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Medicare Reform: As Reality Sets in, a New Plan Emerges

When the House and Senate passed separate versions of Medicare reform last spring, many Hill-watchers predicted a quick bill-signing in the Rose Garden. After all, the Republicans who run Washington wanted to prove they could deliver on their promise to give elderly voters a new prescription-drug benefit. But exploding deficits and bitter ideological disputes are threatening ambitious reform efforts. Now, the chances of Bush seeing a major Medicare restructuring are down to 50-50. And in an effort to build bipartisan consensus out of partisan gridlock, a surprising coalition is mulling a stripped-down drug benefit dubbed Plan B. Says Senator Chuck Hagel (R-Neb.): "The forces of reality have set in."

Thirteen GOP House conservatives, who oppose a big new entitlement and worry about its $400 billion-plus price tag, are asking their leadership to consider a far less ambitious proposal. And Senate Republicans such as Hagel, John Ensign (Nev.), and Don Nickles (Okla.) are looking at ways to target benefits to those with low incomes or high drug bills.

Similarly, more than 40 moderate House Democrats, led by California's Cal Dooley, are pushing their own scaled-back plan. In the Senate, Democrats including New York's Hillary Rodham Clinton are exploring compromises. And some liberal groups could back the idea if a broader bill collapses. "Even with $400 billion, you can't have a [full] benefit," says Ron Pollack, executive director of Washington-based advocacy group Families USA. "You have to make choices. The first call should be those who have the greatest need."

The still-evolving plan would ditch the new drug premium, complex benefits, and controversial reforms of the broad-based bill. Instead, Washington would issue a free discount drug card to all those 65 and older that could cut prices by 10% to 20%. The poorest seniors could still get benefits through Medicaid. The feds would pick up roughly the first $1,000 of drug costs for those making up to, say, $20,000. And all retirees with catastrophic expenses -- regardless of income -- would get extra help. The bill would also boost government reimbursements for doctors, rural hospitals, and other health providers -- a key to wooing wavering lawmakers.

The compromise would avoid the nastiest issues in the reform debate. For instance, many Republicans won't vote for restructuring Medicare unless it includes a central role for private insurance. But most Democrats, and some GOP moderates, won't support a measure that includes such a provision, fearing it would destroy the traditional program. A bare-bones compromise would delay the insurance battle until after 2004. "We could get this bizarre meeting of the minds," says one health lobbyist. "If they can't resolve these issues, Plan B becomes a lot more credible."

That's not to say it's a sure shot. Backers must agree on how much to spend and how to divide the money between a catastrophic benefit and a low-income subsidy. And for now, the combatants aren't ready to abandon broader reform. The powerful seniors' lobby AARP hasn't given up on benefits for all. Bush and the Hill GOP leadership continue to push for a big Medicare overhaul. And liberals, led by Senator Edward M. Kennedy (D-Mass.), still want the most generous benefits possible.

Hill Republicans say it's unlikely an ambitious reform plan can succeed unless Bush devotes substantial time and political capital to the cause. But the President is busy with foreign-policy flare-ups and a vexing economy. With little progress so far and lawmakers eager to deliver an antidote to the high cost of drugs, Plan B could soon emerge as Plan A. The Securities & Exchange Commission is ready to give corporate boards a dose of democracy. BusinessWeek has learned that the SEC is putting the finishing touches on proposals to make it easier for shareholders to nominate their own candidates for board seats on the official proxy ballot. Despite stiff opposition from Corporate America, the SEC is likely to give the proposals tentative approval in early October.

In July, the SEC suggested it would consider a two-stage process for getting outside nominees on the proxy. In the detailed plan, shareholders would first need to show that management and the board weren't responding to owners. The "triggering event" could be a majority vote on a shareholder resolution requesting access to the proxy ballot. Another trigger could be the company's failure to act on shareholder proposals that win majority votes and whose sponsors hold at least 1% of the outfit's equity.

Once either of those hurdles is cleared, shareholders could nominate candidates for at least two seats. The SEC may let them put up to 20% of director slots in play. To avoid chaotic contests, investors would have to agree on nominees. If they can't, the group representing the most shareholders would get to pick the insurgent slate. "We don't want to turn [this] into California," says a top official. CEOs fear that giving shareholders access to the proxy will crimp their agendas. But with the four SEC commissioners likely to support Chairman William H. Donaldson, final rules could be in place for 2004's proxy season.

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