Free-Market Healthcare Reform

President Bush believes the Nation has a moral obligation to fulfill Medicare's promise of health care security for America's seniors and people with disabilities. Medicare has provided this security to millions of Americans since 1965. However, as Medicare's lack of prescription drug coverage demonstrates, Medicare is not keeping up with the rapid advances in medical care. Medical care this century holds the promise of improving and extending life through countless innovations. To ensure that Medicare continues to provide a secure entitlement for access to modern health care, on July 12, 2001, President Bush proposed a framework to strengthen Medicare and address its financial security.

As the President continues to work with Congress to address the threats to our Nation's security, he will also work with Congress to enact legislation this year to address the problems facing Medicare. In his budget and State of the Union address, the President will renew his commitment to provide prescription drug coverage in Medicare, based on the framework for bipartisan legislation that he proposed in July 2001. The President's budget includes $190 billion in net additional spending for improving Medicare.

Many improvements in Medicare, such as full implementation of a prescription drug benefit, will take several years to set up. But some needed improvements in Medicare benefits can begin to take effect sooner, by building on existing programs. The President's budget will include proposals which can be implemented quickly as part of legislation to improve Medicare benefits. The proposals are based on ideas that have been proposed previously by Democrats and Republicans. They include:

• Building on the proposed Medicare Rx Drug Card to give seniors access to drug discounts of 10 to 25 percent, by quickly putting in place the structure for a Medicare drug benefit that uses the best features of private drug benefits to get lower prices from drug manufacturers.
• Implementing a new "model waiver" program in Medicaid, Pharmacy Plus, which will help states use their Medicaid programs to provide prescription drug coverage for seniors who need help the most - including 365,000 low-income seniors in Illinois who will get new drug coverage through a Medicaid waiver approved today.
• Helping states implement comprehensive drug coverage for low-income beneficiaries as quickly as possible, as part of the Medicare drug benefit. The Federal government will pay 90 percent of the costs of comprehensive drug coverage for beneficiaries with incomes between 100 and 150 percent of poverty. This will provide comprehensive drug coverage for up to 3 million additional low-income Medicare beneficiaries without drug coverage now, and even more when the Medicare drug benefit is fully implemented, while easing the fiscal pressures on states that already provide prescription drug assistance.
• Providing better private health plan options for Medicare beneficiaries who prefer them by directing almost $4 billion to help correct chronic underpayments to Medicare's private plans and to create new incentives for popular coverage options like "point of service" plans that are essentially unavailable to Medicare beneficiaries today.
• Giving seniors access to two additional Medigap (supplemental coverage) plans, with updated benefits that provide better protection against high medical expenses and assistance with prescription drugs at a more affordable cost than the current standard Medigap plans.

I. PRESIDENT'S FRAMEWORK FOR STRENGTHENING MEDICARE

Medicare needs better benefits, including a prescription drug benefit, like modern health insurance plans. Medicare's outdated benefit package does not cover prescription drugs and does not provide timely, consistent coverage for many modern technologies and preventive treatments. It does not protect beneficiaries against the high costs of treating serious illnesses, and it imposes unnecessary regulatory burdens on providers and patients. As a result, seniors often do not receive appropriate, up-to-date treatment for their health problems. Most other insurance programs, including the program available to all Federal employees, provide reliable options for getting modern health insurance benefits. However, Medicare's options are actually becoming more limited.

The President believes that we must give seniors better options. He also believes that any improvements in Medicare should not force changes on today's seniors who are satisfied with their current coverage.

Medicare is not financially secure for the retirement of the Baby Boom. The 77 million Americans who will be in Medicare by 2030 are counting on Medicare's promised benefits. Yet Medicare's fund for hospital insurance will face cash flow deficits beginning in 2016, and Medicare's fund for its other benefits will likely require a doubling of beneficiary premiums and of Medicare's claims on general revenues to remain solvent over the next 10 years. Medicare's bifurcated accounting disguises the true fiscal health of Medicare and makes it difficult to plan ahead.

President Bush has worked with members of Congress from both parties to develop a framework for a modernized Medicare program and for keeping Medicare's benefits secure. Modernized Medicare includes an improved traditional fee-for-service plan, and improved health insurance plan options.

The President's framework for bipartisan legislation includes the following principles:

• All seniors should have the option of a subsidized prescription drug benefit as part of modernized Medicare.
• Modernized Medicare should provide better coverage for preventive care and serious illnesses.
• Today's beneficiaries and those approaching retirement should have the option of keeping the traditional plan with no changes.
• Medicare should provide better health insurance options, like those available to all Federal employees.
• Medicare legislation should strengthen the program's long-term financial security.
• The management of the government Medicare plan should be strengthened so that it can provide better care for seniors.
• Medicare's regulations and administrative procedures should be updated and streamlined, while the instances of fraud and abuse should be reduced.
• Medicare should encourage high-quality health care for all seniors.

II. IMMEDIATE ASSISTANCE FOR SENIORS AS PART OF LEGISLATION TO STRENGTHEN MEDICARE

Medicare Rx Drug Card Program

Approximately 10 million seniors and persons with disabilities have no prescription drug coverage. As a result, even though they are among the heaviest users of prescription drugs, seniors often must pay full retail price for their prescriptions. Most privately-insured Americans pay significantly lower prices, because their private insurance plans allow them to use the purchasing power of large groups to get discounts from manufacturers. The President believes that Medicare should help seniors get access to these tools right away, even before a prescription drug benefit is fully implemented. Using competitive tools to get lower prices for drugs and better pharmacy services is a common feature of major Democratic and Republican proposals to provide a prescription drug benefit.

In conjunction with his framework for Medicare legislation, the President announced an initiative to create a Medicare-endorsed Drug Card Program, to help seniors get lower drug prices right away. The Drug Card will not only provide some short-term relief for seniors; it will also give the Medicare program needed experience in administering a Medicare prescription drug benefit. Seniors' groups such as the AARP support the Drug Card Program, calling it "a positive first step toward a prescription drug benefit." The implementation of the drug card has been blocked temporarily by an injunction from United States District Court for the District of Columbia. However, the Court has stayed the injunction while the Department of Health and Human Services submits a revised drug card proposal for public comment. The improved proposal reflects comments and creative new ideas that followed the initial announcement of the card. For example, several drug manufacturers have announced new programs that provide drug discounts for low-income seniors, illustrating the kind of assistance that the drug card will help make more widely available. The formal "notice and comment" process on the proposed drug card will permit further improvements in the program before it is implemented.

Seniors today have some access to voluntary discount cards that provide pharmacy discounts of about 10 percent on average. Privately-insured Americans regularly achieve additional savings of between 2 percent to 35 percent on brand name drugs through manufacturer discounts. We expect that the Medicare Drug Card will help seniors get access to some of the manufacturer discounts achieved by insured drug card programs, and the discounts will increase as prescription drug coverage is phased in, for the following reasons:

• The initiative proposes that card sponsors secure manufacturer rebates, and pass them through to pharmacies and beneficiaries, resulting in lower prices.
• The initiative would provide education programs targeted to Medicare beneficiaries about generic substitution, drug utilization, pharmacist services and other ways to lower prescription drug spending and get higher-quality pharmacy services.
• The initiative would allow Medicare beneficiaries to pool together to use their buying power to get better prices from drug manufacturers.

Drug Coverage for Low-Income Seniors through Pharmacy Plus Model Waiver Program

A number of states have asked for Federal approval to use the Medicaid program to extend drug-only coverage to senior citizens and people with disabilities who are not otherwise eligible for Medicaid. States are also concerned about rising drug costs in Medicaid and have been exploring common private-sector cost-control mechanisms, like preferred drug lists, as a way of moderating drug spending. Medicaid law and federal regulations, however, have discouraged the use of these management tools.

The Administration has developed a model Pharmacy Plus drug waiver that states can use to provide drug-only coverage to low-income Medicare beneficiaries through Medicaid. These waivers will permit states to provide drug coverage and implement private-sector benefit management techniques in their Medicaid drug programs. Although it will incur costs for a new population of individuals, the model waiver program is budget neutral because it will provide more cost-effective drug coverage for persons with Medicare and other coverage who might otherwise have periods of eligibility for Medicaid. Details depend on the characteristics of state Medicaid programs, with states usually able to extend drug coverage up to around 200% of poverty. A newly-approved waiver for Illinois will now provide drug coverage to 365,000 Medicare beneficiaries in the state, indicating the potential for this program to provide assistance now to seniors who most need it.

Medicare Low-Income Drug Assistance

The President's Medicare Low-Income Drug Assistance proposal would make it possible to quickly phase in comprehensive drug coverage for Medicare beneficiaries up to 150 percent of poverty as part of Medicare drug benefit legislation, even before the Medicare benefit is fully phased in. States have the option to expand comprehensive drug coverage to Medicare beneficiaries up to 100 percent of poverty at current Medicaid matching rates. As an incentive to states to further expand coverage to 150 percent of poverty (approximately $17,000 for a family of two), the Federal government would pay 90 percent of the cost of expanding drug benefits from 100 to 150 percent of poverty. States would be responsible for the remaining 10 percent of the cost. This proposal is expected to lead to coverage for up to 3 million Medicare beneficiaries who would otherwise not receive coverage until the Medicare drug benefit is fully implemented, which will require several years. In addition, states that already provide comprehensive drug coverage to low-income beneficiaries would be eligible for the Federal funding, easing the fiscal pressures on states that provide these benefits.

Federal support for comprehensive drug coverage for low-income beneficiaries is a part of all major Democratic and Republican drug benefit proposals, and is part of the President's framework for strengthening Medicare. Because states already have mechanisms in place to provide assistance to low-income Medicare beneficiaries, this proposal permits relatively quick implementation of drug coverage for the beneficiaries who need help the most. States would also have the flexibility to provide the comprehensive drug benefit using the infrastructure of the Medicare-endorsed prescription drug card program and any other Medicare infrastructure for drug assistance as soon as it is available.

The budgetary cost of this program is approximately $1.2 billion in FY 2003 and $8 billion in fiscal years 2003-2005. Federal support for comprehensive drug coverage for low-income beneficiaries would continue even after the Medicare drug benefit is fully implemented, and would be integrated with it.

Essential Additional Funding to Sustain Private Health Insurance Plans

The President's framework for strengthening Medicare calls for a fair payment system for private plan options for Medicare beneficiaries, like the system that provides reliable health insurance options to all Federal employees in the Federal Employees Health Benefits program. Private plans have long been the preferred choice of 6 million Medicare beneficiaries. This is not surprising, because the private plans allow beneficiaries to receive more up-to-date benefits than are available under traditional Medicare. The enhanced benefits can include prescription drugs, disease management programs, and better preventive care services - benefits widely available to the nonelderly and to members of Congress. Frequently, private plans have provided much lower cost sharing for required Medicare benefits as well.

Action is needed now to ensure that these benefits remain available to Medicare beneficiaries, because the current "Medicare+Choice" system for paying private plans is not giving beneficiaries the options they deserve. Since the new payment system was implemented in 1998, hundreds of Medicare+Choice organizations have left the program or reduced their service areas, adversely affecting coverage for hundreds of thousands of beneficiaries - reversing what had been an upward trend in private plan availability and enrollment. In addition, the remaining plans are offering less generous drug benefits and other coverage. Moreover, "open network" plans like Preferred Provider Organizations (PPOs) and "point of service" plans have become popular among privately covered individuals, yet only two PPOs participate in a few counties in the entire Medicare program.

Annual increases in Medicare+Choice funding have failed to reflect rising health care costs, leading to unreliable options and reduced benefits for seniors. Specifically, between 1998-2002, Medicare+Choice rates increased at 2 or 3 percent per year, or only 11.5 percent overall, in counties where the majority of Medicare+Choice enrollees live. This compares with increases in Medicare fee-for-service (government) plan spending by over 21 percent and medical cost inflation of 9 to 10 percent per year and the same time period. Because payments to private plans do not reflect conditions in Medicare and the health care marketplace, private health plans cannot meet beneficiaries' needs.

The President's budget proposes to take urgently needed steps toward the equitable payment system for private plans proposed in the President's framework for strengthening Medicare. The proposal will modify the Medicare+Choice (M+C) payment formula to better reflect actual healthcare cost increase and allocate additional resources in 2003 to counties that have received only minimum updates over the last few years. This would make it possible for more private plans to remain in Medicare until the new payment system is phased in. Proposals to help sustain private plans in Medicare are supported by both Democrats and Republicans.
Under the President's proposal, all plans will receive payment increases equivalent to national fee-for-service cost growth minus 0.5 percent. For 2003, plans in counties that have been receiving the minimum updates (2 to 3 percent) in the last 4 years will receive a 6.5 percent increase in payments. The budget also proposes incentive payments for new types of plans that enter Medicare+Choice to encourage a variety of new managed care plans (e.g., PPOs) to participate in Medicare+Choice. The augmented payments to improve beneficiaries' options would cost $3.7 billion between 2003-05 and would permit about 7 percent more Medicare beneficiaries to join Medicare+Choice plans.

Additional Medigap Options for Affordable Protection Against High Out-of-Pocket Costs

Medicare's statutory benefits have enormous gaps - copayments as high as 50% on many services, poor coverage for preventive care, and no limits on out-of-pocket spending. For this reason, nearly all seniors in the fee-for-service (government) plan have supplemental insurance, mainly through Medigap. But the cost of supplemental coverage is rising much more rapidly than the cost of Medicare, and the "standard" Medigap plans have barely been updated in more than a decade. As a result, seniors face important problems in getting the coverage they need:

• Limited drug coverage: The three existing Medigap plans that cover prescription drugs offer an unattractive drug benefit coupled with a rich package of medical benefits. The richness of the non-drug package and the cost of drugs make the plans prohibitively expensive to most beneficiaries. Fewer than 500,000 beneficiaries receive a Medigap drug benefit today.
• First dollar coverage: All of the existing Medigap plans pay the up front costs of care for beneficiaries, including the first dollar spent on care. Research has demonstrated that first dollar coverage, defined as the absence of any upfront copays, coinsurances, or deductibles paid by the beneficiary, results in increased utilization and higher costs.
• Antiquated benefit packages: The plans have been the same since 1990 and have not kept up with the evolution in the Medicare program over the last decade. The concentration of enrollment in only three to four plans suggests that the other available plans are not providing the range of options that beneficiaries need.

The President's framework for strengthening Medicare includes updated, more affordable Medigap options for beneficiaries who choose the improved Medicare benefit package. Beneficiaries who wish to keep their current benefits with no changes would be able to do so. To provide more affordable Medigap options before the improved benefit package becomes available, the President's Budget proposes the addition of two new Medigap plans to the existing ten standardized plans. The new plans will include prescription drug assistance, protection against high out-of-pocket costs, and buydown of most of the cost of Medicare deductibles and copays. The idea of making updated Medigap plans available has long had bipartisan support. For example, President Clinton proposed to update Medigap with supplemental coverage that included reasonable limits on cost sharing. The new plans will provide new opportunities for savings for beneficiaries, with a one-time opt in for current beneficiaries. The new plans would also provide modest budgetary savings, due to the elimination of first-dollar coverage.