Federal Costs Dropping Under New Medicare Drug Plan, Administration Reports

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Federal Costs Dropping Under New Medicare Drug Plan, Administration Reports

Magazine article

By: Robert Pear

Date: February 3, 2006

Source: Pear, Robert. "Federal Costs Dropping Under New Medicare Drug Plan, Administration Reports." New York Times. February 3, 2006: A20.

About the Author: Robert Pear is a political columnist for theNew York Times.


Health care is one of the fastest-growing segments of the American economy. A 2003 report on the expansion of health care costs noted that medical care, as a percentage of the total U.S. economy, doubled in size from 1970 to 2002, rising from just 7 percent of Gross Domestic Product (GDP) to 14 percent during this period. The report also projected that health care costs would continue to climb as a relative share of the nation's economy, reaching almost 17 percent of GDP by 2011.

Medical costs have risen for a variety of reasons. Improvements in nutrition and medical technology have led to longer life spans, and growing ranks of senior citizens require larger health care expenditures. The development of expensive treatments for previously untreatable conditions has also raised health care costs. Employer-funded and government-funded medical benefits have encouraged Americans to take advantage of health care opportunities, thereby raising average medical spending per person. Finally, as the Baby Boom generation (generally, those born between the years 1946 to 1960) moves from early adulthood to old age, this group is incurring increasing medical costs, which contribute to the continuing rise in national health care outlays.

Spending on prescription drugs in particular has climbed. From 1993 to 2003, national spending on prescriptions rose at an average rate of 13 percent annually. From 2002 to 2003, overall medical care expenditures excluding prescriptions rose at a rate of 7 to 9 percent, while prescription costs rose 11 percent. With more than 60 percent of adults and more than ninety percent of seniors taking prescription drugs on an ongoing basis, these rising costs represented a significant drain on the financial resources of a broad segment of the American population. The rising costs of prescription drugs posed a particular burden for many retirees, who in some cases were forced to choose which of several prescriptions to fill each month.

The federal Medicare program was created by President Lyndon Johnson (1908–1973) as part of his "Great Society" initiative to eradicate poverty and improve standards of living. Johnson's success came on the heels of two decades of political debate over the merits and dangers of establishing federal medical insurance for Americans; his accomplishments included Medicare coverage for seniors and Medicaid for the poor.

Medicare originally included two major sections. Medicare Part A covered hospitalization and related expenses. For most beneficiaries, Part A was provided at no cost as part of participation in the Social Security system, and participants were responsible for a deductible amount before Medicare began paying; in 2006, the Part A deductible was $952.00. Medicare Part B covered doctor visits and outpatient medical expenses; participation in Part B was optional and those who enrolled paid a monthly premium and a deductible; in 2006, these amounts were $88.50 and $124.00 respectively.

Because Medicare did not cover all expenses, private insurers were also authorized by Medicare to offer standardized insurance policies to make up the difference. These Medicare supplements, sometimes known as Medi-gap policies, paid for many of the charges not covered under Medicare Parts A and B. Seniors on Medicare could choose among several standardized benefits packages for their Medicare Supplement.

Despite the comprehensive nature of Medicare coverage, the program originated in an era before prescription drugs were so common or so expensive. For this reason, Medicare never provided coverage for prescription drugs, meaning that participants in the program were expected to pay for their own prescription drugs. Beginning in 2006, all forty million Medicare participants were able to receive prescription drug coverage under the program's newly established Part D. Retirees could choose among plans offered by several local providers in order to maximize their cost savings. Federal spending on Part D was expected to top $38 billion in the program's first year of operation.


WASHINGTON, Feb. 2 — Federal spending on the new Medicare drug benefit will be 20 percent lower than expected this year because beneficiaries are choosing prescription drug plans with lower premiums, the Bush administration said Thursday.

"People are tending to sign up for less expensive plans," said Dr. Mark B. McClellan, administrator of the federal Centers for Medicare and Medicaid Services.

To some experts, the new estimates suggest that the Bush administration's philosophical approach of encouraging private-market competition to hold down costs is working.

John K. Gorman, a former Medicare official who is now a consultant to many insurers, said: "Competitive bidding is working for beneficiaries and for taxpayers. This will force some consolidation of drug plans. Only a few big companies, like Humana and UnitedHealth, can keep up with this kind of aggressive pricing."

Beneficiary premiums are now expected to average $25 a month, down from the $37 projected last year, Dr. McClellan said. The figures came from the office of the Medicare actuary, a career civil servant.

Another factor involves a national trend: Insurers reined in drug costs, and as a result spending on prescription drugs grew less than expected in 2004 and 2005. The government now estimates that drug costs for Medicare in 2006 will be lower, as well.

When Congress debated the Medicare drug bill in 2003, lawmakers feared that some regions might not have even two competing drug plans. Now, in almost every state, more than 40 free-standing drug plans are available. Every state but Alaska has at least one plan with a premium less than $20 a month.

The net cost to the federal government for Medicare drug coverage in 2006 is expected to be $30.5 billion, down from a prior estimate of $38.1 billion—a difference of $7.6 billion, or 20 percent. The estimated cost over 10 years is also lower: $678 billion, down 8 percent from the earlier estimate of $737 billion for the decade from 2006 to 2015.

One reason for the lower cost is the intense competition among private insurers offering drug coverage. But the multiplicity of drug plans has caused confusion among beneficiaries and pharmacists.

Senator Thomas R. Carper, Democrat of Delaware, who voted for the 2003 law that created the drug benefit, said: "The Centers for Medicare and Medicaid Services approved too many plans. For many of our seniors, the system is almost incomprehensible." Mr. Carper made the comment Thursday at a hearing of the Senate Special Committee on Aging.

In August, after reviewing bids from private insurers, the Bush administration lowered its estimate of the average premium to $32 a month, from $37. But it had no firm estimate of savings to the government, and it did not anticipate the behavior of beneficiaries in choosing cheaper plans. Enrollment began on Nov. 15.

Insurers try to save money by negotiating discounts with drug manufacturers and retail pharmacists. Actuaries said the discounts proved to be larger than they had expected.

Under blistering criticism from senators of both parties, the Bush administration announced several steps on Thursday to help beneficiaries who could not get their medications through Medicare. Democrats said they doubted the steps would be sufficient to solve all the problems in the program, which began Jan. 1.

On Thursday, the Senate rejected an effort by Democrats to extend the enrollment deadline for the program from May 15 until Dec. 31.

Insurers had been required to provide a temporary 30-day supply of any drug that a beneficiary was previously taking. Beneficiaries and pharmacists say that many insurers have flouted this requirement.

Anticipating more problems, the Bush administration said that insurers must provide an additional 60-day supply of medicine, guaranteeing 90 days of transitional coverage.

At Thursday's hearing, Senator Ron Wyden, Democrat of Oregon, told Dr. McClellan he had done "great damage to the cause of private-sector choice" in health care. With so many plans available, he said, "it's bedlam out there."

Mr. Wyden voted for the drug benefit in 2003, but said: "I did not conceive that the rollout of the new program would be bungled this way."

The aging-panel chairman, Senator Gordon H. Smith, Republican of Oregon, said the administration had not done enough to ensure a smooth transition for six million low-income people who lost Medicaid drug coverage on Jan. 1 and were to receive drug coverage under Medicare.


Supporters and critics of of Part D coverage frequently found themselves agreeing on what the plan had done but disagreeing over whether the results were positive or negative. For example, critics of the program claim that the large number of plan options created confusion for many seniors, leading some of them to give up on applying for coverage. Supporters responded that the large number of choices allowed seniors to remain in control of their own medical care; they also credited competition among providers with the lower than expected costs experienced during the program's first year.

Proponents of Part D also point out that the program drastically reduced out-of-pocket costs for most seniors who enroll and that these savings occurred immediately; opponents countered that the program glossed over the high prices being charged by pharmaceutical companies, which they claimed was the root cause of the problems. These critics also derided the plan's inability to negotiate with drug makers, an option that the Veteran's Administration regularly used to reduce drug prices. As Medicare prescription coverage completed its first year, it appeared likely that the first decade of the program's life would be a period of intense disagreement over its success or failure.

Although the new prescription drug benefit was good news for retirees, the future of Medicare remained in doubt. The 2006 annual report by the system's trustees projected that Medicare could be unable to pay its promised benefits by 2018, when its trust fund could be depleted.



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Web sites

Milken Institute. "America's Healthcare Economy." 2003 <http://www.maricopa.edu/bwd/pdfs/healthpole003.pd f> (accessed June 29, 2006).

U.S. Government. "Medicare Prescription Drug Coverage." 2006 <http://www.medicare.gov/pdphome.asp> (accessed June 29, 2006).

Washington Post. "Medicare Will Go Broke By 2018, Trustees Report." 2003 <http://www.washingtonpost.com/wp-dyn/content/article/2006/05/01/AR200605 0101448.html> (accessed June 29, 2006).

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Federal Costs Dropping Under New Medicare Drug Plan, Administration Reports

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Federal Costs Dropping Under New Medicare Drug Plan, Administration Reports