Sens. Grassley, R-Iowa, top, and Baucus, D-Mont., on opposite sides of the issues.

Between a Rock and a Hard Place

Cost, Politics Cloud Drug Benefit

By Patricia Barry

Photo © Robert Trippett, AP/Wide World Photos

Escalating health care costs, President Bush's proposed tax cuts and a huge philosophical divide between the political parties are all complicating, and maybe eroding, the possibility that Congress can enact a universal Medicare prescription drug benefit that is affordable to both beneficiaries and taxpayers.

In fact, analysts say, legislators find themselves between a political rock and an economic hard place:

Having made strong public commitments to modernizing Medicare with a drug benefit, they are now confronted with sobering new estimates of what the price tag could be and much less money in the federal purse if tax cuts carve too large a slice out of the budget surplus and future revenues.

"A prescription drug benefit was always going to be expensive," says Robert D. Reischauer, president of the Urban Institute, a Washington think tank. But with these new developments, he points out, "it's not at all clear there's going to be enough [money] there to provide such a benefit."

According to the latest estimates from the Congressional Budget Office (CBO), the amount spent on prescription drugs used by the Medicare population over the next 10 years (without a benefit) will be about $1.5 trillion.

Cost implication for Congress

This figure is 31.8 percent higher than the 10-year projection CBO made last year.

CBO Director Dan Crippen, testifying at a recent Senate Finance Committee hearing on prescription drugs, warned senators that any large subsidy for Medicare prescription drugs "means that you're going to pick up a substantial piece of the $1.5 trillion."

Crippen also attached "rough cut" 10-year price tags to different types of drug benefits targeting separate areas of need.

These ranged from about $200 billion for a benefit targeting all Medicare enrollees with low incomes to as much as $1.1 trillion for a stand-alone catastrophic benefit that would pay all enrollees' out-of-pocket costs of over $1,000 a year.

Even with a much less generous catastrophic benefit, over the next decade "universal coverage ... could easily cost [the government] $1 trillion," Crippen said.

In outlining the challenges that face Congress in designing a benefit, he noted: "It is not possible to provide a generous drug benefit to all Medicare beneficiaries at low cost—either the enrollees' premiums or the government's subsidy costs would be high."

To illustrate that point, the CBO calculated some hypothetical examples of what beneficiaries and the government might pay in a single year (choosing 2004 for the projection) according to different types of cost-sharing scenarios that might be considered. These include:

* If the beneficiaries paid 50 percent of the cost of drugs, with no deductible, and the government paid the other half plus all out-of-pocket spending above $4,000, the federal tab would be $31.6 billion in 2004. Beneficiaries would pay a premium (in addition to the regular Medicare Part B premium) of $55.50 a month.

* If beneficiaries' coinsurance was reduced to 25 percent, the federal tab would rise to $42 billion and the beneficiaries' drug premium would rise to $80.70 a month.

* If the government paid 75 percent of the premiums, in addition to covering 50 percent of drug costs, but required a $250 deductible, capped benefits after $2,500 in total spending and raised catastrophic protection to a $6,000 threshold—leaving a large out-of-pocket spending "hole" in the middle—then the federal tab would be $30.3 billion and the monthly premium $17.60.

"The last example has the lowest premium, but the benefit 'hole' means that many beneficiaries could actually pay more under this design than under others," says David Gross, of AARP's Public Policy Institute, in explaining how complex such designs can be.

Previous estimates dwarfed

By the end of the 10-year period, overall costs would be higher. Average prescription drug spending per Medicare enrollee is expected to rise by more than 10 percent a year (nearly twice the rate of current Medicare benefits) from just under $2,000 a year in 2002 to more than $4,800 in 2011.

The CBO figures dwarf previous estimated costs attached to proposals or allocated in budgets by lawmakers. Last year, the House voted $40 billion over five years for a GOP proposal on prescription drugs. The plan advanced by former Vice President Gore and the Democrats was estimated at more than $300 billion over 10 years. President Bush's 10-year budget allocation is $153 billion —though a recent amendment in the Senate increased that figure to $300 billion.

Although 10-year projections very often turn out to be off the mark, the CBO estimates and the recent report of the Medicare trustees on the program's long-term financial health [see related article on page 22], have brought a new element of caution into the debate.

"I hope we can all agree that in light of the enormity of the potential cost of prescription drug coverage and Medicare's worsening financial situation, we must be fiscally responsible in adding any new benefits to Medicare," said the finance committee's chairman, Sen. Chuck Grassley, R-Iowa.

But the higher estimates also sharpen the different philosophical perspectives of the parties. "To my mind," said the committee's ranking Democrat, Sen. Max Baucus of Montana, "that increase makes the case for the enactment of a prescription drug benefit. That is, if it's getting worse, we shouldn't try to avoid it ... we should tackle it."

Medicare beneficiaries without drug coverage, he added, "are beneficiaries in name only for an increasingly important component of health care."

Many Democrats also believe that Bush's high-priority proposal to spend $1.6 trillion of the budget surplus in an across-the-board tax cut poses the greatest threat to enacting an affordable drug benefit.

"If this massive tax cut goes through, we're done," says Rep. Pete Stark of California, a leading Democratic spokesman on health care. "The opportunity to pass a prescription drug benefit that will be worth more than a couple hundred dollars to anybody is lost."

In floor votes on the budget in the evenly divided Senate, the Democrats put forward amendments aimed at carving money from the proposed tax cut in order to spend more on Medicare, education and debt reduction.

One amendment succeeded in slicing away $400 billion, one-fourth of the proposed tax cut, after three moderate Republicans voted with the Democrats. In the House, the whole tax proposal easily passed.

"It would be nice if [Congress] could have a balanced debate on competing priorities that face the nation over the next 10 years, with realistic estimates of the cost of addressing them," says Reischauer.

"But that's not what we're having. What we're having is largely a discussion about surpluses and tax cuts," he says, "with a promise that after that discussion is over we will debate whether there's enough left to address any other priorities."

Competing with other priorities

Beyond tax cuts, a prescription drug benefit has to compete for budget money with other spending allocations for defense, education, agriculture and biomedical research. In that way too, notes Reischauer, a benefit may get short shrift.

Because drug coverage "is such a complex issue, where many details have yet to be worked out," he says, "it seems that the cupboard could be picked bare before legislative attention turns to designing a prescription drug benefit."

Precisely how to design that benefit has consumed legislators and health policy analysts for years, without much narrowing of the philosophical divide.

On the one hand, analysts say, Democratic leaders want to add prescription drugs as a new defined benefit to Medicare with some changes to keep the program afloat when the baby boomer generation doubles the number of retirees.

On the other, the Republican leadership and the Bush administration want any benefit to be part of a wider restructuring of Medicare that would bring the program closer to the type of private insurance used by federal employees.

"This is a major philosophical issue," says Robert Blendon, a health policy expert at Harvard University. "If the pharmaceutical benefit gets tied up in this, we have gridlock—even though everybody agrees we should have help for seniors in paying their bills.

"I don't think it will just disappear from the agenda," he adds. "But the answer may be that, when they do get to it, the cost of it will make the benefit more modest than anyone's been promised here."

Insurance options limited

On the whole, Medicare beneficiaries pay more for prescription drugs than other people. "But their options for insurance coverage are increasingly limited and very expensive," says John Rother, AARP's director of legislative affairs.

"So rising costs mean it is more important than ever to enact an affordable Medicare drug benefit," he says. "AARP members need to remind their congressional representatives that this is an urgent priority."