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Medicare Reform and Prescription Drugs

February 17, 2000
Related Topics: Miscellaneous Legal Issues, Featured Article

"Immediate Helping Hand"; Medicare Prescription Drug Coverage Actof 2001 (S.10); Medicare Reform Act of 2001 (S.1135); Medicare Preservation andImprovement Act of 2001 (S.357); Medicare Prescription Drug and ModernizationAct of 2001 (S.358); Medicare-Endorsed Prescription Discount Card

During the 2000 presidential campaign, President Bush proposed a two-partMedicare reform proposal, one program to provide immediate assistance tolow-income beneficiaries and those with catastrophic drug costs through stateblock grants ("Immediate Helping Hand"), and the other to implementcomprehensive Medicare reform, including an expanded drug benefit.

Soon after taking office, President Bush unveiled the "Immediate HelpingHand" proposal to a cool congressional reception. The proposal wouldsubsidize drug coverage for Medicare beneficiaries with incomes up to 175percent of poverty and for those with catastrophic drug costs exceeding $6,000.The provision would sunset in four years or as soon as comprehensive Medicarereform, including a drug benefit, is enacted. President Bush has not yetunveiled the comprehensive reform package, but he supports a proposal similar tothe Breaux-Frist premium support program described below.

Democrats introduced competing proposals with a broader scope. The proposals(S. 10, S. 1135), introduced by Senators Daschle (D-SD) and Graham (D-FL), wouldestablish prescription drug coverage in the Medicare program and would beavailable to all beneficiaries. A standard Medicare drug benefit would becreated with a $250 deductible, 50 percent beneficiary cost-sharing forout-of-pocket costs up to $3,500, and 25 percent cost-sharing for costs between$3,500-$4,000. A catastrophic benefit would cover 100 percent of out-of-pocketcosts over $4,000. Employers would be eligible to receive a subsidy, equal toone-third of the total cost of Medicare drug coverage, for providing retireedrug coverage..

Senators Breaux (D-LA) and Frist (R-TN) reintroduced two bipartisan plansthat they proposed in the last Congress. Both bills would make prescription drugcoverage available to Medicare beneficiaries. One of the bills (S. 357), wouldtransform Medicare into a premium support system where the traditional Medicareplan run by the Health Care Financing Administration would compete with privateplans overseen by a new executive branch agency, in providing Medicare benefits,including an extended benefits package with prescription drugs.

The second bill (S. 358), makes more incremental changes to Medicare such asestablishing a new voluntary drug benefit and a new agency to oversee the drugbenefit and private Medicare plans. This bill would offer employers that providedrug coverage to retirees’ reinsurance payments that would cover 80 percent ofdrug costs over $7,050.

The Administration is also trying to establish a new voluntary prescriptiondrug discount card program for all Medicare beneficiaries, as a way to giveMedicare beneficiaries immediate assistance in purchasing prescription drugswithout having to wait for Congress to pass legislation. Under the proposal,Medicare beneficiaries would be able to select a drug card program for a smallfee that would offer select drugs at discounted prices (10-15 percent offretail). Pharmacy benefit managers would administer the drug cards throughparticipating pharmacies and mail-order..

Democrats and Republicans have both expressed reservations about theImmediate Helping Hand proposal. Democrats argue that drug coverage should beoffered to all seniors and fear that enacting this proposal would impedesubsequent passage of coverage for all Medicare beneficiaries. Democrats, andsome Republicans, would rather see comprehensive Medicare reform, includingprescription drug coverage, and argue that providing low-income drug coveragewould relieve pressure to enact comprehensive reforms..

Despite the high visibility of the debate over prescription drug coverage,the outlook for enactment of a Medicare drug proposal is uncertain because ofthe absence of bipartisan consensus and the complexity of the issue. Bothparties favor expanding drug coverage for Medicare beneficiaries, but recommenddifferent approaches with some important philosophical differences. The largefederal budget surplus that was available in 2001 no longer exists due to theslumping economy and war on terrorism, which may create an impediment toestablishing a high-cost Medicare drug benefit. However, Congress will be underenormous pressure from the public and the Bush Administration to pass a proposalexpanding drug coverage in 2002, before the next elections.

The Administration's proposed Medicare drug card program also faces obstaclesto its implementation because pharmacy groups immediately filed a lawsuit andmotion for a preliminary injunction against the Administration. In September2001, a U.S. District Court Judge issued a temporary preliminary injunction atthe request of the pharmacy groups to halt implementation of theAdministration's Medicare prescription drug card initiative, which was set tobegin in January 2002.

In November, 2001, the judge lifted the injunction to allow the Department ofHealth and Human Services (HHS) to submit a new drug card plan through proposedrule-making. On March 6, 2002, HHS released a revised Medicare drug cardproposal and the pharmacy groups asked the judge to enforce the preliminaryinjunction that was previously issued. The pharmacy groups contend that the newprogram is substantially the same as the original proposal and that theAdministration lacks the statutory authority to launch the program.

Establishing a Medicare prescription drug benefit could potentially providesignificant financial relief to employers that currently offer retiree healthbenefits and also relief to retirees that do not have drug coverage. Thefinancial savings for employers will hinge on a number of key technical detailsin the design of any new program, such as whether employers would be eligible toreceive subsidies or reinsurance payments, whether there would be a"maintenance of effort" provision, and the manner in which retireehealth coverage could coordinate with a new Medicare drug benefit.

A Medicare drug benefit may provide a financial incentive to some employerscurrently offering retiree drug coverage to drop that coverage. However, mostlarge employers (80 percent) have indicated they would not eliminate retireedrug coverage in the short-term (3-5 years) solely in response to the enactmentof expanded prescription drug coverage for Medicare beneficiaries. Most largeemployers currently providing drug benefits would continue coverage by wrappingaround (making it supplemental to) the new prescription drug coverage, whichcould provide significant savings.

The drug-card proposal may have less of an impact on employers because few oftheir employees would likely enroll in a drug card plan. Medicare beneficiarieswith retiree coverage would receive more generous drug benefits through theiremployer-sponsored health insurance compared to the drug card, which is onlyproviding a discounted price. The drug card program would be more appealing touninsured beneficiaries paying the full retail price for medicines.

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