Another Medicare catastrophe?

Posted: Aug 03, 2006 12:01 AM

This year, Medicare began paying 68 percent of the cost of prescription drugs for seniors who sign up for Part D, or about $1,750 per enrollee by one estimate. You might think that giving away so much federal money would be politically popular, at least with those on the receiving end. But it doesn't always work out that way.

A Dulko Research poll in April did show that 58 percent of seniors who had enrolled in the plan approved of it at that time, although a plurality of registered voters did not. Unfortunately for Congress, elections are not held in April, when many had just signed up. The mood has soured since then as more and more seniors fell into the infamous "hole in the doughnut." A recent New York Times headline tells the tale: "Medicare Beneficiaries Confused and Angry over Gap in Drug Coverage."

Unsubsidized Medigap used to cover half of my wife's drug bills all year. Since switching to Medicare Part D, all of her drug costs have been out-of-pocket since April 15th, yet we owe monthly premiums to Medicare for these non-benefits. Want to switch back to Medigap? Tough luck -- that's illegal.

The new drug plan has a ridiculously low deductible of $250 and a co-payment of just 25 percent on drug bills from $251 to $2,250. Then there is no insurance at all for the next $2,850. Since this scheme covers three-fourths of routine drug bills, which is hugely expensive, there was nothing to spare for unexpectedly large expenses. Politicians figured more votes could be bought by covering the little stuff, because there are many seniors with yearly drug bills below $2,250 and relatively few with more serious expenses. But those with small drug expenses today nonetheless worry about larger expenses tomorrow, and the unknown is what genuine insurance is all about. Besides, politicians have miscalculated before.

In July 1988, the House passed the Medicare Catastrophic Coverage Act by an overwhelming 328 to 72 majority. That ill-fated law promised future coverage for prescription drugs with a $600 deductible in 1991 and co-payments that were supposed to drop from 50 percent to 20 percent after 1993. Sixteen months after that law passed, the House voted 360 to 66 to repeal it. Why? People discovered these distant promises were to be largely financed by a surtax of up to $800 on seniors who paid the most in income tax -- meaning a massive transfer payment from those who worked or saved the most to those who did neither.

In 2003, Congress apparently took the wrong lesson from that 1988 fiasco, figuring extra Medicare benefits might still attract AARP support so long as the cost could be concealed. As Michael Kinsley rightly noted, the new drug benefit was enacted "without even a theory about how it will be paid for." We have a special payroll tax earmarked for Medicare, yet no congressman dared suggest that increased Medicare benefits ought to be even partly financed by an increased Medicare tax.

Many of us oldsters were quite willing and able to buy catastrophic drug insurance without all these unfinanced subsidies. The trouble was, it wasn't legal.

A year after repealing its 1988 catastrophic catastrophe, Congress moved in the opposite direction and prohibited the sale or purchase of insurance for major prescription drug expenses. Congress then designed and mandated 10 standardized Medigap policies which prohibited coverage for major drug bills, yet required insurance companies to pay for expenses that should never be insured -- deductibles. Only the two costliest Medigap policies were permitted to offer any insurance for prescription drugs, and those policies covered only half the cost of the first few thousand dollars.

An otherwise interesting paper by David McAdams of M.I.T. and Michael Schwartz of the University of California at Berkeley, about several perverse incentives of the new drug benefit, claims that "private markets have failed to provide meaningful stand-alone prescription drug coverage for seniors." Yet this was a failure of government, not markets. Private markets were prohibited by law from providing such coverage. Medicare Part D, by contrast, covers the largest and smallest drug bills too generously, leaves a hole in the middle and adds another $8 trillion to the already unbearable load of unpayable promises to future retirees.

Ironically, these new subsidies to producers and consumers of prescription drugs could easily prove to be a political liability for Republican incumbents in November. Seniors who feel deceived and pushed around can be extremely angry and vocal while the mildly satisfied are more or less indifferent and stay home. Some in Congress may offer to fill the hole with more of that money they don't have, but younger taxpayers know who ends up with such unpaid bills. And the perennial Democratic favorite -- trying to shift most expenses to the loosely defined "rich" -- is precisely what killed the 1988 plan.

Assuming this whole impetuous venture does not just wind up summarily scrapped, like its 1988 precursor, any politically viable repair is likely to require two cheap and simple changes. First, allow people who switched from a Medigap policy with drug coverage return to such a policy if they absolutely despise their experience with Part D. Second, allow anyone of any age to buy (and insurance companies to sell) a less-generous "catastrophic" policy to cover 80 percent of drug bills in excess of $5,100 a year on mutually agreeable terms with no federal subsidy. In other words, give freedom a chance. It works.