Medicare's poison pill

February 22, 2004|By Pramit Mitra and Chris M. Herbst

THE MEDICARE prescription drug law not only provides insufficient benefits to seniors but also puts an enormous financial burden on younger generations.

Don't get us wrong, we are not against providing prescription drug benefits to seniors. But what we want to know is how the lawmakers who voted for this mammoth election gimmick intend to pay for it. The attitude of Congress, it seems, is "put it on the credit card."

In other words, it will be today's young workers who are expected to pay it off. And what guarantee do they have that the same benefits will be available when their time comes in about 30 to 40 years? None.

A number of surveys indicate that young professionals are ambivalent about the law. That's not surprising, since the full extent of the financial damage will not be apparent until at least the next decade, well beyond the time frame for assigning political blame. But that doesn't mean we have to wait to add the numbers.

And it's a gargantuan figure. Initial estimates from the Congressional Budget Office (CBO) suggested that it would cost about $400 billion over the first 10 years. But revised figures released by the Bush administration put it at $530 billion, an increase of 30 percent. This new estimate apparently hides significant additional costs arising from tax breaks to individuals who set up private accounts for medical expenses.

The new estimate will likely increase as the cost of drugs goes up and new medication becomes available. It will only add to the flood of red ink set in motion by the Bush tax cuts, the cost of war in Iraq, the economic downturn and 9/11. As anyone who has struggled to pay off his credit card knows, huge debts are never good. The same logic applies to our national account.

But even with the high price tag, the Medicare bill falls short of providing the necessary help to seniors. Instead, it's the employers, doctors and private providers of health plans whose coffers will be filled.

Retired people will have to pay a premium of about $35 a month. The coverage will kick in only after grandma has spent $250, and even then there will be a 25 percent co-payment, up to a total drug cost of $2,250. There is no coverage between $2,250 and $5,100. Only after grandma hits $5,100 does the government step in again. What's more, the average buyer of prescription drugs spends $3,167 annually, and this amount falls in the coverage gap. Translation: The average senior will be left with more expenses than savings.

In fact, some seniors will be worse off since their former employers may use the expansion as an excuse to limit the generosity of benefits or stop coverage completely. The CBO estimates that 2.7 million retired people may lose their employer-provided drug coverage despite the subsidies.

Further, the law prevents the government from negotiating lower drug prices, as is done in most developed countries, arguing that this will hamper free market forces. One final way in which seniors lose is through the ban on reimporting prescription drugs from Canada.

But there is even more bad news. As the baby boom generation starts to retire, the costs will balloon; the 20-year figure could reach a staggering $2 trillion, according to the CBO. Since this bill does not "pay for itself," (it will be funded out of revenues from current payroll taxes), it will likely become more difficult to save Social Security from insolvency.

Reformers had hoped the new prescription drug benefit would come with some effort to discipline a wasteful program. Instead, there is only limited means testing and a pilot study scheduled to test competition from the private sector. By the time today's twentysomething worker becomes eligible, he or she is most likely to see slashing of benefits and higher taxes. This is not a well-planned strategy but a shortsighted law that was designed to win the November election.

But there is good news: Debate on the law is far from finished, and it will likely undergo important changes.

Democratic candidates for their party's presidential nomination have signaled their intention to alter the benefits, suggesting that Medicare will be an important election issue. Sen. John Kerry of Massachusetts, the current front-runner, issued a four-step plan that seeks to remove some clout from the HMOs. Even conservative Republicans are angered by the drug benefit's larger-than-expected price tag.

Twentysomethings are well advised to join the growing dissent, for it is they who will have to swallow the bitter pill.

Pramit Mitra is a research associate at the Center for Strategic and International Studies in Washington. Chris M. Herbst is a doctoral student at the School of Public Affairs, University of Maryland, College Park.

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