Senate Finance Committee Proposal Would Adjust Financial Risk in Medicare Prescription Drug Benefit

To attract more private insurers to participate in their version of Medicare reform, Senate Finance Committee members are proposing that the government absorb most of the risk if the actual cost of their planned prescription drug benefit is higher than estimated, the Wall Street Journal reports (Rogers, Wall Street Journal, 6/5). Finance Committee Chair Charles Grassley (R-Iowa) and Sens. Olympia Snowe (R-Maine), Orrin Hatch (R-Utah), John Breaux (D-La.) and James Jeffords (I-Vt.) have developed a proposal that would increase participation of private health plans in Medicare and offer all beneficiaries a prescription drug benefit. The proposal would give an equal drug benefit to all beneficiaries, regardless of whether they join a private plan. Beneficiaries would pay a $275 deductible and a $35 monthly premium for the drug benefit (California Healthline, 6/4). The New York Times reports that participating health plans could set premiums higher or lower than $35 per month as long as the drug coverage they offer has the same overall value as called for in the committee's proposal (Pear, New York Times, 6/5).

Under the committee's plan, beneficiaries would be required to pay half of annual drug costs up to $3,450 and all drug costs between $3,451 and $5,300. After $5,300, beneficiaries would be required to cover 10% of drug costs, with Medicare paying the remainder. The committee's plan also calls for a new type of coverage, called "Medicare Advantage." Breaux said that under the proposal, the private plans would offer coverage for catastrophic health expenses and preventive care services, giving beneficiaries an incentive to move out of traditional Medicare and into a private plan. Further, beneficiaries opting for private coverage would pay a $400 deductible for hospital and doctor visits, compared with $840 for hospital stays and $100 for doctor visits for beneficiaries remaining in traditional Medicare (American Health Line, 6/4). The proposal would break the country into at least 10 regions, in which beneficiaries would have access to at least two preferred provider organizations, according to the Times. Beneficiaries could join the new coverage option in November 2005, the Times reports. In the meantime, the federal government would authorize the use of drug discount cards in 2004 to help beneficiaries save money, and low-income beneficiaries would be eligible for a $600-a-year drug benefit in 2004 and 2005 (New York Times, 6/5).

Under the committee's plan, health plans providing drug coverage would be responsible for all of the first 2.5% of any losses sustained in the first two years, the Journal reports. After that threshold, the federal government would bear 75% of any cost overruns up to 5% and 90% of losses above that. After two years, private insurers' risk would increase, but the government would remain a "major backstop" for at least several more years, the Journal reports. If health plans' costs are lower than expected, the rules also would apply to plans' gains, the Journal reports. According to the Journal, the purpose of the mitigating risk is to "provide a margin of safety for companies as they transition into what is still very much a social -- and business -- experiment." Grassley, anticipating that he will reach an agreement on the proposal with Sen. Max Baucus (D-Mont.), the committee's ranking Democrat, has scheduled a final hearing on the proposal for tomorrow, the Journal reports.

"Risk sharing between the government and health plans is an important transitional strategy to ensure the viability of a new Medicare program," a spokesperson for Leonard Schaeffer, CEO of WellPoint Health Networks, said. Karen Ignagni, president of the American Association of Health Plans, added that the risk corridors will help the government by contributing to a "more stable system." Administration officials maintain that risk sharing will cause health plans "to be more aggressive in their bidding" for Medicare contracts, the Journal reports. However, critics contend that the provision shows the extent to which Republicans must promote their market solutions for Medicare. The Journal reports that the proposed risk rules also demonstrate "how much the Republican approach to revamping Medicare isn't just about coordinating health care, but also managing the losses and profits of the plans they enlist." In addition, conservatives have begun questioning whether the government's risk would be too high, and liberal Democrats contend it would be "more straightforward" if the government took on the risks directly, the Journal reports (Wall Street Journal, 6/5). Senate Minority Leader Tom Daschle (D-S.D.) said yesterday that while he objects to some portions of the proposal, such as the allowance for variable premiums and drug coverage gap, he has "no intention to filibuster" it (New York Times, 6/5).