New Medicare Drug Law – Beginning to Look Like a Bad Deal

September 20, 2004 – Bill Vaughan - who works for a consumer advocacy group - explains how the new Medicare drug law hurts the very people it is intended to help. New data released by the Medicare Trustees underscores his point. To this growing mountain of evidence that the drug law was a huge mistake, the Institute for America's Future adds a new report that finds the lowest-income Americans will actually pay more because of the law.

The new Medicare drug law is a financial - and political - disaster for the average senior and for younger taxpayers. Why? Because it totally fails to control or moderate prescription drug inflation.

This law basically requires Medicare to pay twice as much for drugs as the Department of Veterans Affairs (VA), Canadians and Europeans pay - which means that the benefit for seniors is woefully inadequate. Taxpayers will pay about half a trillion dollars for this new benefit over the next decade, seniors will get a “doughnut” and drug companies will be laughing all the way to the bank.

Decoding The Drug Benefit. When the prescription drug benefit starts in 2006, the first part of the benefit isn’t too bad: After they pay a $250 deductible, beneficiaries then pay only 25 percent of the next $2,000 in drug expenses. But once beneficiaries reach $2,250 in expenses, they are totally on their own - getting no help - stuck in what is called the “doughnut hole” until they have spent $2,850 of their own money out-of-pocket. Then, once they’ve had $5,100 (the $2,250 + $2,850) in prescription drug expenses, they qualify for very good catastrophic coverage where they only pay about 5 percent of the cost of each prescription. Of course, each beneficiary must still pay about $35 a month ($420 a year) in premiums. If a beneficiary's income is below $12,569, he or she will not be subject to the monthly premium or yearly deductible - however, many of these lowest income people will face higher out-of-pocket costs than they pay now.

However, one quipster has used this example to explain the drawback of the doughnut hole: It’s as if you buy cable TV policy for the year - you pay monthly premiums, but only get six months of programming in return. Understandably, seniors and people with disabilities in Medicare don’t like the doughnut hole. But they absolutely freak out when you tell them that - because of uncontrolled drug price inflation - that doughnut hole will balloon from $2,850 in 2006 to $5,066 by 2013 (the last year for which the Congressional Budget Office has provided estimates).

Newly released Medicare agency data documents the impact of soaring health inflation on seniors’ incomes.  The new numbers show that the average Social Security check that seniors get will rapidly be consumed by Medicare premiums, deductibles and co-payments.

In The Balancing Act, Seniors Lose. Its woefully inadequate drug benefit and gaping doughnut hole are the main reasons out-of-pocket Medicare expenses will take such a big bite out of Social Security checks. Of course, the fact that seniors used to pay for drugs out of their own pockets and will soon have drug coverage that is part of the Medicare program means that their total spending on drugs may go down. (How much those out-of-pocket spending levels will decrease will vary from individual to individual depending on their actual level of drug spending). But the huge amount that seniors will still have to pay out of their average Social Security check is proof that seniors will consider the law a financial - and therefore, political – failure.

What Can Be Done...NOW. Congress needs to improve the drug benefit. It can do that by stopping runaway drug price inflation so that the doughnut hole, premiums and co-payments don’t double in size every eight years. The first step on this road is to repeal the ban that prevents the federal government (the Medicare program) from negotiating directly with the drug companies to get the best prices. Direct negotiating is how the VA successfully gets drug prices that are about 50 percent lower than the prices seniors pay at drugstores. Yet incredibly, the new law prohibits Medicare from using this tool. Second, Congress should repeal the de facto ban on the importation of reasonably priced drugs from Canada and the European Union.

If Congress would take these two pro-consumer, pro-senior, pro-taxpayer actions, it would cut program costs roughly in half - or enable the current program to offer a benefit that is roughly twice as good as the one in the law as it stands today. Then, maybe seniors and their children would send their lawmakers thank-you notes instead of brick bats.

Bill Vaughan is director of government affairs for Families USA - a national nonpartisan organization that advocate health-care consumers.

Posted: 09/25/04