V I E W P O I N T

The Skyrocketing Cost of Health Care: Will Seniors Keep Up?

Ever since its enactment in 1965, Medicare has successfully provided basic, nearly universal health coverage to America's older and disabled citizens. The new Medicare law takes us on a journey backward in time by giving seniors a meager new prescription drug benefit , while eroding their standard of living by failing to include any meaningful cost containment to help them keep pace with the skyrocketing cost of health care.

Because of this, the value of the benefit is only going to erode with time. Virtually every out-of-pocket cost provision in the new law is tied to health care inflation, which has traditionally risen faster than inflation generally. In the meantime, most seniors will find themselves losing ground because their incomes won't keep up. Many seniors depend largely on Social Security as their primary source of income. While they receive Cost of Living Adjustments (COLAs), the increases only reflect general inflation, not health inflation, so their incomes will rise slower than health care inflation drives the Medicare bill. Few private pensions have COLAs at all, so seniors relying on 401(k) plans or IRAs for their retirement income are at the mercy of the markets and the economy.

A quick look at the history of Medicare's Part B premium over the last two years tells the story. In 2002, the Medicare Part B premium was $54. By 2003, it had gone up almost 9% to $58.70, and in 2004 it jumped another 13% to $66.60. The Medicare Part B premium went up another 17% this year – the highest dollar amount increase in any single year in the history of the program – to $78.20. Yet the Social Security COLA in 2004 was 2.1%, and 2.7 % in 2005.

The new law imposes means-testing on Medicare for the first time . Beginning in 2007, higher income seniors (starting at $80,000 for singles and $160,000 for couples) will pay significantly higher premiums for Part B. Higher income workers already pay higher Medicare taxes during their working careers, and usually make higher general tax payments as well, which help support the program. Imposing means-testing further erodes the value of the benefit to them, and undermines the concept of universal coverage.

In addition to the expected premium increases, the Medicare law also increases the deductible for Medicare Part B for the first time. In 2005, the deductible is slated to increase by 10%, with annual increases afterwards tied to inflation in health care. This provision will increase costs for all Medicare beneficiaries, whether or not they sign up for the new prescription drug benefit. The rate of increase will mirror the continued increases in health care costs.

The drug benefit thresholds themselves are a trap for the unwary . Most seniors have focused on the benefit as it is designed for the first year it becomes effective. This includes an average premium that is estimated to cost $37.37 monthly, a $250 deductible, and a gap in coverage that requires seniors to keep paying premiums while bearing the full cost of their prescription drugs between $2,250 and the $5,100 limit that triggers catastrophic coverage. This benefit formula results in seniors spending $3,600 in out-of-pocket drug costs, in addition to the estimated $448 in annual premiums, before they become eligible for the catastrophic benefit, while Medicare only picks up $1,500 of their drug costs during that period of time.

But what most seniors don't realize is that all of these thresholds will rise after the first year, because they are all tied to increases in health care costs. By 2014, according to the Medicare Trustees, seniors will need to have over $8,900 in covered drug costs to trigger the catastrophic coverage. At that point, seniors will be paying about $6,300 in out-of-pocket costs, in addition to an estimated $771.12 in annual premiums , and only $2,623 will be picked-up by Medicare. If previous history is any guide, these projections are more likely to be too low than too high. They also only count the cost of drugs covered by the sponsor – seniors get no credit for any drugs that are not included in their provider's formulary, or that they purchase outside the United States.

Conclusion:

The truth is that the chief proponents of the new law want to do away with social insurance, and begrudgingly provided a prescription drug benefit to seniors wrapped in a bill that will ultimately leave them scrambling to keep up with ever escalating health care costs.

The lack of any meaningful cost containment is one of the greatest failings of the new law. Because proponents are committed to privatizing Medicare, they chose to rely on competition between private companies to drive health care costs down, a policy that has proven woefully inadequate in keeping the cost of health care from rising dramatically for working Americans. In the case of seniors, the model already exists – the Medicare program could have been allowed to harness the purchasing power of America's 42 million seniors to negotiate for lower prescription drugs like the Veterans Administration does. Instead, the new law specifically prohibits Medicare from negotiating drug prices.

The law also fails to make it legal to reimport drugs from Canada or other countries, even though many of those drugs were manufactured in the United States and are significantly cheaper abroad. The reimportation of prescription drugs is not a permanent solution to the problem of exorbitant drug costs in the United States. Pharmaceutical companies can too easily restrict supplies to other countries, driving up costs for everyone, and there will be additional administrative costs to ensure the reimported drugs are safe. But allowing reimportation would have provided temporary, short-term relief to help today's seniors make ends meet.

Finally, the new law includes a misguided attempt to rein in the cost of Medicare to the government by suggesting an arbitrary limit on federal contributions of 45 percent of the program's costs. This provision is designed to make it easier to cut benefits or raise senior's premiums and out-of-pocket costs than to simply raise the cap and allow higher federal contributions. It will artificially force the Medicare Trust Funds to become insolvent sooner. The lack of cost containment, combined with the law's increased subsidies to providers, virtually guarantees that this “cap” will be reached quickly. Once this happens, an “emergency” will be created, and seniors could be forced to accept large benefit cuts or cost increases.

For more information about the National Committee's views on the new prescription drug law, please call Member Relations at 1-800-966-1935 or check out our webpage at www.ncpssm.org.