Tommy Thompson on Fixing Medicare

On the key issue of insurers' participation, the HHS Secretary says the vast potential market will make it difficult not to be a player

Tommy Thompson, Secretary of the Health & Human Services Dept., is in the vortex of the Capitol Hill battle over reform of Medicare, the federal health program for seniors, and Medicaid, the joint federal-state medical system for the poor. In late June, the House and Senate passed competing versions of a Medicare-reform plan, including a $400 billion drug benefit. They hope to send a final version of the bill to President George Bush by fall.

While the bills have some differences, especially in how much competition they would eventually allow between private managed-care companies and traditional fee-for-service Medicare, they take a similar approach. Each would create a drug discount card that seniors could use, starting in 2004, to reduce prescription costs. Beginning in 2006, retirees would be able to buy new drug insurance through private companies for a premium of about $35 a month. Most seniors would either buy that coverage as an add-on to old-style Medicare, or they'll be able to purchase full medical insurance, including doctor and hospital care as well as drugs, from private managed-care players.


  A key issue is whether insurers will be willing to offer either stand-alone drug coverage or broader medical packages. Many carriers worry that they won't be able to make a profit offering government-mandated plans. They point to a late-1990s managed-care experiment called Medicare+Choice. In that program, Washington refused to increase payments to insurance outfits sufficiently to cover rapidly rising health costs, and many insurers simply dropped out.

Thompson, the former GOP governor of Wisconsin, met on July 2 with BusinessWeek Washington Correspondents John Carey and Howard Gleckman to discuss action on both Medicare and Medicaid. Thompson argued that seniors want more choice in Medicare health plans. And despite concerns that insurers will be reluctant to offer new Medicare managed-care plans, Thompson insists that many carriers will eventually participate (see BW, 7/14/03, "This Medicare Reform Is No Cure").

He concedes, however, that the current versions of Medicare reform don't do enough to encourage companies to keep retirees on their health-insurance rolls. Thompson blames congressional Democrats for stalled efforts to restructure Medicaid. He also says his office's efforts to encourage all Americans to exercise, lose weight, and quit smoking can save the health system billions of dollars. Here are edited excerpts of that interview:

Q: What would the new legislation fix?


The new legislation…is going to be a tremendous help to older Americans, who are having a very difficult time purchasing the drugs they need. It will be extremely appreciated by the senior citizens of America. Things have changed a lot since 1965 [when Medicare was created] -- except Medicare.

There are three major problems [with Medicare now]: There's no competition, no choice. I, as a federal employee, [can choose insurance coverage,] and we have to make certain we give the same choices to our senior citizens. The second big problem is that Medicare doesn't cover drugs. It will cover the heart operation -- but not the drugs to prevent the heart disease. The [third] problem with the current system is that it's going broke.

The legislation doesn't have all the reforms I would like, but it certainly is a step in the right direction. It will have to be addressed again in the future, but at least we can put the reforms in and put Medicare on a more solid financial footing.

Q: Conservatives say the legislation doesn't really create a market. Do they have a point?


A market is being created. A lot of senior citizens have indicated to us they want to have a choice. There are 42 million Americans right now in Medicare. If you're going to be in the health-insurance business, how could you not get involved in bidding on this growing population? How could you just write off this huge bloc of business?

I don't think the conservatives realize the sheer numbers and the potential for this market. The size and the needs of that population are going to encourage a lot more competition.

Q: But insurance companies are holding back. None of them have said they'll participate.


We've contacted several large [Blue Cross plans]. They've indicated their interest. But how could you ever expect an insurance company to say it will definitely bid on a product not knowing the final bill and how the regulations are going to be set up in the next two years?

We went out and solicited companies, and they told us: "We have to see the details." They got burned in Medicare+Choice. They're reluctant to go where they potentially could lose money. So I can understand that we're not going to have a lot of people standing up saying they're going to bid right now. Once we get the regulations out, companies are going to look at the potential of a growing market, and they're going to be hard-pressed not to be players.

Q: But couldn't they just get burned again?


Sure, but the likelihood isn't very high. Medicare+Choice was growing. Then Congress cut back on the reimbursement in areas where it was doing well in order to shift money to rural areas where it couldn't function. As a result, the plan didn't get any takers in the rural areas, and they starved the suburbs and urban areas. Is that kind of problem possible? Sure. But the probability [of it happening with the new Medicare plan] is so much lower.

Q: Liberals say the drug benefit is too skimpy. What's your response to that?


Look at a senior citizen who has to make a choice right now of not being able to purchase drugs and [must] split the pills or take them in an irrational way because of the cost. The federal government is going to pay 80% [of drug costs] in the House bill and 50% in the Senate bill. I can't imagine that any senior who's having financial difficulties isn't going to jump at that opportunity.

And the lowest-income individuals -- [earning] up to 160% [about $15,000 a year for a single person] of poverty [level] in the Senate bill -- really are getting subsidized tremendously [under the proposed legislation]. Those under 135% of poverty [would pay] 3% of total [drug] costs. That's going to cover the vast majority of seniors.

Q: The House and Senate are struggling with ways to encourage companies to maintain retiree health benefits. How important is that to you?


It's very important. I don't think we've solved that problem yet. I don't have an answer, but we're working on that. We're trying to find language that would be much more beneficial for companies to stay in and not dump [retirees] on to the Medicare system, which could very easily happen. It's a problem that we have to try and find a solution to.

Q: Which do you like better, the Senate bill or the House bill?


There are positives and minuses in each proposal. Our job in the Administration is to wed the two and develop a package that's good at competition and big on reform and gives the maximum benefits to the lower-income population.

Q: Are provisions to encourage the use of generic drugs part of the push to help seniors?


The drug card that we hope to have set up and running by January of next year will reduce [seniors'] drug costs by between 20% and 25%. That would be a very positive step. We think the encouragement of generics -- something we've already done through the Food & Drug Administration -- is another positive thing. And with competition, [insurance] companies are going to be using their purchasing power with drug companies to also lower drug costs.

Q: Has Medicare been defused as a political issue?


It hasn't been defused yet because it hasn't passed. The President is going to get very positive marks from the public next year. This is one of those items that when you wed the policy with [good] politics, you come out very much a winner.

Q: Insurance companies worry that as costs rise, the pressure from Washington to hold down expenses will build. Drug companies fear they're going to end up with price controls. Do they have reasons to be concerned?


The drug companies are nervous -- and rightly so. There's definitely going to be a reduction in their pricing. The drug card is going to [mean] a reduction. When you have competition, that's bound to drive down the price as well. They also recognize full well that $400 billion to purchase drugs is going to pharmaceutical companies.

Q: What progress are you making with Medicaid reform?


Not as much as I would like. We met with 10 governors, and I thought the meeting went very well. But it has gone the other way now. I think they're getting a lot of pressure from members of the Democratic congressional delegation, which doesn't want them to do anything on Medicaid because of Presidential politics. We were making a lot of progress, and all of a sudden it stopped.

Q: Can the work you're doing on prevention [of illnesses] make a dent in rising health-care costs?


Absolutely. It's the future. We spend $155 billion a year on tobacco-related illnesses and $132 billion on diabetes, which can be influenced by diet and exercise. If we don't do something, that $132 billion will double in five years, to $264 billion.

And we spend $117 billion on obesity -- that's the fastest-growing disease. That's more than $400 billion on three illnesses. If you're really going to have an impact health-care dollars and the quality of life in America, you have to address those three big items. We have to lose weight, we have to exercise, we have to stop smoking or reduce smoking. If we do that, we'll have the biggest impact on health-care spending than anything else we can do.

Edited by Patricia O'Connell

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