Issue Brief

September 2000

Prescription Drug Benefit for Seniors    

What Is Congress doing on a Prescription Drug Benefit for Seniors?

For those who like the “theater of politics” the ongoing struggle over the design of a prescription drug benefit for seniors has all the elements of a great show. It involves some of the most lucrative industries in the country (pharmaceuticals and insurance), some of the poorest people in the country (low-income seniors), a Democratic Administration and a Republican Congress.

It is too soon to tell how this package will finally develop but at this point it is safe to say that one clear winner is the senior citizen community. Even though a prescription drug benefit is unlikely to pass this year, there has been widespread acceptance among leading policy makers that one is needed. This represents a significant change in thinking for many people and reflects the successful work of senior citizen advocates who have presented compelling information to support their case. It also reflects the ability that rising budget surpluses give elected officials to address new problems.

I.  The Plans
At the moment there are two competing plans on the table – one passed by House Republicans in June and the other proposed by President Clinton earlier in the year and enriched later this summer when projections of future budget surpluses were increased. There are also a few plans floating around the Senate but thus far none of these has been brought to the Senate floor. Each plan has its strengths and weaknesses and each reflects the philosophy of its proponents.

In many ways these proposals are as interesting for what they have in common as they are for their differences. For instance, each plan provides a universal entitlement to a subsidized prescription drug benefit. In each proposal, participation in the program is voluntary. Each plan includes some catastrophic protection in the form of a threshold over which the federal government will pay 100% of all drug expenditures. And, each plan would cover all FDA-approved prescription drugs.

II.  Differences Among the Plans
Having said that, the differences among the plans are quite profound and will probably play a big part in the upcoming election debate on health care policy. The fundamental partisan difference stems from seriously divergent views about Medicare.

Democrats consider Medicare a highly successful government program. They believe it needs some modifications but they are fundamentally committed to it as an appropriate endeavor for the government. And they have a 35-year tradition that says Medicare is a broad-based program funded by all working Americans through the payroll tax and its benefits should be available to all Americans. Congressional Republicans, on the other hand, would like to change Medicare dramatically with the most radical among them wanting to privatize the entire program. They also argue that the program is very expensive and any new prescription drug benefit should be means-tested. This is a fundamental difference that will have to be resolved before any final benefit can be designed.

In keeping with these views, the Administration proposal would add a prescription drug benefit directly to the current Medicare program. The House Republicans, on the other hand, are proposing a more market-oriented approach. They would provide incentives for private insurers to offer stand-alone drug insurance to the elderly and disabled. The Senate will probably vote on a package that is some variation of a bill introduced by Senators Breaux and Frist. Their bill provides for drug coverage through a Medicare Prescription Plus plan or Medicare + Choice.

A second major difference between the Administration proposal and the Republican proposals is in the level of coverage. The Democratic plan provides first dollar coverage for all participants with no deductible required. The House Republican plan and the Breaux-Frist plans each include a $250 deductible before any subsidy kicks in.

Beneficiaries would pay basic premiums of $25 with the federal government paying the remainder under the Administration plan. It is estimated that the government share would be about 50% of the cost. In the House Republican plan, premiums would be negotiated with the new Medicare Benefits Administration (MBA). They are projected to be $35 to $40 per month depending on which plan the beneficiary chooses. Both of these packages and the likely Senate proposal provide additional subsidies for very low-income beneficiaries, with this additional support phasing out gradually for seniors whose incomes are between 135% and 150% of poverty.

Under the President’s plan, the Healthcare Financing Administration would be responsible for carrying out the administrative functions with the Social Security Administration collecting basic premiums. Under the House Republican plan, the MBA would oversee prescription drug coverage, and premiums would be collected by the sponsors offering the drug coverage. In both plans the administrators (HCFA in the President’s plan and insurance companies in the House Republican plan) would be able to negotiate discounts with pharmaceutical companies. Most advocates believe this would significantly lower the cost of prescription drugs to seniors.

In the beginning the annual benefit limits or caps are $2000 under the Administration plan and $2100 for the Republican plans. The caps are raised over time in both plans. The point at which the catastrophic coverage kicks in is $8000 ($4000 out-of-pocket) in the Administration and $7050 ($6000 out-of-pocket) in the Republican plans.

From the brief comparison above one can see that the Administration’s plan is significantly richer than the House Republican plan. In fact, estimates made by the Congressional Budget Office price the President’s package at $338 billion over the next ten years, more than twice the estimate of $146 billion for the House Republican bill. The cost of the Breaux-Frist plan has not yet been estimated.

III.  Criticisms of the Plans
Each side levels serious criticisms at the other’s proposal. Republicans question the cost of the President’s package and believe that it could pose serious future risks for the Medicare program. They also object to the principle of “first dollar coverage” (no deductible) regardless of beneficiary income.

The pharmaceutical industry opposes the President’s approach because they insist that any coverage should be run through the private insurance system. They fear that putting a drug benefit in Medicare will ultimately lead to government price controls on prescription drugs.

Insurance companies oppose the House Republican plan in its present form. They fear adverse selection and maintain that a stand-alone pharmaceutical plan is not workable because the sickest elderly will sign up for coverage and spend so much that insurers will be forced to make premiums prohibitively expensive. The authors of the GOP plan counter that they will simply increase financial subsidies to the companies.

White House officials question the workability of the House Republican plan. They believe that designs to increase subsidies to insurers in the event of adverse selection will only give companies an incentive to hold back coverage.

It is clear that neither the Administration nor the Congressional Republican plans are ready to become law just yet. But it is also clear that the problem of uninsured seniors with costly prescription drug needs is not going to go away. Both presidential candidates have pledged to help the elderly with this matter, so we can expect to hear more about the issue as the campaigns unfold this fall. Even though a final resolution is unlikely this year, Congress and the Administration have made a serious start on dealing with this major challenge.