Stretching Federal Dollars: Policy Trade-Offs in Designing a Medicare Drug Benefit with Limited Resources

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A prescription drug benefit has proven to be an elusive addition to the Medicare program. While policymakers are in nearly universal agreement on the need for drug coverage, Congress reached a stalemate during the summer of 2001 on what such a benefit should look like. The biggest area of controversy was, and continues to be, money: How much will the federal government contribute to such a benefit and what can beneficiaries be expected to pay?

Budget constraints will inevitably clash with goals for establishing a desirable benefit package. This policy brief considers how to structure a drug benefit and what trade-offs will need to be made in the context of financial limitations. It discusses three potential approaches, each of which employs a different cost/payment structure and each of which benefits one group while neglecting another. Nonetheless, it suggests that it is possible to craft a drug benefit that would preserve universal coverage by protecting low-income beneficiaries and placing a cap on high costs.

In 2001 and again this year, the opening salvo in the debate over a drug benefit focused on the level of federal contributions available over a 10-year period. In 2001, Congress initially set a goal of $300 billion over 10 years while the Bush administration proposed a lower amount. But even this amount was not enough to provide a benefit package that members of Congress were willing to endorse. For example, one proposal costing $318 billion required 50 percent coinsurance and a monthly premium of $50, which would be nearly as high as Medicare's Part B premiums for physician services and outpatient care. Focus groups of all ages soundly criticized a benefit that would ask beneficiaries to pay such a premium.¹

Numbers from the Congressional Budget Office suggest that keeping any benefit at the same level as last year will carry a substantially higher price tag. The discussion of a Medicare drug benefit began again in 2002 when the Bush administration proposed spending $190 billion over 10 years on all Medicare reforms, $77 billion of which would be for a low-income drug benefit.The drug bill passed by the House of Representatives in June is projected to cost about $320 billion over the next 10 years. Majority members of the Senate Budget Committee proposed setting aside $500 billion for all new health care spending over the next 10 years (including some money for the uninsured).

Notes

1. Public Opinion Strategies and Peter D. Hart Research Associates, Medicare and Prescription Drug Focus Groups, Summary Report, Henry J. Kaiser Family Foundation, July 2001.

Note: The full report is available in PDF format.

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

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