V I E W P O I N T

THE NEW MEDICARE LAW

On December 8, 2003, President Bush signed into law the Medicare Prescription Drug, Improvement and Modernization Act of 2003.

For more than 38 years, Medicare has successfully provided basic, nearly universal health coverage to America 's older and disabled citizens. Because older Americans generally have higher health care costs than any other segment of our population, they are mostly shunned by private health plans. Before Medicare was enacted, about half of all seniors had no health insurance, and nearly 35 percent lived in poverty.

Medicare changed all that. By creating a universal insurance pool, Medicare allowed the previously uninsurable senior population to share their risks and resources, providing affordable coverage where little had existed before. But the Medicare program had one major shortcoming it did not provide seniors with out-patient prescription drug coverage.

The National Committee to Preserve Social Security and Medicare has spent years advocating for a comprehensive, affordable prescription drug benefit. What we now have instead is a complicated program that places the interests of the drug manufacturers and private health insurers before the interests of seniors. While the law will help subsidize the cost of medications for some, its glaring flaws erode the value of what seniors are receiving, and could undermine the Medicare program itself. We believe Congress must revisit this law to allow for an affordable drug benefit offered to all through the traditional Medicare program.

Key Issues:

Drug Discount Card: From June 2004 to December 2005, seniors were able to buy a Medicare-endorsed prescription drug discount card as a temporary help to reduce their high drug costs. Even though the $600 transitional assistance benefit helped some low income seniors, many seniors were no better off than they were with the many private discount cards already available.

The Prescription Drug Benefit: As of January, 2006, the discount card was replaced by a permanent prescription drug benefit, which is provided by private companies rather than directly by Medicare. Signing up for the new benefit is voluntary, but seniors who wait will be penalized by paying premiums that increase by 1% for each month the senior postpones enrollment.

The structure of the benefit is complicated because proponents were trying to minimize its cost. Participating seniors pay monthly premiums and are subject to a deductible, as well as a gap in coverage during which seniors get no help with the cost of their drugs, while still paying 100% of the premiums. Once a senior has reached $5,100 in covered drug expenditures, a catastrophic benefit begins, and the government picks up 95% of covered drug costs above that amount for the rest of the year.

Unfortunately, after the first year the thresholds in the law are scheduled to increase based on increases in health care costs. In the year 2014, a senior will need to have about $8,900 in covered drug costs, in order to trigger the catestrophic benefit. And of course, these numbers only count the costs of drugs covered by the sponsor. Seniors get no credit for any expenses for drugs not included in the company's formulary, or purchased outside the United States .

Low-income seniors without significant assets who have no other prescription drug coverage could receive significant benefits from the new program because their premiums, deductibles and co-payments will either be eliminated or significantly reduced. Seniors without other coverage who have extremely high drug costs could also benefit. But for other seniors, particularly those with drug coverage from previous employers, it's not clear the new law will be much help.

Cost Containment: In one of its greatest failings, the legislation is woefully lacking in any meaningful containment of the skyrocketing price of either prescription drugs or health care. Proponents claim the drive to compete for seniors will encourage private companies participating in Medicare to bargain for the lowest possible prices. So instead of being encouraged to use the purchasing power of America's 43 million seniors to negotiate for lower prescription drug costs like the Veterans Administration does, Medicare is specifically prohibited from negotiating drug prices. The law also fails to make it any easier to reimport drugs from Canada or other countries, despite the fact that many of those drugs were originally manufactured in the United States and are significantly cheaper abroad.

Some claim this law is a good first step toward providing a meaningful prescription drug benefit that they will build upon in time. Yet their goal will continually get further out of reach because virtually every provision in the new Medicare law is tied to health care inflation, so the gaps will get more expensive to fill with every passing year. And many seniors will still find themselves in a race they cannot win because their incomes will continue to lag well behind their increasing health care costs. Many seniors depend on Social Security as their primary source of income, with COLAs that are based on general inflation, not health inflation. Few other types of retirement income have any COLAs at all.

In addition to the expected premium increases and the inflation fueled changes in the drug benefit thresholds, the Medicare law also increased the deductible for Medicare Part B for the first time in over a decade in 2005, with annual increases afterwards tied to inflation in health care. The deductible was slated to increase by 10% in 2005 and another 13% in 2006. This increased deductible will apply to all Medicare beneficiaries, whether or not they sign up for the new prescription drug benefit.

The Privatization of Medicare: Proponents of the new Medicare law claim that injection of competition between private providers will result in better benefits to seniors at lower cost. But it is clear that private companies simply cannot match Medicare for its low administrative costs and efficiency, and they'll only participate in the program if they are given more money than it costs Medicare to provide the same benefit. The 2004 Medicare Trustees report bore this out as it projects the Trust Funds have lost 2 full years of solvency due in large part to the extra costs of privatization in the new Medicare law.

The truth is that most proponents of the new law don't support a national social insurance program, and want to transform Medicare to individual risk pools of one. Healthier seniors may do better in such a system for a time, while older, sicker seniors are left with fewer choices and higher costs. Ultimately, dismantling the national insurance risk pool will likely cause the entire system to collapse, taking us full-circle back to the days before Medicare began providing universal, affordable insurance coverage to all of America's seniors.

For more information about the National Committee's views on the new prescription drug law, please call Member Relations at 1-800-966-1935.

Government Relations and Policy/Policy Research, February, 2006