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Our Later Years

The Medicare Prescription Drug Improvement and Modernization Act

For more than 38 years, the Medicare program has successfully provided basic, nearly universal health coverage to Americans who are over age 65 or disabled. Because women live longer, the majority of Medicare beneficiaries are women. Medicare’s success derives from its social insurance model, under which nearly all working Americans and all beneficiaries contribute toward a national pool that shares both risks and resources. That is why Medicare can provide a guaranteed standard of health care to the nation’s highest consumers of care at an administrative cost far lower than private insurance that covers younger and healthier Americans.

The Medicare Prescription Drug Improvement and Modernization Act, passed in 2003, represents a major restructuring of Medicare. It began the segmentation of the strong national risk pool of more than 40 million individuals into smaller regional groups. The law provides subsidies to convince private companies to offer a complex array of plans whose benefits and costs are not specified in the law. The program is designed to draw or even force seniors out of Medicare as we know it and into competing private health insurance plans. In the past, similar private health plans have lost money on Medicare enrollees and eventually dropped the insurance plans.

The program took political cover from the demands of busloads of U.S. seniors crossing the border to buy affordable prescription drugs in Canada. In the past, the main Medicare program did not cover drugs. Beneficiaries could buy private supplemental plans to get coverage, but even these became unaffordable for many as drug prices skyrocketed. In 1997, relaxed regulations allowed drug companies to advertise directly to consumers, and that helped inflate drug prices. A well-financed army of drug company lobbyists saw to it that the 2003 Medicare law did not threaten the windfall.

The new Medicare benefit for prescription drugs is scheduled to begin in 2006. While it may offer some improvements for low-income seniors, the benefits, cost and access are not guaranteed in the law. The benefit has a complex and confusing structure, containing provisions such as holes in coverage and new types of private, prescription drug-only plans. Most critically, it directs billions in federal subsidies to pharmaceutical companies while expressly prohibiting effective cost control measures. Drug re-importation from lower-cost countries like Canada is unlikely under the bill. The federal government is specifically banned from negotiating for lower prices with the pharmaceutical companies as do other federal agencies like the VA. Seniors could ultimately end up paying more than we do today for medications.

For the first time, the part of Medicare that pays for doctor visits and other outpatient care (Part B) will be means-tested: People will contribute based on income, beginning in 2007. This will erode the equitable nature of the program. It will also allow health plans to “cherry pick” wealthier – and hence likely healthier – enrollees. 

Finally, the law sets an artificial and arbitrary cap on Medicare financing. Once this limit is hit, which is considered inevitable, an “emergency” will be artificially created, and seniors will be forced to accept large benefit cuts or cost increases.

Interim Prescription Drug Discount Card

An interim program beginning in 2004 allowed seniors to purchase a “Medicare- approved” drug discount card from private companies, available until the new prescription drug benefit becomes available in January 2006. The cost of the card cannot be higher than $30 per year. Low-income seniors below 135% of  poverty will receive some subsidies.

There is no requirement that cards offer a minimum discount, or cover all Medicare eligible drugs. Companies may change which drugs are covered and how big a discount they provide at any time. Prices can change on a weekly basis. Once a beneficiary chooses a card, she cannot change until 2005.

Prescription Drug Benefit

On January 1, 2006, a new, voluntary prescription drug benefit will become available as Part D of Medicare. The new benefit will be financed by federal Medicare dollars, which will pay private companies to administer the program.

Beneficiaries will pay a monthly premium plus a deductible, as well as 100% of drug costs within certain dollar limits (the “doughnut hole”). These charges will all rise over time. The initial costs would be:

In addition to the annual premium of $420 1 

 If your drug costs are:  You pay:  Up to: Cumulative total
amount out of pocket:
 $0 - $250  100%  $250  $250
 $251 -  $2,250  25%  $500  $750
 $2,251 - $5,100  100%  $2,850  $3,600
 Over $5,100  5%  No limit  $3,600 plud 5% of costs
above $5,100

The initial enrollment period will last six months, beginning in November 2005. Seniors who sign up after the initial enrollment period will be assessed a permanent penalty on their premiums of 1% for each month they opt out of coverage. Seniors who opt for the benefit will no longer be able to purchase drug coverage through private Medigap insurance.

Currently some low-income seniors are also covered by the public Medicaid program, which offers drug coverage. Seniors eligible for both Medicare and Medicaid will get their drug benefit paid for under Medicare instead of Medicaid, though the Medicaid program will continue to administer the benefit.
Private insurance plans that provide the drug benefit, including managed care plans, will receive subsidies to minimize the amount of risk they bear for the program. The subsidies could initially lower the cost of these private plans. The traditional fee-for-service Medicare program will not be permitted to offer prescription drug coverage, except as a fallback. This erodes support for traditional fee-for-service Medicare and pushes seniors into private managed care plans with lower premiums and better drug benefits, even if they would prefer to stay in the traditional Medicare plan.

Cap on the Cost of Medicare Program

The law requires Medicare trustees to report whether the program is projected to rely on general revenues for 45% of its total costs for two years in a row. Once this happens, an “emergency” will be artificially created, and seniors will be forced to accept large benefit cuts or cost increases. The 45% threshold is an arbitrary number. There is no research indicating that is an appropriate level of funding by the government.

Establishment of a 45% federal contribution threshold will inevitably accelerate the insolvency date for the program. The combination of lack of cost containment and increased subsidies to providers virtually guarantees that the federal portion of the costs will rapidly reach the 45% threshold. 

Changes to Medicare Part B

Medicare has two components: (1) Part A, which covers hospital expenses; (2) Part B, which covers physician and outpatient expenses. Part B is financed partly by beneficiaries’ monthly premiums, which were set to cover no more than 25% of program costs. The premium is the same for all beneficiaries. Beginning in 2007, Part B premiums will begin to be means-tested. When fully phased in after seven years, singles with incomes above $80,000 ($160,000 for couples) will pay premiums equal to 35% of program costs; seniors above $100,000 will pay 50%.

Medicare was designed to be a universal program, not a welfare program for the poor. Means testing Part B erodes the equitable, fundamental nature of the program. Because the program will be means tested, the IRS will share income tax information not only with Social Security, but also with the private companies providing the managed care options, making it easier for plans to “cherry pick” wealthier and likely healthier enrollees.

Privatization of Medicare

Under the new law, managed care plans will bid for Medicare beneficiaries. Seniors who chose a plan that is less expensive than a specified “benchmark” rate would be allowed to pocket 75% of the difference. Those who chose a more expensive plan would be responsible for paying any additional costs.

Beginning in 2010, up to six Metropolitan Statistical Area (MSAs) will be selected by the government to participate in a six-year demonstration project. To entice the private sector into the experiment, the bill increases payment to private managed care plans by 20% to 30%, using a $12 billion discretionary fund. The resulting lower premiums will encourage seniors to join private managed care plans instead of traditional fee-for-service Medicare. 

Under a similar failed experiment with Medicare Plus Choice, seniors became dependent on private companies, only to be abandoned when those companies decided their profit margins weren’t big enough.

The demonstration project breaks up the large and successful nationwide risk pool. Under the demonstration project, each region will have its own risk pool, each with fewer participants than the national pool. The oldest and sickest will likely opt to stay in traditional Medicare. The risk of insuring them will be spread among fewer people. With no large risk pool to keep costs low and with sick, expensive seniors concentrated in FFS, seniors in a demonstration project will see premiums increase.

1 Families USA. Q&A;: Understanding the New Medicare Prescription Drug Benefit.  Spring 2004. http://www.familiesusa.org/site/DocServer/Q_A_.pdf?docID=2768,

For additional information and updates on Medicare, see Medicare resources at the Kaiser Family Foundation website. 

Written by: Ellen Shaffer
Last revised: June 2004

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