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Five Troubling Aspects of Medicare Legislation
Center on Budget and Policy Priorities
Revised- December 8, 2003

The final Medicare drug bill that the President will sign into law today will cost an estimated $395 billion over ten years, and much larger amounts in succeeding decades as drug prices continue to rise.  (It will cost more than $1 trillion in the second decade it is in effect, according to the Congressional Budget Office.)  Because the legislation is not "paid for," it will substantially worsen the nation's long-term fiscal problems, which already threaten to be the most serious in the nation's history.

The five troubling aspects of the Medicare legislation are as follows:

1. Private plans

Under the Medicare program, beneficiaries can elect to receive all of their Medicare benefits from private managed care plans (primarily HMOs) rather than through traditional fee-for-service.  According to the Medicare Payment Advisory Commission, a nonpartisan organization established by Congress to analyze Medicare payment policies, Medicare already pays these private managed care plans at rates that are 19 percent higher than traditional Medicare pays.  (This differential is the result both of provisions in the Medicare statute that require higher payments to private managed care plans in certain geographic areas and of the fact that Medicare beneficiaries who enroll in the managed care plans tend to be healthier - and hence to have lower average health care costs - than beneficiaries who enroll in traditional Medicare fee-for-service.)  The new Medicare legislation exacerbates this disparity in payments; it increases payments to these private plans (both HMOs and new Preferred Provider Organizations) by another $14 billion over the next ten years.  This will result in the private plans being paid approximately 25 percent more than Medicare fee-for-service pays for comparable services to comparable beneficiaries.  As explained below, this disparity has significant implications for inducing more Medicare beneficiaries to leave fee-for-service Medicare for private plans.

  • The generous subsidies provided to the private managed care plans will create an unlevel playing field, which is likely to leave many beneficiaries with little choice but to switch to private plans for their Medicare benefits if they wish to receive less skimpy drug coverage. 
  • The premium support demonstration is considerably larger than is needed for a demonstration project and is likely to cause a substantial increase in premiums for traditional Medicare coverage for beneficiaries in demonstration areas. 

2. Health Savings Accounts

 Tax-advantaged savings accounts to pay out-of-pocket medical expenses, which exist today only under a limited demonstration project, will be made universally available.  These accounts will be available to people with high-deductible health insurance policies; the accounts cannot be used in conjunction with the comprehensive health insurance coverage that employers have traditionally offered.  Holders of these accounts will be able to make tax-deductible deposits in them, watch the earnings compound tax-free, and pay no tax upon withdrawal as long as the funds are used for medical expenses.

  • This establishes a new, unprecedented and extremely lucrative type of tax shelter.
  • It could undermine comprehensive health insurance. 

3. Effects on Low-income Elderly and Disabled People Covered by both Medicare and Medicaid

Currently, if a benefit is covered by Medicare and Medicaid alike, the low-income elderly and disabled people who are eligible for both programs receive the benefit through Medicare and also receive any additional assistance that Medicaid may provide, such as a lower co-payment for the covered services.  The final Medicare legislation takes the unprecedented step of eliminating this Medicaid "wrap-around" coverage with respect to the new drug benefit.  That will have adverse consequences for several million poor elderly and disabled people.

  • Many low-income Medicare beneficiaries will end up worse off than under current law and eventually may have difficulty affording their drugs.
  • Low-income elderly and disabled Medicaid beneficiaries also are likely to lose access to some medically necessary drugs that they currently receive through Medicaid. 

4. Cost containment

Each year the executive branch will project the share of overall Medicare costs that would be financed with general revenues.  When that share is projected to exceed 45 percent within the coming seven years, the President will be required to submit legislation presumably to alter Medicare to bring the projected percentage back below 45 percent.

  • Staying within the 45-percent threshold would entail making increasingly drastic changes in Medicare over time. 
  • The burden of financing Medicare could shift increasingly to working-poor families and middle-income families, as well as to Medicare beneficiaries.

5. Long-term effect on states 

State Medicaid programs face serious long-term budget pressures as a result of the impending retirement of the baby-boom generation.  Rising drug costs for low-income Medicare beneficiaries who also qualify for Medicaid constitute a significant part of this problem, since drug coverage is the part of Medicaid that is growing most rapidly in cost, and drug costs are expected to grow still faster when the baby boomers retire in large numbers.  The House version of the Medicare drug legislation would have phased out state financial responsibility for providing drug coverage to low-income Medicare beneficiaries.  Such relief is likely to be essential if states are to be able to continue financing their share of Medicare costs without instituting deep Medicaid cuts, once the baby boomers retire en masse.

The final Medicare legislation marks a major step backward from the House bill in this area; it removes most of the long-term fiscal relief the bill provided.  Under the final legislation, states will remain responsible in perpetuity for 75 percent or more of the drug costs for low-income elderly and disabled people that states would have incurred if these beneficiaries had continued receiving drugs through Medicaid.  Moreover, a sizeable share of the remaining savings will be consumed by new costs that the legislation imposes on states, such as the costs of determining eligibility for the new Medicare low-income drug subsidies.

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