Nov. 25 (Bloomberg) -- The U.S. Senate voted 54-44 to approve Medicare's biggest expansion in history, a bill designed to help the elderly pay for medicines and test competition between private and federal health insurance.

The legislation now goes to President George W. Bush, whose signature will make it law. The House passed the measure in an unusually long three-hour vote Saturday in which Republicans persuaded enough opponents to win, 220-215.

``A lot of people searched their soul on this complex piece of legislation,'' Bush said after meeting with senior citizens at a Las Vegas hospital. ``Because of the actions of members of both political parties, the Medicare system will be modern, and it will be strong.''

The bill gives Bush a domestic policy victory for his 2004 reelection campaign. The legislation would help 41 million elderly and disabled Americans pay for prescriptions at pharmacies, expanding sales for drugmakers including Pfizer Inc. and Merck & Co.

A new prescription-drug discount card program may boost pharmacy-benefit manager revenue, including Express Scripts Inc. Insurers such as UnitedHealth Group Inc. would get incentives to enroll Medicare patients in their health plans.

The independent Congressional Budget Office estimated Medicare would spend an extra $410 billion over 10 years on drugs. Now, the program only covers medicines, such as chemotherapy, administered by doctors.

The Standard & Poor's 500 Pharmaceuticals Index fell 0.8 percent, after climbing 5.1 percent in the previous two weeks. The index rose 1.6 percent yesterday. The Morgan Stanley Health Care Payer Index rose 1 percent.

How It Works

The new drug benefit would begin in 2006, and insurers such as Aetna Inc. would manage the coverage for Medicare. The Department of Health and Human Services hopes to have the discount-drug card available by next spring, Secretary Tommy Thompson said.

``While HHS is working to implement the drug benefit, seniors will get a discount drug card providing 10 to 25 percent savings on purchases,'' Thompson said. ``Low-income seniors would get an additional $600 credit on this card.''

Patients enrolled in drug plans would pay a $250 deductible and average monthly premiums of $35. Medicare would pay 75 percent and patients, 25 percent, of drug costs up to $2,250. The poorest seniors would get additional government aid.

After spending $3,600 out of pocket on medicines, enrollees will be eligible for ``catastrophic'' coverage, in which Medicare pays most of the cost.

``I've written hundreds of prescriptions I knew'' patients couldn't afford, said Senate Majority Leader Bill Frist, who is a doctor. ``With this bill, that changes.''

Drug-Benefit Managers

In April, Medicare may hire companies such as Express Scripts and Caremark Rx Inc. to offer drug-discount cards. Patients would pay a fee to enroll in the plan and use the cards at pharmacies.

``We expect to participate,'' said David Myers, a spokesman for Express Scripts, which is still calculating the bill's effect on revenue. ``We have the infrastructure in place.''

Drug sales may increase by $4 billion to $13 billion a year, analysts estimate. Pfizer Chief Executive Hank McKinnell said greater competition holds down prices, tempering volume growth. ``It is probably neutral'' for profit, he said in a televised interview with Bloomberg News yesterday.

``Seniors will be shocked to find that when it comes time to pay for their prescriptions, the benefit likely won't keep up with their costs,'' said Gail Shearer, director of health policy analysis for Consumers Union in a statement on the group's Web site.

Thompson Monitors Voting

Medicare Administrator Tom Scully was smiling slightly as he watched the vote from the gallery above the floor. ``This has been a long time coming,'' he said.

Thompson, Bush's chief Medicare negotiator, walked the Senate floor as nine Republicans voted against the bill. Eleven Democrats voted for it. Thompson shook hands with congressional aides after the vote and hugged Scully, who sat beside him during negotiations.

Starting in 2004, Medicare would pay doctors the average wholesale price reported by drugmakers minus 15 percent for drugs that they administer. The next year, payments would be based on average sales prices plus 6 percent. That will reduce reimbursements, possibly hurting companies including physician manager US Oncology Inc.

Senate Minority Leader Tom Daschle pledged to continue to work on Medicare. ``I predict within 12 months we will be back for many more votes'' to correct the legislation, he said.

Drug Funding Cuts

The bill will cut $4.2 billion over the next decade from payments for inhaled drugs such as albuterol, according to the budget office. That would affect companies such as Apria Healthcare Group Inc., the biggest U.S. provider of home health- care services. Its shares plunged 17 percent last week.

The government would save money by cutting reimbursements for other drugs by $12 billion and durable medical equipment such as canes by $6.8 billion. A provision allowing cheaper copies of medicines to get to market more quickly would save the government $600 million, the budget office estimated.

The issue that caused the most contention was a part of the bill that set up a test program to compare costs between Medicare and private insurers. The project, set to begin in 2010, will include six regions or metropolitan areas.

Insurer Incentives

Democrats such as Senator Edward Kennedy argued that the provision would undermine Medicare, raising costs for seniors and leaving only the sickest patients in the federal program.

The legislation would give private insurers about $14 billion to encourage them to offer broader coverage to seniors.

``Medicare beneficiaries finally have a 21st century program that addresses their 21st century health-care needs,'' Scott Serota, president and chief executive officer of the Blue Cross and Blue Shield Association said in a written statement.

Language that would have made it easier for Americans to buy cheaper drugs from Canada didn't make it to the final version. The compromise requires the U.S. Health and Human Services Department to certify that the medicines are safe. Thompson has refused so far to do that.

Hospitals in New York and other states would be grouped into larger metropolitan areas under the bill, which would raise Medicare reimbursements for labor costs starting Oct. 1. Rural hospitals and doctors would get almost $20 billion in extra funds over the next decade. Those provisions would help Health Management Associates Inc. and other rural hospital chains.

California ``is a state where Medicare is closely held, feelings run deep, they run passionately, and yet as I began to look at the specifics of the bill, it became pretty clear that the very things that many people over the last 10 years have asked me for are contained in this bill,'' said Democratic Senator Dianne Feinstein, who voted for the bill.

Last Updated: November 25, 2003 16:30 EST