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Medicare Donut Stop
Bizarre drug plans.


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Michael Tanner

It is probably too late to stop Congress’s headlong rush toward creating a costly new entitlement out of proposals for a Medicare prescription-drug benefit. But perhaps we can learn from this cautionary tale of what happens when politics and special-interest pandering trumps sound public policy.

Consider: Even without a prescription-drug benefit, the cost of Medicare will double as a percentage of GDP by 2040. The program’s unfunded liabilities are more than $13.3 trillion, dwarfing even Social Security’s massive debt. Faced with this looming crisis, a more courageous or sensible Congress might have tried to reform this deeply troubled program and bring some restraint to its escalating costs.

Instead, Congress decided that what Medicare really needed was a brand-new entitlement estimated to cost at least $400 billion over the next ten years — most outside observers think that the program will end up costing far more than that. That’s a bit like a family that can’t pay their mortgage deciding that they should build a new swimming pool.

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Indeed the whole rationale for a massive new prescription-drug entitlement has always been debatable. Many, if not most, seniors already have prescription-drug coverage through their Medigap policies. More than 70 percent of Medicare beneficiaries spent less than $500 from their own pockets for prescriptions last year. A small, targeted prescription-drug benefit aimed at the small number of low-income seniors with high drug costs might have made sense. But that was unacceptable to both the organized seniors lobby and those who see expanding Medicare as the gateway to national health care. They demanded an all-inclusive prescription-drug benefit for everyone, regardless of income or other health coverage.

President Bush and some reform-minded Democrats like Sen. John Breaux originally supported a prescription-drug benefit in the context of overall Medicare reform. They were willing to provide the new benefit, but only if other actions were taken to encourage greater competition and hold down costs. Prescription drugs were to be offered as an additional benefit to seniors who chose to leave traditional Medicare for competing private-sector plans. The competition of a private health-care marketplace, combined with integration and managed care, would have helped offset the new benefit costs and served as a platform for further Medicare reforms to come.

Unfortunately, most members of Congress created a bind for themselves by promising in the last election to pass a prescription drug plan no matter what. That sort of pandering may have made political sense — seniors made up one-out-of-four voters in the 2002 elections. But it also meant that when faced with pressure from the national health-care crowd, they abandoned all restraint. A prescription-drug benefit at all costs turned out to mean exactly that.

An option still exists for seniors to choose private-sector alternatives to Medicare, but there are no longer any incentives for them to do so. Under the plan about to be passed by Congress, seniors would receive nearly identical drug benefits under both traditional Medicare or private plans. Without competition on the basis of either price or benefits, few seniors can be expected to move out of traditional Medicare. Nor is there even a certainty that the private sector will offer competing plans. The legislation would extend so much regulation to these private alternatives that most insurers are liable to feel that they are not worth the effort.

To add insult to injury, Congress has made one last feeble attempt to hold down the program’s costs by creating a bizarre “donut hole,” under which Medicare payment for drugs will start, stop, and then start again. Few believe that this structure will survive for long. Democrats already are pressing for a more generous benefit. The result will almost certainly be costs far in excess of the estimated $400 billion. Look for calls for price controls on drugs to follow shortly.

Unless they are reformed, entitlement programs like Medicare and Social Security will soon become an unbearable burden on our children and grandchildren. But, unfortunately, young people don’t vote. Unless they do, or unless a few members of Congress discover their courage, today’s young workers can expect to be handed the bill once again.

Michael Tanner is director of health and welfare studies at the Cato Institute.



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