drug benefit, and, beginning in 2011, a phased increase of the eligibility age to 67 from 65.
Benefit structure reform is essential. Medicare has been mired in a time warp. When the program started operating in 1966 hospital costs dominated Medicare spending, so the inpatient benefit was made the richest component. As costs shifted to ambulatory surgeries, high-technology ancillaries and now pharmaceuticals, Medicare was hamstrung by a defined benefit program that made reducing any single component politically unpalatable. Meanwhile, as medical inflation outstripped general inflation, the cost of adequately enriching other existing benefits or adding new ones became prohibitive. The solution: one recommended in 1999 by a majority of the National Bipartisan Commission on the Future of Medicare dubbed "premium support"-actually a defined-contribution program modeled after the highly successful Federal Employee Health Benefit Program. Such a system would enable Medicare to annually fix and adjust its costs for a core benefits program. Likewise, it would afford beneficiaries the flexibility of tailoring their individual core package by varying, within limits, deductibles and copayments for the major benefit components.
Restraining costs is impractical in what is essentially a fee-for-service system where at little or no cost a patient with a headache may consult three neurologists, who unbeknownst to the others, might each in turn order three high-tech imaging studies. Attempts at control over the years have gone nowhere. A solution: real provider accountability as in the "managed competition" approach of the 1993 Clinton universal healthcare reform plan, echoed by the 1999 Medicare reform panel.
The prescription-drug problem is complex. Two-thirds of seniors have some drug insurance, but still pay half their costs out of pocket. The poorest quartile is more likely to be insured than others, thanks to Medicaid dual eligibility and state programs. The wealthiest half, who traditionally have had adequate insurance coverage, are losing ground as employers reduce retiree benefits, and Medicare HMO and Medigap premiums increase. Most vulnerable, however, are the near poor with incomes from 100% to 200% of the poverty level who have the lowest insured rate but spend little more than half what other seniors do on drugs. Finally, but critically, is the one of seven Americans, concentrated in the two lower-income quartiles, who have catastrophic drug costs of several thousand dollars each year.
Income-based premiums, deductibles and copayments will be keys to maximum beneficiary affordability. A cap on out-of-pocket expenses plus a realistic trigger level for catastrophic coverage will best serve those with higher drug needs. Controlling the costs of drugs will involve negotiating with manufacturers and tiered drug formularies, along with strict entry criteria for new drugs. Managing this complex system is best entrusted to independent pharmacy-benefit managers, given government's dismal record in traditional Medicare.
That's my prescription for a viable drug benefit. Only after these major first steps are taken should we bring all other Medicare enrollees into the drug-benefit program, paying means-based premiums to maximize the insured pool and minimize adverse selection.