What’s in the 2003 Medicare Modernization Act?

What’s in the 2003 Medicare Modernization Act?

The Medicare law that Congress enacted in November 2003, with opposition from labor and most senior citizen organizations, has a number of troubling provisions in addition to the Part D prescription drug program. Here are some of the details.

Inadequate Rx Benefits with a Big Gap in Coverage

 The prescription drug benefit in the new law has an average premium of $25 a month, an average $250 annual deductible and 25% co-pays for drug costs from $251 to $2,250 per year. After you reach $2,250 in drug expenses, the coverage stops and you are required to pay 100% out of pocket for the next $2,850 in annual prescription drug costs. This gap is known as the "doughnut hole." While in the "hole," seniors continue to pay their monthly premiums but get no benefits. After $5,100 is reached in annual drug spending, the plan covers 95 percent of drug expenses for the remainder of the year.

The drug benefit will be provided through private, prescription-drug-only insurance policies (a supplement for seniors in traditional Medicare) and by Medicare HMOs. Signing up for either of these options is voluntary; retirees in employer or union health plans can keep their current drug coverage and not join Part D.

Medicare Privatization

 In addition to the skimpy drug benefit, the new law authorizes a "demonstration project" in 2010 in six metropolitan areas that could change the social insurance nature of Medicare. It's the first step toward turning Medicare into a privatized program in the hands of the HMOs.

In these yet-to-be-chosen areas, traditional fee-for-service Medicare will be forced to compete and bid against private plans. These plans will have large government subsidies to encourage their participation and will try to attract the youngest seniors who use the fewest services, in order to maximize profits. Since traditional Medicare will be left with an older, sicker and much more expensive population, costs will be driven up and passed along to beneficiaries. Over time, the cost of traditional Medicare could become so high that most seniors won't be able to afford it. They'll be forced to go into HMOs.

In the six project areas, seniors will get "vouchers" to buy their health coverage (the coverage being either an HMO plan or traditional Medicare). The amount of the voucher will be a percentage of the average price of all competing plans. If a coverage plan costs more than the voucher amount, the senior pays the difference. Medicare advocates don't like vouchers because they make it easier for Congress to shift Medicare costs away from the federal government and make seniors pay more. If the demonstration results in permanent vouchers in Medicare, the amounts could be cut whenever Congress finds itself in a budget crunch.

Containing Drug Costs

 The law prohibits Medicare from negotiating with the drug companies for lower prices, thus foregoing the enormous buying power of a system that represents 40 million beneficiaries. Instead, private insurers will negotiate separately on behalf of smaller subsets of the Medicare population — a much less effective means of containing costs.

A provision allowing re-importation of prescription drugs from Canada was included in the law, BUT only if the Department of Health and Human Services (HHS) certifies that there are no safety risks. Because HHS has already stated that it won't provide this certification, re-importation continues to be illegal, despite the change in the law.

Means-test on Part B Premiums

 For the first time in the history of the Medicare program, the Part B premium will vary depending on income. Seniors with incomes over $80,000 per year will have to pay higher premiums than others. Though this may sound reasonable on the surface, it has serious consequences. Medicare is a social insurance program, where every one pays in and everyone receives the benefit. Universality and fairness are Medicare's political strengths.

Means-testing the Part B premium for higher income seniors establishes a precedent that eventually could make Medicare more like a welfare program. The $80,000 income threshold will almost certainly be lowered in the future, when Congress wants to shift a larger share of Medicare costs to a greater number of seniors.

Also, higher income seniors paid more for Medicare when they were working. They paid the 1.45 percent Medicare tax on all of their earnings. If they have to pay a whole lot more to get benefits now, their support for Medicare may decline.

Limits on Medicare Funding

 The law requires specific actions that could limit future funds for Medicare. It creates a new accounting standard that would declare Medicare insolvent once general federal revenues exceed 45 percent of the program's costs. No comparable standard exists for any other program of the federal government. The Congressional Budget Office estimates that the threshold will probably be reached between 2015 and 2020. At that point, legislation cutting Medicare benefits, raising premiums or reducing payments to providers would be fast-tracked in Congress - all because of an arbitrary and unfair accounting rule.

Health Savings Accounts

The law includes $6.7 billion for Health Saving Accounts (HSAs). These are essentially tax shelters for the healthiest and wealthiest and have nothing to do with Medicare or seniors. Designed like an IRA or 401(k) for health care, contributions to the accounts are made with pretax dollars. The account allows for withdrawals for health related expenses without tax penalty.

To qualify for an HSA, you would first have to buy a high deductible health insurance policy (with a $1,000 deductible for singles, $2,000 for families). Younger, healthier and more affluent workers could opt out of standard workplace insurance pools in favor of the combination of high deductible plans and individual accounts. This would leave a higher concentration of sicker, older workers in the standard plans, driving up premiums and endangering the continuation of comprehensive coverage.

Big Winners — Insurance and Drug Companies

 The law significantly raises reimbursement rates to HMOs to encourage their participation in Medicare — a terrible waste of Medicare funds since HMOs tend to cover the healthiest seniors who are the least expensive to serve. In addition to the higher reimbursements, a $14 billion slush fund will provide even more enticements for HMOs. In 2010, the insurance industry will stand to make even bigger gains with the six-city privatization project.

Drug companies will gain a lot from this legislation as well. The new drug coverage will result in a higher volume of drug sales and the total absence of cost-containment means nothing will get in the way of increased profits. It's estimated that the drug companies will gain an additional $139 billion over 10 years.

Other items of note in the new law

  • The Part D drug benefit may not cost the same in all plans. Private plans can charge different premiums and co-pays as long as the overall benefit is equal in value (determined by an actuary) to the standard benefit described in the law.
  • Drugs covered will vary from plan to plan. The plans are not required to cover all drugs. Seniors will have to make sure the plan they enroll in covers the drugs they need. Only drugs covered by the plan will count toward the deductible, or the out-of-pocket limit that triggers the catastrophic benefit.
  • The new law increases the amount of Medicare's Part B deductible for all beneficiaries. Currently $100 a year, the deductible will rise to $125 next year and will be indexed to the rise in health care inflation every year thereafter.
  • The deductible and the size of the "doughnut hole" will grow each year based on increases in government spending for the drug benefit. That spending is likely to rise rapidly, as drug prices are increasing at much higher rates than general inflation (and the bill includes no cost-containment feature). As a result, the drug benefit will become more and more inadequate over time.
  • Medicare managed care plans will no longer be called Medicare+Choice. The new name is Medicare Advantage.
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Jerry LaPoint
Retiree Chapter 7, Wisconsin

Jerry LaPoint

"AFSCME values the experience and dedication of its retiree members. We built this union, and AFSCME gives us the respect we deserve. That’s why we’re the biggest organization of retired public employees in the country and the fastest growing retiree group in the labor movement."