Medicare Part D 'Reforms' Will Harm Seniors

An ObamaCare change will cost taxpayers a bundle and lead to poorer drug coverage.

By TOM SCULLY

There is a little-noticed provision buried deep in both the House and Senate health-care reform bills that is intended to save billions of dollars—but instead will hurt millions of seniors, impose new costs on taxpayers, and charge employers millions in new taxes.
As part of the Medicare Modernization Act in 2003, Congress created a new drug benefit—called Medicare Part D—for retirees at a cost of about $1,900 per recipient per year. Many private employers already provided drug coverage for their retirees, and the administration and Congress did not want to tempt employers into dropping their coverage. Actuaries calculated that if the government provided a subsidy of at least $800, employers would not stop covering retirees.
The legislation created a $600 tax-free benefit (the equivalent of $800 cash for employers), and it worked. Employers continued to cover about seven million retirees who might have otherwise been dumped into Medicare Part D.
It was a good arrangement for all involved. An $800 subsidy is cheaper than the $1,900 cost of providing drug coverage. And millions of seniors got to keep a drug benefit they were comfortable with and that in many cases was better than the benefit offered by the government.
But now that subsidy is coming in to be clipped. This fall congressional staff, looking for a new revenue source to pay for health reform, proposed eliminating the tax deductibility of the subsidy to employers. The supposed savings were estimated by congressional staff to be as much as $5 billion over the next decade.
It sounds smart—except that nobody asked how many employers will drop retiree drug coverage. Clearly, many will. The result is that, instead of saving money, the proposed revenue raiser will force Medicare Part D costs to skyrocket as employers drop retirees into the program.

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The careful calculation that was made in 2003 to minimize federal spending and maximize private coverage will go out the window if this provision becomes law. Any short-term cost savings that Congress gets by changing the tax provision will be overwhelmed by higher costs in the long run.
Some members in the House want to mitigate the cost of this provision by mandating that employers maintain existing levels of retiree coverage despite the reduced subsidy. But it's not that simple. A mandate would increase costs on businesses, which in turn would make it harder for those businesses to hire new employees. The mandate would effectively be a tax on employers that provide retiree benefits; this in turn will simply induce some unknown number of employers to terminate their retiree drug programs before the mandate kicks in.
In short, if the changes that are proposed for employer subsidies in the current Medicare Part D program are enacted, everyone will lose. Unions will lose as employers seek ways to drop retiree drug coverage. Seniors will lose as employers drop them into Medicare Part D. Medicare and taxpayers will lose as they face higher costs. And employers will lose as they find it harder to provide benefits.
To make matters worse, accounting rules for post-retirement benefits will require companies that keep their retiree benefits to record the entire accrued present value of the new tax the day the provision is signed into law. This would cause many employers to immediately post billions in losses, which could significantly impact our financial markets.
There are many reasons to pass health-care reform. There is no reason to hurt seniors, employers and taxpayers in the process. Businesses are struggling, and the Medicare trust funds have plenty of problems as it is. It makes no sense to make these problems worse.
Mr. Scully was the administrator of the Centers for Medicare and Medicaid Services from 2001-04 and was one of the designers of the Medicare Part D benefit.