The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 is being fiercely criticized from both the right and the left, but tucked away in this huge and hugely expensive legislation are seeds that can lead to transformative changes in the health sector.

Liberals are angry and demoralized over enactment of Medicare legislation that simultaneously robs them of nearly 40 years of dominance over the program and also injects some market competition into a program that many hope to use as a base for universal, single-payer government health insurance.

And many conservatives are angry because they believe that the Republican Congress and White House abandoned principles of smaller and limited government to create a massive new entitlement projected to cost more than $400 billion in the first 10 years and burden future generations with trillions of dollars in unfunded liabilities. They also feel cheated that the plan to put Medicare on a track toward competing with private plans was reduced to six demonstration projects, starting in 2010.

Nonetheless, the legislation is to be signed into law by President Bush on Monday, after narrowly passing Congress before Thanksgiving. The House kept the vote open for a record three hours and ultimately enlisted President Bush to make pre-dawn phone calls to win over the last votes to pass the legislation 220-215. The Senate voted 54-44 in favor of the bill after more than two-days of rancorous debate. Democratic leaders were angry that two key members, Senators Max Baucus of Montana and John Breaux of Louisiana, broke ranks to work with Republicans throughout nearly five months of meetings to craft the Medicare bill.

But the clincher that led to enactment was endorsement by the AARP, the 35-million-strong seniors lobby. The price of AARP?s support was to scale back measures that put Medicare on a track to compete with private health plans. Lead Medicare conference negotiator Bill Thomas, chairman of the Ways and Means Committee, stormed out of an eleventh-hour session when told of the deal, only to be coaxed back to fix and polish the agreement.

For six long years, Congress has been debating how to add an outpatient prescription drug benefit to Medicare. The final package offers a benefit structured to appease the Congressional Budget Office but which even insurance agents find hard to understand. The benefit design will continue to be the target of intense debate next year and beyond.

Congress could have reduced the total cost of the benefit by making it available primarily to the 22 percent of seniors who don?t have drug coverage, but congressional leaders were determined to pass a drug benefit that was universally available.

So starting in 2006, all 40 million Medicare beneficiaries will be able to get a voluntary prescription benefit, delivered through private drug plans; the plans will be paid partly through government payments and partly by premiums from seniors, estimated to be about $35 a month. Once enrolled, seniors will pay the first $250 each year in drug costs, and the drug plans will cover 75 percent of the next $2,000 in drug spending. Then, there is an infamous ?doughnut hole? requiring seniors to pay all of their next $2,850 in drug costs before the coverage triggers again, paying 95 percent of costs once a senior?s drug expenditures total $5,100. Lower-income seniors receive more generous subsidies, including reduced premiums, deductibles, and drug co-payments. Many observers are concerned that only seniors with high or moderately-high drug expenses will enroll in the drug plans, leading to higher and higher premiums for everyone.

But the legislation also contains important victories, including Health Savings Accounts (HSAs), drug cards offering privately negotiated discounts with cash subsidies of up to $600 for low-income seniors, and incentives for private health plans to stay in Medicare, including privately negotiated premiums, providing a base of participation for future modernization.

Health Savings Accounts have the potential to transform health insurance arrangements for all Americans, including future retirees. HAS?s build on Archer Medical Savings Accounts with a much more accessible and open design structure. Starting next year, 250 million Americans under age 65 can make tax-free deposits to their own health accounts. Individuals will be able to deposit up to $2,600 and families $5,150 next year to pay for routine health expenses and to save for future medical needs, and allowable deposits will be adjusted for inflation every year after that. Whatever isn?t spent in one year rolls over to the next. The money stays tax free as long as it is spent on IRS-allowable health care, and the inside build-up is tax free as well. The accounts must be coupled with high-deductible health insurance that covers major health care expenses.

The average cost this year of a family insurance policy provided through the workplace is more than $9,000; this gives employers more options in allocating the money. HSAs also give consumers an incentive seek the best value for their dollars and can begin the essential change of putting doctors and patients back in control of medical decisions. Some forward-looking physicians already are starting to see the value of these new arrangements, with a few forgoing insurance altogether and offering their services for cash payments at fixed, posted prices.

The link between consumers and sellers has been broken in the health sector because third-party payment systems have led consumers to believe that someone else is paying the bill for their medical expenses. Federal, state, and local programs pay 45 percent of all health care bills, largely through price-controlled programs like Medicare and Medicaid. And much of the remaining 55 percent of health costs paid through the private sector are paid through third-party insurance and governed by rules set by government and by corporate bureaucracies. Health insurance prices continue to rise at double-digit rates year after year while consumers complain about a lack of control over decisions.

Before enactment of the Medicare bill, free-market advocates had only a few policy initiatives to reverse the trend. The movement toward consumer-driven health care is marching forward, recently enabled by an Internal Revenue Service ruling allowing employers to set up a more flexible health care arrangement for employees that is based upon the Medical Savings Account model. But MSAs, enacted in 1997 as a demonstration project, were almost strangled by strict regulations and limited access. And the Medicare+Choice (M+C) program created in 1998 to give seniors a choice of private plans, was hamstrung by regulation and restricted payment. At its peak, 16 percent of seniors signed up for M+C to get integrated health and drug benefits in one plan, but more and more of the plans have dropped out because Medicare increased payments by only two percent a year while costs were rising by ten to fifteen percent. At last count, 11.7 percent of seniors were participating in M+C.

Keeping private health plans in the program is key if there is to be a base to create a competitive Medicare program in the future. Supporters of the bill believe the new incentives will encourage many more private health plans to stay and enter the Medicare market.

And in 2006, when the drug benefit kicks in, there will be a solid base of millions of seniors who will be able to choose from among competing private health plans offering an integrated drug benefit ? a key goal of Medicare reformers. In addition, the plans will have some flexibility in the design of the drug benefit so they can develop a more consumer-friendly structure ? as long as the benefit maintains the same value.

The next step will be to fix the financing structure to give beneficiaries more control over the resources. But that is the next battle.

Medicare-endorsed prescription drug discount cards also will be available to all beneficiaries starting next spring, giving seniors access to privately negotiated drug discounts that the Department of Health and Human Services estimates will provide savings of 15 to 25 percent on prescription drugs. Lower-income seniors will receive a temporary subsidy on the drug discount card of up to $600 in 2004 and 2005. This is a defined contribution that gives government certainty over its costs and seniors an incentive to make the dollars go as far as possible, putting down a good marker for future programs.

The two sides already are squaring off for the next round. Senate Minority Leader Tom Daschle has introduced legislation to repeal what he considers to be the worst provisions of the bill. Topping the list will be filling the ?doughnut hole,? repealing the six demonstration projects, allowing Americans to import price-controlled drugs from Canada and Europe, and insisting that the federal government use its bulk purchasing power to ?negotiate? lower drug prices.

Government-controlled health systems in other countries don?t negotiate; they use their monopsony purchasing power to fix prices, but the pricing has become a red flag for Daschle and company and the issue will return again and again.

On balance the bill is a good starting place for reform of Medicare, not the end. It begins by engaging consumers and competition in a sector of the economy dominated by government-fixed prices, and bureaucratic and regulatory control. The challenge for lawmakers will be to build on the reforms, not revert to greater political control over the health care economy.

*************

Grace-Marie Turner is president of the Galen Institute, a not-for-profit research organization based in Alexandria, VA, that is devoted to promoting free-market

ideas to invigorate the health sector. She can be reached at galen@galen.org

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 is being fiercely criticized from both the right and the left, but tucked away in this huge and hugely expensive legislation are seeds that can lead to transformative changes in the health sector.

Liberals are angry and demoralized over enactment of Medicare legislation that simultaneously robs them of nearly 40 years of dominance over the program and also injects some market competition into a program that many hope to use as a base for universal, single-payer government health insurance.

And many conservatives are angry because they believe that the Republican Congress and White House abandoned principles of smaller and limited government to create a massive new entitlement projected to cost more than $400 billion in the first 10 years and burden future generations with trillions of dollars in unfunded liabilities. They also feel cheated that the plan to put Medicare on a track toward competing with private plans was reduced to six demonstration projects, starting in 2010.

Nonetheless, the legislation is to be signed into law by President Bush on Monday, after narrowly passing Congress before Thanksgiving. The House kept the vote open for a record three hours and ultimately enlisted President Bush to make pre-dawn phone calls to win over the last votes to pass the legislation 220-215. The Senate voted 54-44 in favor of the bill after more than two-days of rancorous debate. Democratic leaders were angry that two key members, Senators Max Baucus of Montana and John Breaux of Louisiana, broke ranks to work with Republicans throughout nearly five months of meetings to craft the Medicare bill.

But the clincher that led to enactment was endorsement by the AARP, the 35-million-strong seniors lobby. The price of AARP?s support was to scale back measures that put Medicare on a track to compete with private health plans. Lead Medicare conference negotiator Bill Thomas, chairman of the Ways and Means Committee, stormed out of an eleventh-hour session when told of the deal, only to be coaxed back to fix and polish the agreement.

For six long years, Congress has been debating how to add an outpatient prescription drug benefit to Medicare. The final package offers a benefit structured to appease the Congressional Budget Office but which even insurance agents find hard to understand. The benefit design will continue to be the target of intense debate next year and beyond.

Congress could have reduced the total cost of the benefit by making it available primarily to the 22 percent of seniors who don?t have drug coverage, but congressional leaders were determined to pass a drug benefit that was universally available.

So starting in 2006, all 40 million Medicare beneficiaries will be able to get a voluntary prescription benefit, delivered through private drug plans; the plans will be paid partly through government payments and partly by premiums from seniors, estimated to be about $35 a month. Once enrolled, seniors will pay the first $250 each year in drug costs, and the drug plans will cover 75 percent of the next $2,000 in drug spending. Then, there is an infamous ?doughnut hole? requiring seniors to pay all of their next $2,850 in drug costs before the coverage triggers again, paying 95 percent of costs once a senior?s drug expenditures total $5,100. Lower-income seniors receive more generous subsidies, including reduced premiums, deductibles, and drug co-payments. Many observers are concerned that only seniors with high or moderately-high drug expenses will enroll in the drug plans, leading to higher and higher premiums for everyone.

But the legislation also contains important victories, including Health Savings Accounts (HSAs), drug cards offering privately negotiated discounts with cash subsidies of up to $600 for low-income seniors, and incentives for private health plans to stay in Medicare, including privately negotiated premiums, providing a base of participation for future modernization.

Health Savings Accounts have the potential to transform health insurance arrangements for all Americans, including future retirees. HAS?s build on Archer Medical Savings Accounts with a much more accessible and open design structure. Starting next year, 250 million Americans under age 65 can make tax-free deposits to their own health accounts. Individuals will be able to deposit up to $2,600 and families $5,150 next year to pay for routine health expenses and to save for future medical needs, and allowable deposits will be adjusted for inflation every year after that. Whatever isn?t spent in one year rolls over to the next. The money stays tax free as long as it is spent on IRS-allowable health care, and the inside build-up is tax free as well. The accounts must be coupled with high-deductible health insurance that covers major health care expenses.

The average cost this year of a family insurance policy provided through the workplace is more than $9,000; this gives employers more options in allocating the money. HSAs also give consumers an incentive seek the best value for their dollars and can begin the essential change of putting doctors and patients back in control of medical decisions. Some forward-looking physicians already are starting to see the value of these new arrangements, with a few forgoing insurance altogether and offering their services for cash payments at fixed, posted prices.

The link between consumers and sellers has been broken in the health sector because third-party payment systems have led consumers to believe that someone else is paying the bill for their medical expenses. Federal, state, and local programs pay 45 percent of all health care bills, largely through price-controlled programs like Medicare and Medicaid. And much of the remaining 55 percent of health costs paid through the private sector are paid through third-party insurance and governed by rules set by government and by corporate bureaucracies. Health insurance prices continue to rise at double-digit rates year after year while consumers complain about a lack of control over decisions.

Before enactment of the Medicare bill, free-market advocates had only a few policy initiatives to reverse the trend. The movement toward consumer-driven health care is marching forward, recently enabled by an Internal Revenue Service ruling allowing employers to set up a more flexible health care arrangement for employees that is based upon the Medical Savings Account model. But MSAs, enacted in 1997 as a demonstration project, were almost strangled by strict regulations and limited access. And the Medicare+Choice (M+C) program created in 1998 to give seniors a choice of private plans, was hamstrung by regulation and restricted payment. At its peak, 16 percent of seniors signed up for M+C to get integrated health and drug benefits in one plan, but more and more of the plans have dropped out because Medicare increased payments by only two percent a year while costs were rising by ten to fifteen percent. At last count, 11.7 percent of seniors were participating in M+C.

Keeping private health plans in the program is key if there is to be a base to create a competitive Medicare program in the future. Supporters of the bill believe the new incentives will encourage many more private health plans to stay and enter the Medicare market.

And in 2006, when the drug benefit kicks in, there will be a solid base of millions of seniors who will be able to choose from among competing private health plans offering an integrated drug benefit ? a key goal of Medicare reformers. In addition, the plans will have some flexibility in the design of the drug benefit so they can develop a more consumer-friendly structure ? as long as the benefit maintains the same value.

The next step will be to fix the financing structure to give beneficiaries more control over the resources. But that is the next battle.

Medicare-endorsed prescription drug discount cards also will be available to all beneficiaries starting next spring, giving seniors access to privately negotiated drug discounts that the Department of Health and Human Services estimates will provide savings of 15 to 25 percent on prescription drugs. Lower-income seniors will receive a temporary subsidy on the drug discount card of up to $600 in 2004 and 2005. This is a defined contribution that gives government certainty over its costs and seniors an incentive to make the dollars go as far as possible, putting down a good marker for future programs.

The two sides already are squaring off for the next round. Senate Minority Leader Tom Daschle has introduced legislation to repeal what he considers to be the worst provisions of the bill. Topping the list will be filling the ?doughnut hole,? repealing the six demonstration projects, allowing Americans to import price-controlled drugs from Canada and Europe, and insisting that the federal government use its bulk purchasing power to ?negotiate? lower drug prices.

Government-controlled health systems in other countries don?t negotiate; they use their monopsony purchasing power to fix prices, but the pricing has become a red flag for Daschle and company and the issue will return again and again.

On balance the bill is a good starting place for reform of Medicare, not the end. It begins by engaging consumers and competition in a sector of the economy dominated by government-fixed prices, and bureaucratic and regulatory control. The challenge for lawmakers will be to build on the reforms, not revert to greater political control over the health care economy.

*************

Grace-Marie Turner is president of the Galen Institute, a not-for-profit research organization based in Alexandria, VA, that is devoted to promoting free-market

ideas to invigorate the health sector. She can be reached at galen@galen.org