The Coming Showdown over Medicare

Can Bush get a drug benefit -- and reform? Not without a fight

Fresh from his big win on tax cuts, President George W. Bush isn't pausing to catch his breath. The next item on his to-do list: an ambitious $400 billion plan to create a prescription-drug benefit for seniors. On the surface, writing a big check to pay for medicine for the silver-haired set shouldn't be hard. After all, what pol doesn't love to pass out money to voters?

But because the White House insists on tying a drug plan to sweeping Medicare reform, the coming showdown over the future of the popular program will be hugely divisive. Its outcome will shape the way the U.S. cares for both today's 40 million seniors and the 77 million baby boomers who will begin retiring in just five years. That means big opportunities, and big risks, for drug and insurance companies. What's more, it will have profound implications for the federal Treasury. "Can Medicare absorb the demographic shock of the baby boom generation and continue to deliver high-quality medical care?" asks the Heritage Foundation's Robert E. Moffit. "That's going to be the big debate."

The political stakes are just as big. For years, Democrats successfully argued that they are the party best able to protect Medicare. But if Bush and his GOP allies can win approval of a drug benefit before the 2004 election, they will have neutralized a perennial Democratic campaign issue. That's why some Dems are already accusing the GOP of trying to kill Medicare. And it's why Hill Republicans hope to complete a bill by summer's end.

Most health experts agree that some reform is needed. This year, the program will cost taxpayers $263 billion. In a decade, the price tag is expected to hit nearly $500 billion, according to the Congressional Budget Office. Worse, for all that money, Medicare does not cover drugs, offers little protection against costly long-term hospitalization, and is slow to O.K. new diagnostic tests.

But Washington is deeply divided over how to fix the program. In February, Bush proposed giving retirees a new drug benefit plus subsidies to buy insurance from private managed-care providers. But to get the new drug coverage, seniors would have to trade in their traditional Medicare for managed care. One Administration goal: to reduce overall costs. The plan still has strong support from many Hill conservatives, but collapsed in a hail of criticism from GOP moderates and rural lawmakers, whose voters have limited access to managed-care networks.

Moreover, liberal Democrats argue that senior health care based on private insurance would shift too much of the cost burden to the elderly. Today, taxpayers subsidize most of those added expenses. As a result, these Dems want simply to graft a generous drug benefit on to government-run Medicare.

So is there a middle ground? Senate moderates, such as Finance Committee Chairman Charles E. Grassley (R-Iowa) and John B. Breaux (D-La.), are looking for a compromise. With the quiet support of Senate Majority Leader Bill Frist (R-Tenn.), they hope to come up with a deal within the next week. Their idea: Give seniors the option to buy private insurance, but let them keep old-style Medicare if they choose. Retirees would get the same drug benefit, even if they stay in basic Medicare. But private insurers could offer improved coverage for hospitalization and preventative care, in hopes of drawing seniors in. States would get more money to care for the poor elderly through Medicaid. And both the shift to private insurance and a drug benefit would be slowly phased in. While Breaux would start some benefits in 2004, for instance, reforms would begin in 2006.

In the House, Republicans such as House Ways & Means Committee Chairman Bill Thomas (R-Calif.) are looking at yet another variation on Medicare reform and drug coverage. Thomas wants to let private insurers operate Medicare. But he would beef up basic benefits, including drug coverage. Seniors could buy extra insurance if they chose.

If Congress can't agree on such dramatic reforms, lawmakers may settle for a stripped-down plan that provides total drug coverage for low-income seniors, and for others with extremely high pharmacy bills. Restructuring would be put off until after the 2004 elections. But Thomas is cool to such a fallback: "If we do that, we would have failed."

One reason reaching a deal will be so tough: Transforming Medicare into a private, managed-care model creates big winners -- and big losers. Pharmaceutical companies are wary of negotiating prices with Washington, which could hammer margins. Yet at the same time, Big Pharma is salivating at the prospect of increased sales to millions of newly insured seniors. "The industry's top priority is getting a Medicare drug benefit," says Ian D. Spatz, vice-president for public policy at Merck & Co. "We'll get some cost containment. [But] without that, the government will come in and set prices."

Private insurers have the same mixed feelings. They're eager to sell policies to seniors, but worry that government-subsidized premiums won't be high enough to make the business profitable. Says Karen Ignagni, president of the American Association of Health Plans: "They have to make sure the public funding keeps up with the cost."

For their part, seniors groups such as AARP May accept managed care along with basic Medicare. But only "if it has a more adequate drug benefit and nothing that undermines [traditional] Medicare," says Policy Director John Rother. The cost: at least $500 billion.

And that's another reason a deal will be hard to strike. Even a $400 billion benefit would provide just a 20% subsidy for seniors, according to the CBO. A plan modeled on typical employer-based drug coverage would cost twice as much, says Paul B. Ginsburg, president of the Center for Studying Health System Change, a Washington-based nonpartisan research group.

As a result, $400 billion would buy a low-rent plan, with a premium of roughly $35 a month, a deductible of $275, and stiff co-payments. And those with high pharmacy bills -- say up to $5,000 per year -- could find themselves stuck paying big out-of-pocket charges until full coverage kicks in.

Will privately run managed-care plans save money? The Administration says it will. But recent studies by the CBO and the Kaiser Family Foundation, a nonpartisan research group, dispute that. Still, managed care has some potential advantages. It could provide comprehensive benefits in a single policy, eliminating the need for seniors to buy costly supplemental coverage.

Key lawmakers are increasingly confident that Congress can pass some Medicare drug bill soon. And a bill-signing ceremony before summer is out would be another great success in an extraordinary year for George Bush. But before a bill reaches the President's desk, Congress will have to decide how big a role it wants private insurance to play in delivering those benefits.

By Howard Gleckman in Washington, with Amy Barrett in Philadelphia

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