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Last Updated: Tuesday, 25 November, 2003, 16:51 GMT
Analysis: Medicare drug benefits

By Steve Schifferes
BBC News Online economics reporter

For the first time in a generation the US has expanded the government-run medical insurance system for the elderly. But more bitter battles over the future of health care are sure to come.

The final approval of a government-sponsored prescription drug benefit is a major victory for the elderly, who have been lobbying for nearly a decade for help with the soaring cost of medicines.

Elderly (generic)
US senior citizens have something to smile about

Passing the prescription drug benefit is also a huge victory for President George W Bush, who hopes to use it in his 2004 election campaign to attract more votes from 41 million senior citizens, who generally tended to vote for the rival Democratic party.

The approval means Mr Bush can claim to have delivered on his key election promises, including tax cuts, education and health reform.

And in doing so, he gained the support of a key lobbying group, the American Association for Retired People (AARP), with millions of politically active members.

The bill is also a victory for the drugs industry, which beat off attempts to make it more tightly regulated.

Tortured passage

But the narrowness of the victory, and its tortured passage of the legislation through the Congress, are signs of deep-seated disagreements about the future the US health care system, which is facing both rising costs and serious gaps in coverage.

Conservative Republicans fear that the expansion of Medicare will lead to its future bankruptcy, with the system predicted to run out of money by 2026 without further increases in payroll taxes.

Some Democrats warn that the cost-cutting measures included in the legislation will lead to the privatisation of Medicare.

And they fear that big drug companies and private health insurance companies will be the main beneficiaries.

Less than full coverage

Although it will cost $400bn over ten years, the new bill provides far from universal coverage.

US hospital
Some elderly will pay more for their health care
Only about one-third of drug costs will be covered through a complex formula that includes premiums, deductibles, and a gap in coverage once drug costs reach more than $2,250.

Under the new plan, private insurance companies will operate the new prescription drug benefit on behalf of the government - just as they do now under private policies called "Medigap" for seniors who may have company health plans with drug benefits.

And Congress promised an $86bn subsidy to big companies to ensure that they continue to offer such benefits to their retired workers.

The bill also gives an extra $25bn to rural hospitals, helping to gain the votes of Congressmen and Senators from the smaller Western states.

In its most controversial move, the bill also prohibits the Federal government from negotiating discounts with the drug companies, or restricting the number of drugs that will be eligible for coverage - a common practice in European health care systems, including Britain.

Conservatives claim that the competition among the private plans will bring down costs faster than if the government negotiated directly.

But - after intense lobbying from the industry - it is also likely to ensure that the US remains one of the most profitable regions for the drug companies.

Testing the private market

Conservatives also succeeded in introducing a provision in the new legislation that will mandate a trial of a partly-privatised Medicare system by 2010.

Fee-for-service: patient can choose any doctor, cost paid by Medicare on a fixed scale
PPO (preferred provider organisation): patient chooses doctor from a list of participants in health insurance scheme who agree to be directly reimbursed
HMO (health maintenance organisation): patient can only get care from specific doctors after authorisation from HMO insurance provider
There will be a six-year trial in six major metropolitan areas of a system in which private health care companies, called HMOs or PPPs, will provide both doctors and prescription drugs to Medicare patients on behalf of the government.

Traditionally, Medicare patients choose their own doctors, who are then reimbursed by the government.

Senator Ted Kennedy, the Democrat who was instrumental in creating the Medicare system, said that the proposal will dump seniors "in the cold arms of the HMOs."

But in the fact, the proposal is a pale echo of Mr Bush's original plan to make eligibility for any drug benefits contingent on joining such a plan.

That was intended to keep the costs of the system under control by introducing competition among providers.

In effect, the battle over containing costs has been postponed.

Universal coverage

In another sign of the battle over universal coverage, the bill also signals the introduction of differential rates for the rich and poor.

Those below the poverty line will be charged lower rates for gaining access to the prescription drug benefit.

But those who make over $80,000 annually will be forced to pay higher charges for a variety of Medicare services, not just the drug benefit.

To liberals like Senator Kennedy, such measures are anathema, undermining support for Medicare among the middle classes and weakening its claim as a universal service.

Conservatives, however, hope that this will be another way to limit costs and increase revenues in the system.

They want to apply to same principles to the social security system, the government-sponsored old age pensions, to allow younger people to opt-out and invest their money privately.

Liberals, on the other hand, would like to expand government health care coverage to include the uninsured.

The uninsured

The big gap in the system is the lack of coverage for many working age Americans, especially if they are unemployed, self-employed, or working for small companies that do not offer health insurance.

Nearly 40 million Americans lack such health insurance, and many of the Democratic candidates for president have proposed health care plans for dealing with it.

The most ambitious plan, that of Congressman Richard Gephardt, would expand health care coverage to all through subsidised insurance at work, paid for by repealing Mr Bush's tax cuts.

He has been pressing other candidates, especially the front-runner, Howard Dean, to match his plan.

But there lies the Democrats' dilemma.

Further reform of the health system is bound to be expensive, and the growing budget deficit makes it difficult to find the money without raising taxes - never popular in an election year.

And unlike the elderly, many of the young, the poor and immigrants who are prominent among the uninsured do not turn out to vote in elections.

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