Investor’s Business Daily Examines Medicare Costs and Effect of Adding Rx Drug Benefit

With Congress set to return in September, when the two chambers may again consider a Medicare prescription drug benefit, Investor's Business Daily today examines the history of Medicare's "soar[ing]" costs and analyzes the future price tag of a potential drug benefit. Senate Democrats have favored a six-year, $600 billion drug benefit, which House Republicans say is too generous. The House passed a 10-year, $350 billion drug benefit, which Senate Democrats say is "not enough." However, if "the history of Medicare is any guide," either plan "might be too much," according to Investor's Business Daily.

Medicare was created in 1965 as a "small, self-sustaining program" split into two parts -- hospital insurance and supplementary medical insurance. Initial congressional budget projections forecasted hospital insurance costing $2 billion in its first year and rising to $9 billion by 1990. Hospital insurance was to be funded by a 1% payroll tax split between employees and employers, which would reach of cap of 1.6% by 1987, and the taxable wage base would reach a cap of $6,600 by 1971. Supplementary medical insurance was designed to be funded by a $3 monthly premium from beneficiaries, matched by the federal government. However, initial cost projections were "way off," and members of Congress "couldn't resist expanding it later on," leading to a Medicare program which has now "grown so large it threatens to overtake the federal budget," Investor's Business Daily reports. Hospital insurance in the program's first decade cost the government twice its original projection. The cost reached $67 billion by 1990 and is currently $149 billion. The payroll tax used to fund hospital insurance is now 2.9%, and the taxable wage base cap reached $135,000 in 1993, when it was finally eliminated. Meanwhile, the federal match for supplementary medical insurance premiums was eliminated in the 1980s, and the government currently pays approximately 75% of premiums.

Medicare now accounts for 2.5% of the gross domestic product and is expected to grow to 4.5% of GDP by 2030, when its trustees predict it will go bankrupt. Adding a prescription drug benefit is "likely to fuel demand" and raise costs again, but neither of the leading drug benefit proposals would cover the $1.77 trillion that the Congressional Budget Office projects Medicare enrollees will spend on prescription drugs over the next 10 years, according to Investor's Business Daily. Steven Hayward of the Pacific Research Institute said, "The chance for a prescription drug benefit to become hugely expensive the way that Medicare became hugely expensive is clearly there." Guy King, former chief actuary for CMS -- then known as HCFA -- said, "A very wise actuary once told me, 'The only way to find out what a health insurance program costs is to put it in place'" (Higgins, Investor's Business Daily, 8/22).