Back to the future: Medicare Catastrophic Coverage

Healthcare Financial Management, July, 1999 by Jeanne Schulte Scott

"We've had four years of Republicans talking about middle-class tax cuts for people with incomes up to $200,000, yet Breaux's plan places the mark at $40,000."

- Marilyn Moon, an Urban Institute senior fellow, on the growing debate over the Medicare premium-support reform proposal and the options for means testing the program.

"Repeal of the Medicare Catastrophic Coverage Act has helped exacerbate the huge prescription drug cost increases currently confronting seniors."

- Teresa Heinz, widow of the late Sen. John Heinz (R-Pa.) (who was chief sponsor of the repealed 1988 Medicare Catastrophic Coverage Act) and wife of Sen. John Kerry (D-Mass.), on 1999 proposals to add a catastrophic benefit, including pharmacy coverage, to Medicare.

Supporters of the premium-support proposal to reform Medicare should remember the senior citizen revolt against the 1988 Catastrophic Coverage Act. The act had set a $2,000 limit on out-of-pocket health expenditures for Medicare beneficiaries suffering a catastrophic illness and included prescription drug costs as part of this $2,000 deductible. Coverage for the remainder of the catastrophic costs was to be funded by a 10 percent surcharge on the Federal income taxes paid by senior citizens. The repeal of the act in 1989 was a political embarrassment.

Now, 10 years later, a similar plan originally sponsored by Sen. John Breaux (D-La.) is being endorsed by most of the Republican congressional leadership. The plan calls for senior citizens with incomes over $40,000, or 350,000 per couple, to pay 25 percent of their premiums, compared with 12 to 17 percent for most other Medicare beneficiaries.

What will be the fate of this back-to-the-future proposal?

On the surface, the concept of means testing Medicare beneficiaries seems to be popular. A recent poll by the Kaiser Family Foundation found that 60 percent of beneficiaries support sliding-scale premiums based on income. But then, a majority of Medicare beneficiaries supported the 1988 catastrophic coverage plan - until the deductible and additional tax payments hit the pockets of many of them.

Most senior citizens, however, would have been unaffected by the surcharge, as very few paid any significant tax on their retirement incomes. Of arguably greater importance, was their opposition to the principal of converting Medicare from a basic entitlement program to a welfare program. Medicare was viewed as something earned and paid for by years of labor under the social contract long active in America.

The dilemma for those who see means testing and premium support as solutions to the Medicare financial crisis is that setting income thresholds high enough to affect only upper-income beneficiaries simply does not raise enough money to make much of a difference. On the other hand, setting thresholds low enough to be financially feasible runs the risk of a 1988-style revolt from those who hardly consider themselves affluent. In most parts of the country, incomes between $40,000 and $60,000 still are considered to be middle-income levels.

Democrats, led by the President, think they have the solution: use 15 percent of the projected $2.2 trillion Federal budget surplus over the next 20 years to fund an expanded Medicare program. They hope to add a $1,700 annual pharmacy benefit and a $3,000 deductible ceiling to the program, while limiting the assessment of any additional premiums or taxes necessary to finance these new benefits to those with annual incomes over $75,000. Of course, the Democratic proposal begs the question of whether there really is a budget surplus and whether more changes will be necessary to alleviate the continuing Medicare financing crisis.

The appeal of a Medicare prescription drug benefit is difficult to deny. Spending for outpatient prescription drugs is expected to average $942 per Medicare beneficiary this year. Nearly 29 percent of Medicare recipients have additional out-of-pocket healthcare expenses of more than $500 each year. At the same time, the number of companies offering benefits to retired employees is declining, and many Medicare HMOs are putting new limits on prescription drug coverage. Republicans who oppose adding a Medicare prescription drug benefit run the risk of being perceived as hostile to the Medicare program.

The early indication that the rising cost of health care will be a major element of the 2000 political debate should act as a wake-up call to the healthcare financial management industry to assume a leadership role. We all have a stake in the issues that are being debated, and healthcare financial managers need to be tuned in and ready to act to secure the future of Medicare.

Jeanne Schulte Scott, JD, is director of government relations, NDC Health Information Services, Washington, D.C. Her e-mail address is jeanne.scott@ndcorp.com.