Medicare: New Road?

Everyone agrees that Medicare is out of date. President Bush has compared it to the 1965 Mustang—an excellent car, but no longer state of the art. "We need to bring Medicare into the 21st century," he said.

Medicare is missing essential elements of today's best private health care coverage, Bush said. It lacks not only prescription drugs, the most glaring gap, but also eye and dental care and a cap on out-of-pocket expenses.

But all "loaded" vehicles, whether cars or health care delivery systems, carry steep price tags. Neither Bush nor anyone else proposes just to add such benefits to the basic Medicare package at no extra cost to beneficiaries.

When Congress can finally make a serious effort to pass a prescription drug benefit, it will also debate "reform" of the program as a whole.

What Does "Reform" Mean?

It depends on whom you ask. To most beneficiaries, it means better benefits and less expense. To most providers, it means higher federal payments and less red tape. To lawmakers, it is a political minefield pitted with health care inflation, an aging population, a slowing economy and differing ideologies in Congress.

There is certainly greater consensus on Capitol Hill than there used to be, but divisions remain. "The sharpest distinction is that most Democrats would move forward with a drug benefit first and deal with larger issues of Medicare reform later," says Robert D. Reischauer, president of the Urban Institute, a Washington think tank. "The Republican approach is that drug coverage should be part and parcel of a larger reform effort. That's a huge difference."

The other divider is the role of the private sector in a reshaped Medicare. "There's no question that core Republicans would prefer to see, 10 years from now, a program that resembles the variety of private plans available to federal workers, with the government's role drastically reduced," says Robert Blendon, a health policy expert at Harvard University. "Core Democrats prefer government's role to remain central."

Most Republicans and some moderate Democrats believe that providing more choices through competitive private insurance plans and creating an enhanced fee-for-service option, while retaining the traditional program, is the best way to modernize Medicare and keep it solvent.

The three main GOP proposals now in play—Bush's "reform principles," a House bill already passed and a Senate plan crafted by Iowa Sen. Chuck Grassley, senior Republican on the key Senate Finance Committee—all go in that direction.

One argument in favor: The private sector can respond faster to change than Medicare, which must often await acts of Congress.

But a crucial question, critics say, is why we should opt for more privatization when the only experience of that approach to date—Medicare+Choice (M+C), a program of managed-care alternatives to fee for service offered since 1997—has largely failed. It hasn't contained costs, as intended, nor attracted the expected volume of customers.

Only 14 percent of Medicare's 40 million beneficiaries are in M+C. The lucky ones live in large urban centers in California, Florida and New York and have a choice of several health plans, thus reaping the advantages of real competition: good benefits and low costs. Elsewhere, many plans have pulled out of Medicare or have substantially reduced benefits and raised cost sharing.

Half of Florida's 67 counties, for example, now have no M+C plans, and a further 25 percent offer only one. Only 16 counties have real competition, offering two to 10 plans.

One company, the only Medicare HMO operating in a rural Florida county that is home to 25,000 beneficiaries, offers a plan with limited drug coverage for a monthly premium of $98. In urban Miami-Dade, competing with nine other plans for a potential 300,000 beneficiaries, the same company offers more generous drug benefits for a zero premium.

Insurers say that Medicare's complex formula for reimbursing them is responsible for these inequalities. To enrollees, they just seem unfair.

No one has yet figured out how to persuade more private insurers to enter, or stay in, less lucrative Medicare markets, especially in rural areas. Some experts believe that these areas cannot support HMOs.

Grassley's proposal would try to "level the playing field" with traditional Medicare by offering plans a more attractive payment structure, more money for those accepting sicker patients and fewer regulations.

But less regulation could mean diminished protections for beneficiaries, critics say. And the market will always be changing.

"Private companies will always move in or out of Medicare depending on their business interests," says Joyce Dubow, an AARP Medicare expert. "We need a program that combines stability and affordability."

Beneficiaries, too, rate those qualities highly. Swing voters in focus groups organized by the Henry J. Kaiser Family Foundation reacted most positively to the idea that Medicare should be "strengthened and improved" or "preserved and protected" and most negatively to it being "privatized" or including "more competition." An older woman from San Diego said: "I think they ought to leave it alone. I'm scared to death if they start messing around with it."

That remark underscores the enduring popularity of Medicare and the political dangers inherent in changing it. Even some who have advocated more private sector involvement, like Reischauer, urge caution.

"I'm all for getting on this expressway," he says, "but I'm interested in building exit ramps so that, if things don't turn out the way we hope, we can get off without incurring too much damage to the vehicle we've been riding in all these years."

Will Costs Go Up?

The focus groups welcomed more benefits, including drug coverage, but they suffered "sticker shock" at the cost—seeing even a hypothetical $25 monthly drug premium as high, and $50 as beyond the means of many.

No proposal yet advanced, including the leading Democratic plan sponsored by Sen. Bob Graham, D-Fla., offers a drug benefit premium below $50, except for low-income beneficiaries. Sen. Max Baucus, D-Mont., chairman of the Senate Finance Committee, is working on a proposal that would lower premiums.

The one constant in this debate is the soaring cost of health care for both beneficiaries and government.

Medicare now covers only just over half the health expenses of enrollees as a whole. Even if no changes are made to the program, the average out-of-pocket spending of older Americans enrolled in traditional fee-for-service Medicare is expected to rise steadily, [see chart] carving out nearly 30 percent of their incomes by 2025. The annual Part B premium is projected to soar 220 percent from $600 this year to $1,320 in 2011.

In a more privatized system, some beneficiaries might see lower costs if the insurance industry does compete for Medicare markets. But in devising such a system, while government will pay a portion of the premiums, no one can predict what the premiums would be—thus making it difficult to properly compare GOP and Democrat proposals in advance.

Will There Be a Drug Benefit?

The problems of enacting a benefit have always been formidable. Now, in a changed world after the Sept. 11 terrorist attacks, all bets are off.

Even before that day, analysts were pessimistic that enough money would be available in the budget to fund a meaningful benefit this year, because of the shrunken surplus caused by a slowing economy and the recent tax cuts.

Speaking before Sept. 11, Reischauer predicted, "It's going to be tough, because not only do [members of Congress] have programmatic and ideological hurdles to surmount, they're going to have a fiscal hurdle as well. So this is now a three-hurdle, not a two-hurdle race, and the third one is looking quite high."

The political stakes are also high, with next year's midterm elections looming. "Regardless of what else is going on, people will still be struggling with bills for prescription drugs," says John Rother, AARP's policy director. "This will still be an issue in the 2002 elections if Congress fails to act."