Medicare Compliance & Reimbursement

Medicare reform to cost much more than originally projected.

When it issues its budget on Feb. 2, the Bush administration will project a 10-year cost in excess of $530 billion for last winter's Medicare overhaul and prescription-drug benefit.

This estimate is substantially greater than the $395 billion predicted by the Congressional Budget Office in November and again on Jan. 26. The White House isn't explaining the discrepancy, but the legislation substantially increases payments to Medicare private plans, in most cases paying them a premium over fee-for-service costs, and the administration's estimates of how many people will join such plans have been consistently higher than CBO's.

Over the long term, the law is even more of a budget wildcard, as CBO Director Douglas Holtz-Eakin demonstrated Dec. 15 by illustrating the effect of varying just two parameters: the rate of increase for prescription-drug costs, and whether Congress fills in the "doughnut hole," the range between $2,250 and $5,100 of total spending where a beneficiary is on the hook for 100 percent of drug costs.

In scoring the legislation, CBO assumed that the growth rate of drug spending would ramp down over the next 25 years, from 3 percent above the growth in overall health spending to 1 percent above that rate. "That's a forecast constructed on the grounds that trends that cannot continue, won't," Holtz-Eakin said at a Heritage Foundation lecture, "but we have no particular information about the degree to which [drug spending growth] will come down or the timing of that decrease."

If CBO's assumption is right and Congress does not yield to Democratic pressure to fill the doughnut hole, then "this bill ends up at something like $190 billion [annually] in 2023 and is on track to be something like 1 percent of GDP out at 2050," Holtz-Eakin said.

But if drug spending keeps rising 3 percentage points a year faster than overall health-care spending, and Congress does fill the doughnut hole, then "in 2023 this bill would cost in the neighborhood of $360 billion and it will be on track to be about 4.5 percent of GDP by 2050." Even that assumes that Congress retains the current 75 percent government subsidy in the bill, which would mean that filling the doughnut hole would necessitate higher beneficiary premiums that would help offset federal-budget costs. If the government balked at making beneficiaries pay more, the cost of filling the coverage gap would be even higher, the CBO director explained.

Bill Precludes HHS Bargaining

One of the biggest Democratic complaints about the recently passed Medicare bill has been the "noninterference clause," which prohibits the federal government from interfering with the negotiations between drugmakers and sponsors of prescription drug plans, or from requiring a particular formulary or price structure for drugs covered under the legislation.

Democrats have portrayed the provision as a Republican sop to the pharmaceutical industry, saying it prohibits the government from achieving lower drug prices by using Medicare's buying power in direct negotiations with drug companies. However, the CBO has consistently denied that the government would be able to improve on the bargaining performance of the at-risk private plans the bill provides for. In a Jan. 23 letter to Senate Majority Leader Bill Frist (R-TN), Holtz-Eakin said that striking the noninterference clause "would have a negligible effect" on government spending. "Because they will be at substantial financial risk, private plans will have strong incentives to negotiate price discounts, both to control their own costs ... and to attract enrollees with low premiums and cost-sharing requirements," Holtz-Eakin wrote.

Needless to say, not everyone agrees. Edwin Park, of the Center on Budget and Policy Priorities, told MLR Jan. 29 that CBO has always assumed that government wouldn't be able to get discounts as deep as those private plans could get because government is "vulnerable to political considerations which would push in favor of an open formulary." But he pointed to several counter-examples, noting for instance that the Department of Veterans Affairs health system "has a very restrictive formulary and gets very large discounts," even though it has "a very politically powerful constituency: veterans."

"If these private plans are going to get the best price - better than the government could have gotten - then why were the manufacturers most comfortable with the approach that's in the final bill?" Park asked.

The pharmaceutical industry vigorously lobbied against allowing the government to bargain with drugmakers.