The Coming Drug Bust?

Good policy can make for good politics, and bad policy can make for bad politics. Republicans may be about to discover this truism with their Medicare drug benefit, passed by Congress in 2003 and scheduled to take effect in January. As policy, the drug benefit is a calamity. It worsens one of the nation's major problems (paying baby boomers' retirement costs) while addressing a nonexistent "crisis" (allegedly oppressive drug costs for retirees). Its purpose was mostly political: to bribe the elderly or soon-to-be-elderly to support Republicans in 2004. Now it may backfire on Republicans.

Sometimes it's hard to give away money without making people angry. They figure you should give them more, or they dislike your terms. Here, Republicans created grief for themselves. They rejected a simple add-on of drug coverage to Medicare. Instead, they preferred a "market-based" system that has private insurance companies offer plans that are, in turn, subsidized by Medicare. Congress set a minimum benefit (including a $250 deductible and 25 percent premiums on coverage up to $2,250) and invited insurers to provide that plan or something "actuarially equivalent." The result: many plans--and much confusion.

In 46 states, Medicare beneficiaries can choose from 40 plans or more, reports the Kaiser Family Foundation. People feel overwhelmed. It's hard to compare plans, which often cover different drugs and have varying deductibles and premiums. One monthly premium is as low as $1.87; another is as high as $99.90. A survey by Kaiser confirms the bafflement: only 35 percent of Medicare beneficiaries say they understand the drug benefit "very well" or "somewhat well"; a dismal 61 percent say they understand it "not well at all" or "not too well."

For Republicans, there's a second political problem--outrage among conservatives over the new spending and the biggest expansion of Medicare since its creation in 1965. From 2005 to 2015, the drug benefit will cost $858 billion, estimates the Congressional Budget Office. Similarly, many conservatives ridicule the role of private insurance companies. "This is not a market-based system. It's central planning," says Robert Moffit of the Heritage Foundation. "You have [more] red tape and bureaucracy"--all the rules and subsidies that regulate the insurance plans.

Republicans deserve the backlash, because their motives were so blatantly political. President Bush embraced congressional demands for a big drug benefit from, among others, House Speaker Dennis Hastert. "He was pushing for a program that wouldn't just apply to poorer seniors [Bush's original plan]," says John Feehery, Hastert's former press secretary. "Medicare has always applied to all seniors. That's the political reality. They are the people who vote." To be fair, Democrats groveled with equal abandon; their drug plans were generally costlier.

Whether the Republicans' bribe initially succeeded is unclear. Among voters 65 and over, Bush beat Kerry in 2004 by 52 percent to 47 percent, a five-percentage-point gain over 2000 but close to his overall victory margin (51 percent to 48 percent). In the House, the Republican majority increased slightly. But the drug plan's features confirm its political nature. First, Republicans declined to pay for it; most costs (literally trillions of dollars) must be covered by borrowing or future tax increases. Second, there's the "doughnut hole"--the standard benefit provides coverage up to $2,250 of drug costs and then no coverage for the next $2,850. Of course, this makes no sense as health or social policy. The purpose was political: to provide benefits for lots of people while limiting total costs.

The justification for a broad drug benefit was always flimsy. When Congress passed it, about three quarters of Medicare recipients already had drug coverage: the poorest had it through Medicaid; many retirees had it from their former employers; some had it through Medicare managed-care plans or policies (Medigap) they purchased. For Medicare recipients, all out-of-pocket costs--including drug costs--have remained remarkably stable. In 2001, they averaged 9.9 percent of income; the comparable figures for 1977, 1987 and 1996 are 8.1 percent, 9.4 percent and 8 percent. In 2002, 55 percent of Medicare recipients had out-of-pocket costs of less than $1,000; another 26 percent were under $2,499. Drug costs are oppressive mainly for a small minority of uninsured poorer recipients with large bills.

Mark McClellan, the doctor and economist who runs Medicare, thinks that understanding of the drug benefit will increase and that perhaps 30 million of Medicare's 43 million recipients will gladly sign up. Perhaps. But it may be that the program's complexities and idiosyncrasies intensify resentment. Some commentators (including me) have suggested repealing or suspending the benefit. That would be good policy, because it would cut wasteful spending and allow drug coverage to be included in a major Medicare overhaul that focuses on the neediest and takes steps to curb costs. With hindsight, Republicans may someday realize that it also would have been good politics.