Analysis prepared by Democratic Staff, Committee on Energy and Commerce

The President’s budget dedicates $400 billion over 10 years to add a prescription drug benefit for seniors in managed care plans and to Medicare "reform." Last year, while the President’s Budget only included $190 billion for this purpose, the Congress passed a budget resolution providing $350 billion over 10 years for prescription drugs and Medicare reform. Based on the latest Congressional Budget Office estimates of drug spending, the bill that passed the House last year would cost roughly $405 billion this year. The President proposes to spend less than that on his entire Medicare "modernization" initiative.

The President’s plan provides no details on how the money would be allocated between prescription drugs and reform. The Congressional Budget Office 2003 baseline for drug spending by Medicare beneficiaries over the 10-year period is $1.84 trillion, meaning that the President’s plan would only cover a little more than 20% of seniors’ anticipated costs over that period.

Like the previous year’s budget, the FY 2004 budget does not include any specific details on the Medicare drug benefit, such as when the drug benefit would start versus when the reforms would start, how much beneficiaries could expect to pay in premiums, or how much beneficiaries could expect to pay for each drug. This plan includes an interim low-income drug benefit, but unlike the one in last year’s budget, this proposal would means-test Medicare. The proposal would provide actuarial value of $600 for seniors up from 0-135% of poverty ($300 from 135% -150%) for the senior to get drugs in a Medicare+Choice plan. If there is no Medicare+Choice plan in the area, the senior could get that money for a private account for use with a drug card. The states have been asking for fiscal relief with the cost of prescription drugs for "dual eligibles" (low-income Medicare beneficiaries for whom Medicaid pays out-of-pocket expenses that they otherwise would not be able to afford); however, the President’s budget does not appear to allow dual eligibles to get this assistance.

The FY 2004 budget takes bolder steps to privatize the Medicare program than ever before. Under the President’s new plan, seniors must join a private insurance plan with premium support from the Federal Government if they wish to get prescription drug coverage. Seniors who do not wish to participate in the private plan could stay in Medicare with no changes. In essence, the President’s budget forces seniors to choose between their prescription drugs and retaining their choice of doctors.

President Bush’s Medicare proposal envisions private insurance companies and HMOs bidding for seniors’ business at competitive prices. Key implementation issues are, however, left unaddressed by the budget. There is no mention of whether the proposal would ensure all beneficiaries have a choice of plans, even in rural areas, or whether beneficiaries would be guaranteed a "less-costly" plan in every area that would generate savings to beneficiaries. President Bush proposes plans submit regional bids, and then allow the three lowest cost plans to serve seniors. This raises questions about the quality of care and range of providers to which seniors will have access if only the cheapest plans are allowed to serve seniors.

The General Accounting Office (GAO) has found that Medicare HMOs are overpaid compared to traditional Medicare and that giving extra money to these plans has not led to an increase in benefits or better plan availability. MedPAC analysis has likewise found that Medicare+Choice plans are actually paid 104 percent of fee for service costs, and that is without taking risk selection into account, which means the real overpayment is likely higher. It is difficult to see how this proposal will save any money to address the "unfunded liabilities" the Administration claims to be so concerned about in the budget, unless benefits are reduced or seniors are forced to pay more out of their own pockets.

The President’s proposal does not note that many seniors may pay more for their Medicare coverage under these plans if they live in areas where the plan charges more than in other areas of the country. In addition, since plans would be setting their own bids, as they drive premiums up, seniors’ out-of-pocket premium cost will increase as well. Costs vary widely across the country and depending on the amount of money Medicare provides to seniors for enrollment in privatized coverage, seniors in some areas may find their allotment wholly insufficient to afford coverage. At present, Medicare beneficiaries pay the same amount regardless of where they live.

With respect to prescription drug coverage in private plans, the President’s budget indicates these plans will use "some or all of the tools widely available to private drug plans to lower drug costs." With the exception of the Nevada low-income drug program, private drug plans generally do not exist. In the Nevada experiment, however, plans initially charged unaffordable cost-sharing and refused to cover the drugs seniors most commonly needed in order to control costs. State legislative intervention was needed to protect seniors against unscrupulous private insurance plans.

The third component of the President’s private insurance plan is a "modernized" fee for service. This plan would "end the program’s current practice of penalizing patients who need acute care." In other words, the President wishes to combine the $100 Part B physician deductible with the $876 Part A hospital deductible and create one uniform deductible. This provision will be an enormous cost-shift onto the 85% of beneficiaries who only use physician care, but not hospital care, during a year. Modernized fee for service also includes the introduction of new cost-sharing burdens on beneficiaries, including the implementation of home health and hospice copayments. Private insurance cannot cover the combined deductible portion of the new insurance, which means seniors who today have Medigap or employer coverage that helps with out-of-pocket costs, would have to pay the full cost on their own.

Medicare Solvency Issues

The President’s budget portrays the program as bankrupt and supports eliminating or capping the program. In last year’s budget, the Administration reasoned that because 75% of Medicare Part B is funded through general revenue, it was insolvent. Because general revenues are transferred to Medicare Part B every year (in a similar fashion to defense, education, and most other programs), there can be no deficit or shortfall in the Supplemental Medical Insurance Trust Fund. This year, the President has tried to reframe the issue saying that the unfunded promises faced by the program equal a "staggering $13.3 trillion." These so-called "Medicare unfunded promises" are arrived at by looking at the net present value of the difference between Medicare Part A and B outlays and revenues over a 75 year budget window. The Administration is including the liabilities from Medicare Part B expenditures, but excluding offsetting general revenues. By the Administration’s reasoning, the Department of Defense "unfunded liabilities" would be $67 trillion (assuming just 2% real growth per year).

Medicare Provider Payments

Medicare physician payments decreased by 5.4% in 2002 and are scheduled to decrease again by 4.7% in April of 2003. Last year’s budget included no money to revise the flaws in the payment formula. The FY 2004 budget proposes to adjust the physician payment formula for actual data in the current and previous update systems.

The Administration’s budget also calls for using cuts in payments to other unspecified providers to fund some of the Medicare privatization initiatives in the budget. The budget also includes a legislative proposal for a user fee on providers who file a Medicare claims appeal or who submit duplicate claims or claims that cannot be processed. This proposal is estimated to generate $201 million in savings in FY 2004.

Medicare Appeals