Prescription Drugs

The President’s budget dedicates $190 billion over 10 years to add a prescription drug benefit to Medicare and reform the program. Last year, the Congress passed a budget resolution providing for $300 billion over 10 years for prescription drugs and Medicare reform, or over 50% more than the President’s amount. (H. Con. Res. 83, Section 211.) Recently, Speaker Hastert stated that his budget would seek $300 billion for Medicare and prescription drugs again this year. (Robert Pear, "Bush Proposed Drug Benefit for the Low-Income Elderly, The New York Times, January 29, 2002, p. 18.)

Of the $190 billion that the President sets aside for Medicare, only $77 billion is specifically allocated for prescription drugs. (Most of the remainder is set aside for Medicare "modernization," described in the next section.) This $77 billion would be used to provide drug coverage to low-income seniors through the Medicaid program. According to the Administration’s estimates, the low-income benefit would help at most 3 million of the more than 38 million Medicare beneficiaries. (Budget, p. 152.)

Money for the low-income benefit would be phased in slowly – $1.2 billion would be available in FY2003, for a total of $20.7 billion from FY2003 through FY2007. (FY2003 Budget in Brief, Department of Health and Human Services, p. 63.) States could use this money to extend prescription drug coverage to seniors from 100% to 150% of the Federal poverty level. This money would be provided at a 90% Federal matching rate; for every $10 a state spent, it would receive $90 from the Federal Government.

It is unclear whether states that decide to take up this option would need to provide the Medicaid drug benefit and its accompanying cost-sharing protections, or if states could provide an alternative benefit package, such as those currently available through state-only drug assistance plans. The 26 state-only drug assistance programs that are in place today vary widely in terms of benefits offered. The General Accounting Office reported in 1999 that some states limited the type of drugs covered. For example, Rhode Island offered drugs only for certain conditions and Maryland covered only maintenance drugs. All states imposed some form of cost-sharing, from annual fees ($25 in Connecticut, up to $280 in New York), to monthly deductibles ($35 in Minnesota), to copayments ($25 in Wyoming), to coinsurance (20% in Maine, 50% in Vermont). (General Accounting Office, State Pharmacy Programs: Assistance Designed to Target Coverage and Stretch Budgets, September 2000, pp. 12-13.)

The budget does not specify whether states that already provide drug assistance to seniors between 100% and 150% of poverty would be subject to a maintenance of effort requirement. In other words, it is unclear whether states would be required to maintain their existing level of state funding for prescription drugs for seniors, or whether states could replace their previous spending with the 90% Federal match.

The budget describes states as having the option to provide drug-only coverage to Medicare beneficiaries up to 100% of poverty at the regular Medicaid match rate. (Budget of the United States Government, FY2003, p. 152.) This statement implies that in order to access the 90% Federal match rate, states would first have to provide prescription drug coverage for seniors up to the poverty level. Only 17 states and the District of Columbia cover this population, so 33 states would need to expand drug benefits to these seniors using the regular Medicaid match rate, which averages about 57%. In other words, states would need to spend a greater proportion of their own funds before they were eligible to tap into the $77 billion available for the low-income benefit. Again, it is unclear from the budget documents whether states would need to provide seniors under 100% of poverty with the Medicaid drug benefit, or if states could provide something else.

The budget mentions that states would have the option of expanding drug coverage to additional low-income seniors through the model Medicaid drug waivers that the Administration is developing. Because administrative waivers must be budget neutral, no Federal money is provided for expanding drug coverage to seniors above 150% of poverty. The budget describes the waivers as permitting states to reduce drug expenditures; presumably these savings are what would enable states to expand coverage. (Budget, p. 153.)

The President’s budget would subject a Medicare benefit to means-testing, a concept which has been rejected by previous Congresses. A senior with an income over 150% of the Federal poverty level – $12,885 a year for an individual, or $17,415 a year for a couple – would not be eligible for this drug benefit. In addition, there is no guarantee that any of these seniors would receive prescription drug assistance at all, because it would be up to the states to decide whether or not to create a low-income benefit.

The President’s budget seems to assume that a Medicare prescription drug benefit will be enacted at some point, since a prescription drug benefit is described as part of Medicare modernization (see discussion below), but the budget includes no proposal for a comprehensive drug benefit for all seniors.

Medicare Modernization

Beginning in 2006, the President’s budget sets aside $116 billion, or over 60 percent of the total $190 billion requested for increased Medicare funding for prescription drugs and reform, for Medicare modernization. The budget does not explain what "modernization" is, but it mentions that "comprehensive Medicare modernization [includes] a subsidized prescription drug benefit, better insurance protection, and better private options for all beneficiaries." (Budget, page 151.) While the budget is silent on the details, the President has publicly endorsed the "Tripartisan Plan" put forward by Representative Thomas and Senators Breaux and Jeffords, which would privatize Medicare by turning it into a voucher system. Many experts believe that such a system would encourage private health plans to design their benefit packages to attract only healthy seniors who present the least financial risk. Less healthy beneficiaries who remained in the traditional fee-for-service Medicare program would then see their costs increase rapidly, a situation that would worsen as more and more seniors left fee-for-service because they could not afford to stay. (Jacob Hacker and Theodore Marmor, "Misunderstanding Medicare Shifts Risks to Elderly," Baltimore Sun, April 8, 1999.)

Medicare+Choice

The President’s budget spends $3.7 billion over the next 3 years to increase payments to Medicare+Choice plans in order to stop the exodus of plans from the program. A footnote in the budget explains that once Medicare modernization begins in 2006, these increased payments for Medicare+Choice would end (Budget, p. 152.), implying that a portion of the $116 billion for modernization would be used to restructure payments to plans. A small portion of this amount – $0.4 billion – is set aside for incentive payments to coordinated care plans, which are not defined in the budget. These payments for coordinated care plans would continue after Medicare reform was implemented, at a cost of $50 million or less.

The President’s document states that Medicare+Choice plans provide additional benefits that are important to seniors, such as prescription drug coverage and vision and dental care. Instead of creating defined benefits that would be available to all seniors, whether in Medicare+Choice or fee-for-service, the President’s budget opts to give bonus payments to encourage new plans to enter the Medicare+Choice program and prevent current ones from leaving. (Budget, p. 154.)

A similar policy was followed in the 106th Congress. The Benefits Improvement and Protection Act of 2000 (BIPA) increased payments to Medicare+Choice plans in the hopes that these plans would keep participating in the Medicare. Another intent was that these extra payments would translate into increased benefits and lower cost-sharing for seniors. However, the Medicaid+Choice provisions in BIPA did not achieve the desired result. In 2001, 934,000 beneficiaries saw their Medicare+Choice plans exit the program. (Budget, p. 153.) A report prepared by the General Accounting Office in December 2001 found that little if any of these increased payments were passed through to seniors. Payments to Medicare+Choice plans were estimated to increase by almost $1 billion in 2001, but over 70% of plans chose not to use this money to improve benefits. (General Accounting Office, Medicare+Choice: Recent Payment Increases Had Little Effect on Benefits or Plan Availability in 2001, November 2001, pp. 2-3.)

The Supplemental Medical Insurance Trust Fund

The President’s budget makes misleading statements about the status of the Supplemental Medical Insurance (SMI) trust fund, which is used to finance Medicare Part B benefits such as doctor visits and outpatient hospital services. The budget claims that the "SMI trust find is running a large shortfall, since premiums collected from beneficiaries cover only about 25 percent of program costs." (Budget, p. 155.) However, Congress never intended for beneficiary premiums to cover all Part B costs or the SMI trust fund to be self-financing from year to year. By definition, the SMI program, or Part B benefits, are to be financed from both contributions from beneficiaries’ premium payments and funds appropriated by the Federal government. (§1832(a) [42 U.S.C. 1395k].) The statute sets beneficiary premiums at 25% of the cost of Part B services, and the remainder of the cost is covered by appropriations from the Federal Government in the form of general revenue transfers to the SMI trust fund. Because general revenues are transferred every year and beneficiary premiums are collected every year, there can be no deficit or shortfall in the SMI trust fund.

Medicare Beneficiary Appeals

The budget states that the President chose not to allocate money to implement the appeals provisions of BIPA. (HHS Budget in Brief, p. 76.) These provisions were designed to reduce the amount of time that beneficiaries must wait for a decision on a Medicare claims appeal, as well as to grant beneficiaries new rights to request an expedited appeal of a termination of home health, skilled nursing facility, or rehabilitation care. BIPA requires that these appeals provisions be implemented by October of 2002.

Medicare Physician Payments

Medicare payments to physicians will decrease by 5.4% in 2002, and another large decrease is expected in 2003. These decreases are the result of the formula that Medicare is required to use to update physician payments from year to year, which was designed to constrain growth in spending. The Medicare Payment Advisory Commission (MedPAC), has pointed out several flaws in the formula and recommend that Congress replace it with another update mechanism. (MedPAC, Report to Congress: Medicare Payment Policy, March 2001, pp. 21-31.) There is increasing anecdotal evidence that physicians are choosing not to accept new Medicare patients as a result of payment decreases, and seniors are concerned that their access to care may be compromised. (Testimony of Martha McSteen, President, National Committee to Preserve Social Security and Medicare, before the Health Subcommittee, House Energy and Commerce Committee, February 14, 2002.)

Correcting the flaws in the payment formula to preserve beneficiary access in the coming years would cost money. This fix would involve more than providing a temporary increase in payments to physicians for a year or two, because the underlying formula for calculating payment updates would need to be rewritten. While the exact cost of such a correction is unknown, it is likely to fall in the order of tens of billions of dollars over five years.

The President’s budget acknowledges that fluctuations in physician payments have caused concern, but it includes no money to revise the formula. Instead, the budget states that the Administration will work with Congress to smooth out payment adjustments in such a way that these revisions are budget neutral across all providers. (Budget, p. 156.) This statement implies that any money needed to revise the physician payment formula would have to come from unspecified cuts to other providers, including hospitals, nursing homes, and home health agencies. By contrast, H.R. 3351, sponsored on a bipartisan basis by Chairmen Tauzin and Bilirakis and Ranking Members Dingell and Brown, would hold cuts in physician payments to 0.9% for 2002 (as opposed to 5.4%) until Congress had time to rewrite the formula, without requiring reductions in payments to other providers. However, H.R. 3351 would also require additional spending.

With exception of the $3.7 billion allocated for Medicare+Choice plans, the President’s budget contains no identifiable sources of extra revenue among provider payments or among all Medicine funds combined. It does not appear possible to stabilize physician payments without setting aside more revenue for Medicare than the President's budget provides. If payments to physicians are not corrected, there is a real risk that seniors will find it more difficult to obtain care.

The budget documents discuss at length the Administration’s plans to reduce the number of uninsured Americans through expansions of Medicaid and CHIP. The Administration’s Health Insurance Flexibility and Accountability (HIFA) Demonstration Initiative, which was announced in August 2001, grants states more flexibility with Medicaid and CHIP rules to expand coverage to uninsured populations. However, the President’s budget provides no new funds for states to cover more uninsured people through these waivers. Presumably, the only way that states can expand coverage through Medicaid and CHIP is to reduce benefits or raise costs for people already covered under these programs. For example, HHS just granted Utah a HIFA waiver, which permits the state to impose cost sharing, including a $100 inpatient hospital deductible, on certain adults at or below 55% of poverty (an income of $7,087 a year) in order to expand coverage to certain adults at higher income levels.

The President’s budget places additional fiscal pressure on states by assuming in its baseline the implementation of an administrative proposal that would limit the maximum amount that states can pay certain providers (upper payment limits) like hospitals and nursing homes. (Budget, p. 159.) This proposal will reduce Medicaid spending by an estimated $55 billion over 10 years ("HHS Issues Upper Payment Limit Regulation," HHS Press Release, January 5, 2002.), at a time when states are experiencing decreased tax revenues and increasing numbers of people in need of health coverage. States will have great difficulty maintaining their current Medicaid and CHIP programs, let alone expanding them, without any new funds. In fact, several states are planning on cutting benefits and eliminating certain eligibility categories in order to balance their Medicaid budgets. (Robert Pear, "Grim Choices Face States in Cutting Medicaid to Balance Budgets," The New York Times, January 14, 2002.)

The President’s Budget allows states several extra several extra years (until 2006) to use $3.2 billion in CHIP funds that are scheduled to revert to Treasury at the end of FY2002 and FY2003. (HHS Budget in Brief, p. 70.) The President’s budget outlines how this extension of expiring funds will allow states to maintain their current CHIP enrollment and expand coverage to previously uninsured people. Elsewhere in the budget documents, however, this extension in the availability of CHIP funds is explained as a savings to Medicaid. (HHS Budget in Brief, p. 66.) The budget assumes that if the CHIP funds expired, children who lost CHIP coverage would become eligible for Medicaid. It is unclear whether the extension of these CHIP funds would actually increase coverage or simply keep children in one program versus another.

Transitional Medical Assistance

The Transitional Medicaid Assistance (TMA) program, which provides Medicaid coverage for families leaving welfare for work, is set to expire at the end of this year. TMA gives crucial support to people as they move to gain economic independence. Studies of people who leave welfare have found that families who lose Medicaid coverage are a great risk of becoming uninsured, since they have limited access to private coverage. Of all the families who leave welfare for work, only one in six enroll in private health insurance. (Jocelyn Guyer, Health Care After Welfare: An Update of Findings From State-Level Leaver Studies, Center for Budget and Policy Priorities, August 16, 2000, pp. 20, 25.) Recent studies have shown that providing coverage for parents increases coverage of children as well, so extending coverage to uninsured parents is consistent with the goal of reducing the number of uninsured children. (Ed Lazere, Shawn Fremstad, and Heidi Goldberg, "States and Counties Are Taking Steps to Help Low-Income Working Families Make Ends Meet and Move Up the Economic Ladder," Center on Budget and Policy Priorities, November 27, 2000, p. 8.)

The President’s Budget proposes extending TMA for one year rather than making it permanent. No explanation is given as to why the Administration decided to continue the program for one year only, although one possibility is that the Administration has chosen to understate deficits in the out years.