On June 29, 1999, President Clinton unveiled his plan to modernize and strengthen the Medicare program to prepare it for the health, demographic, and financing challenges it faces in the 21st century. This historic initiative would: (1) make Medicare more competitive and efficient; (2) modernize and reform Medicare's benefits, including the provision of a long-overdue prescription drug benefit and cost sharing protections for preventive benefits; and (3) make an unprecedented long-term financing commitment to the program that would extend the estimated life of the Medicare Trust Fund until at least 2027. The President called on the Congress to work with him to reach a bipartisan consensus on needed reforms this year.

MAKING MEDICARE MORE COMPETITIVE AND EFFICIENT. Since taking office, President Clinton has worked to pass and implement Medicare reforms that, coupled with the strong economy and the Administration's aggressive anti-fraud and abuse enforcement efforts, have saved hundreds of billions of dollars and helped to extend the life of the Medicare Trust Fund from 1999 to 2015. Building on this success, his plan:

  • Gives traditional Medicare new private sector purchasing and quality improvement tools. The President's proposal would make the traditional fee-for-service program more competitive through the use of market-oriented purchasing and quality improvement tools to improve care and constrain costs. It would provide new or broader authority for competitive pricing within the existing Medicare program, incentives for beneficiaries to use physicians who provide high quality care at reasonable costs, coordinating care for beneficiaries with chronic illnesses, and other best-practice private sector purchasing mechanisms. Savings: $25 billion over the next 10 years.
  • Extends competition to Medicare managed care plans by establishing a "Competitive Defined Benefit" while maintaining a viable traditional program. The Competitive Defined Benefit (CDB) proposal would, for the first time, inject true price competition among managed care plans into Medicare. Plans would be paid for covering Medicare's defined benefits, including the new drug benefit, and would compete over cost and quality. Price competition would make it easier for beneficiaries to make informed choices about their plan options and would, over time, save money for both beneficiaries and the program. The CDB would do so by reducing beneficiaries' premium by 75 cents of every dollar of savings that result from choosing plans that cost less than traditional Medicare. Beneficiaries opting to stay in the traditional fee-for-service program would be able to do so without an increase in premiums. Savings: $8 billion over the next 10 years, starting in 2003.
  • Constrains out-year program growth, but more moderately than the Balanced Budget Act (BBA) of 1997. To ensure that program growth does not significantly increase after most of the Medicare provisions of the BBA expire in 2003, the proposal includes out-year policies that protect against a return to excessive growth rates, but are more modest than those included in the BBA. These proposals along with the modernization of traditional Medicare would reduce average annual Medicare spending growth from an estimated 4.9 percent to 4.3 percent per beneficiary between 2002 and 2009. Savings: $39 billion over next 10 years (including interactions and premium offsets).
  • Takes administrative and legislative action to smooth out the BBA provider payment reductions. The proposal includes a 7.5 billion "quality assurance fund" to smooth out provisions in the BBA that may be affecting Medicare beneficiaries' access to quality services. The Administration will work with Congress, outside groups, and experts to identify real access problems and the appropriate policy solutions. The plan also includes a number of administrative actions to moderate the impact of the BBA on some health care providers' ability to deliver quality services to beneficiaries. Finally, it contains a legislative proposal to better target disproportionate share hospitals. Cost: $7.5 billion over 10 years.

MODERNIZING MEDICARE'S BENEFITS. The current Medicare benefit package does not include all the services needed to treat health problems facing the elderly and people with disabilities. The President's plan would take strong new steps to ensure that Medicare beneficiaries have access to affordable prescription drugs and preventive services that have become essential elements of high-quality medicine. It also would address excess utilization and waste associated with first-dollar coverage of clinical lab services and would reform the current Medigap market. Finally, it integrates the FY 2000 President's Budget Medicare Buy-In proposal to provide an affordable coverage option for vulnerable Americans between the ages of 55 and 65. Specifically, his plan:

  • Establishes a new voluntary Medicare "Part D" prescription drug benefit that is affordable and available to all beneficiaries. The historic outpatient prescription drug benefit would:
    • Have no deductible and pay for half of the beneficiary's drug costs from the first prescription filled each year up to $5,000 in spending ($2,500 in Medicare payments) when fully phased-in by 2008.
    • Ensure beneficiaries a price discount similar to that offered by many employer-sponsored plans for each prescription purchased - even after the $5,000 limit is reached.
    • Cost about $24 per month beginning in 2002 (when the coverage is capped at $2,000 in spending) and $44 per month when fully phased-in by 2008. (This is one-half to one-third of the typical cost of private Medigap premiums.)
    • Ensure that beneficiaries with incomes below 135 percent of poverty ($11,000/$15,000 single/ couples) would not pay premiums or cost sharing for Medicare drug coverage. Those with incomes between 135 and 150 percent of poverty would receive premium assistance as well. The Federal government would assume all of the costs of this benefit for those above poverty.
    • Provide financial incentives for employers to develop and retain their retiree health coverage if it provides a prescription drug benefit to retirees that was at least equivalent to the new Medicare outpatient drug benefit. This approach would save money for the program because the subsidy given would be generous enough for employers to maintain coverage yet lower than the Medicare subsidies for traditional participants.

    Most Medicare beneficiaries will probably choose this new prescription drug option because of its attractiveness and affordability. Because older and disabled Americans rely so heavily on medications, we estimate that about 31 million beneficiaries would benefit from this coverage each year. Cost: $118 billion over the next 10 years, beginning in 2002.

  • Eliminates all cost sharing for all preventive benefits in Medicare and institutes a major health promotion education campaign. This proposal would cost $3 billion over 10 years and would:
    • Eliminate existing copayments and the deductible for preventive service covered by Medicare, including colorectal cancer screening, bone mass measurements, pelvic exams, prostate cancer screening, diabetes self management benefits, and mammographies.
    • Initiate a three-year demonstration project to provide smoking cessation services to Medicare beneficiaries.
    • Launch a new, nationwide health promotion education campaign targeted to all Americans over the age of 50.

  • Rationalizes cost sharing. To help pay for the new prescription drug and preventive benefits, the President's plan would save $11 billion over 10 years by rationalizing the current cost sharing requirements for Medicare by:
    • Adding a 20 percent copayment for clinical laboratory services. The modest lab copayment would help prevent overuse, and reduce fraud.
    • Indexing the Part B deductible for inflation. The Part B deductible index would guard against the program assuming a growing amount of Part B costs because, over time, inflation decreases the amount of the deductible in real terms. Compared to average annual Part B per capita costs, the deductible has fallen from 28 percent in 1967 to about 3 percent in 2000.

  • Reforms Medigap. The President's plan would reform private insurance policies that supplement Medicare (Medigap) by: (1) working with the National Association of Insurance Commissioners to add a new lower-cost option with low copayments and to revise existing plans to conform with the President's proposals to strengthen Medicare; (2) directing the Secretary of HHS to determine the feasibility and advisability of reforms to improve supplemental cost sharing in Medicare, including a Medigap-like plan offered by the traditional Medicare program; (3) providing easier access to Medigap if a beneficiary is in an HMO that withdraws from Medicare; and (4) expanding the initial six month open enrollment period in Medigap to include individuals with disabilities and end stage renal disease (ESRD).
  • Includes the President's Medicare Buy-In proposal. The plan includes the President's proposal to offer American between the ages of 62-65 without access to employer-based insurance the choice to buy into the Medicare program for approximately $300 per month if they agree to pay a small additional monthly payment once they become eligible for traditional Medicare at age 65. Displaced workers between 55-62 who had involuntarily lost their jobs and insurance could buy in at a slightly higher premium (approximately $400). And retirees over age 55 who had been promised health care in their retirement years would be provided access to "COBRA" continuation coverage if their old firm reneged on their commitment. The $1.4 billion cost over 5 years is offset in the President's FY 2000 budget.

STRENGTHENING MEDICARE'S FINANCING FOR THE 21st CENTURY. The President's Medicare plan would strengthen the program and make it more competitive and efficient. However, no amount of policy-sound savings would be sufficient to address the fact that the elderly population will double from almost 40 million today to 80 million over the next three decades. Every respected expert in the nation recognizes that additional financing will be necessary to maintain basic services and quality for any length of time. Because of this and his strong belief that the baby boom generation should not pass along its inevitable Medicare financing crisis to its children, the President has proposed that a significant portion of the surplus be dedicated to strengthening the program. Specifically, his plan:

  • Extends the life of the Trust Fund until at least 2027. Dedicating 15 percent of the surplus ($794 billion over 15 years) to Medicare not only contributes toward extending the estimated financial health of the Trust Fund through 2027, but it will also lessen the need for future excessive cuts and radical restructuring that would be inevitable in the absence of these resources.
  • Responsibly finances the new prescription drug benefit through savings and a modest amount from the surplus. The new drug benefit would cost about $118 billion over 10 years. Its budgetary impact would be fully offset by:
    • Savings from competition and efficiency. About 60 percent of the $118 billion Federal cost of the new Medicare prescription drug benefit would be offset through these savings.
    • Dedicating a small fraction of the surplus. About $45.5 billion of the surplus allocated to Medicare would be used to help finance the benefit. To put this amount in context, it is:
      • Less than one eighth of the amount of the surplus dedicated for Medicare (2 percent of the entire surplus); and
      • Less than the reduction in the Medicare baseline spending between January and June, 1999.

      Policy experts advising the Congress (MedPAC, CBO, and the Medicare Trustees) have consistently stated their belief that much of the recent decline in Medicare spending beyond initial projections is due to our success creating a strong economy and in combating fraud and waste. Reinvesting the savings that can be reasonably attributed to our anti-fraud and waste activities into a new prescription drug benefit is completely consistent with the past actions of the Congress and the Administration utilizing such savings for programmatic improvements.


(Dollars in Billions, Trustees' Baseline)
  00-04 00-09
Medicare Modernization -5 -25
Competition -0 -8
Provider Savings -4 -32*
Provider Set-Aside +4 +7.5
Total -5 -64.5
Precription Drug Benefit +29 +118
Cost Sharing Changes -2 -8
Total +27 +110
Contribution to Solvency -28 -328.5**
Surplus for Drug Benefit -22 -45.5
Surplus Allocation -50 -374
*Includes $5.7 billion in interactions/premium offset
**Does not count towards package

  • Goals for Reform:
    • Make Medicare More Competitive and Efficient
    • Modernize Medicare's Benefits
    • Strengthen Medicare's Financing for the 21st Century

  • Reduces Medicare spending for current services by $72 billion over 10 years. About half of these savings come from innovative proposals to adopt successful private sector tools and competition. As a result of these policies, Medicare growth per beneficiary from 2003 to 2009 would slow from 4.9 percent to 4.3 percent.
  • Adds an optional prescription drug benefit. This benefit would cost $118 billion over 10 years. This cost is only about 5 percent of total Medicare spending in 2009 (net of premiums).
    • Over 60 percent of the costs are offset by the proposal's savings.
    • The remaining $45.5 billion would come from the Medicare allocation of the surplus. This amount is one-eighth of the $374 billion over 10 years dedicated to Medicare, and less than 2 percent of the overall surplus.

  • Extends the life of the Medicare Trust Fund to at least 2027. The President's plan would dedicate 15 percent of the surplus to strengthen Medicare. This amount, when combined with the offset for the drug benefit and Part A savings, would extend the estimated life of the Medicare Trust Fund for a quarter century from now, through at least 2027.

Medicare Beneficiaries Without Drug Coverage

  • Nearly 15 million Medicare beneficiaries have no prescription drug coverage. The lack of drug coverage is not just a problem for low-income beneficiaries.
    • About 40 percent of beneficiaries without drug coverage have income above 200 percent of poverty (about $16,000 for a single, $22,000 for a couple).
    • As the elderly age, finding and affording drug coverage becomes an even greater problem. Over 40 percent of beneficiaries over age 85 have no coverage and are charged much higher premiums or are excluded altogether from coverage because of health status.
    • Nearly half (48 percent) of rural beneficiaries lack insurance coverage for drugs.
    • Nearly one in three (30 percent) of nonelderly Medicare beneficiaries with disabilities does not have any coverage for prescription drugs.
    • Lack of insurance means no access to discounts – beneficiaries pay retail prices for drugs which can be two to three times higher than what people with insurance pay.

  • Prescription drug coverage is unstable, expensive and declining. Only about half of the over 60 percent of beneficiaries with coverage have it from the private sector. This coverage is not guaranteed, often is or becomes expensive, and can be dropped in some instances.
    • Employer-sponsored retiree health insurance, the most generous type of drug coverage for beneficiaries, covers less than 30 percent of beneficiaries, but is declining rapidly. Between 1993 and 1998, the percent of large firms offering retiree health benefits for Medicare eligibles dropped 20 percent. This trend was more pronounced among employers with greater than 5,000 employees, over a fourth of whom dropped coverage.
    • Medigap, the standardized private insurance supplement for Medicare, covers about 8 percent of beneficiaries. Its drug benefit (offered in some of its plans) has a $250 deductible, 50 percent coinsurance, and a cap on benefits spending of $1,250 or $3,000. Premiums are almost always underwritten, meaning that premiums can be significnatly higher for older, sicker populations of seniors. The premium for a plan with drug coverage is typically $90 more per month than a plan without drug coverage. Medigap premiums have been rising at double-digit inflation and coverage has been declining.
    • Medicare managed care: Less than 10 percent of beneficiaries get drug coverage by joining Medicare managed care plans, which use drug coverage to attract beneficiaries. This coverage typically has no deductibles and relatively low copays, but 55 percent limit the amount that they pay for benefits – about 65 percent of these plans have limits of $1,000 or less. Reports suggest that benefits are likely to decline in the future. Already, 11 million beneficiaries lack access to managed care.

Precripition Drugs Are Especially Important to Medicare Beneficiaries

  • The elderly and people with disabilities are most reliant on prescription drugs. Not only do the elderly and people with disabilities experience greater health problems, but these health problems are typically chronic diseases like hypertension, diabetes or arthritis that can be managed through medications. As a result, over 85 percent of Medicare beneficiaries use at least one prescription drug annually. The elderly's per capita spending on drugs is over three times higher than that of non-elderly adults. While only 12 percent of the population, the elderly account for 33 percent of drug spending.
  • Many beneficiaries need drugs but do not use them because they have no or inadequate insurance. Most research has found that drug coverage influences use of needed drugs:
    • Decreased use of needed medications. Elderly and disabled Medicaid beneficiaries experienced significant declines in the use of essential medicines (e.g., insulin, lithium, cardiovascular agents, bronchodialators) when their Medicaid drug coverage was limited. Many elderly must choose between prescriptions and other basic household needs.
    • Increased nursing home use. Medicare beneficiaries whose Medicaid drug coverage was limited were twice as likely to enter nursing homes.
    • Less protection against drug complications. Even though the elderly and disabled take more prescription drugs and have more complex medical problems, Medicare beneficiaries without coverage do not benefit from drug management. This could lead to adverse drug reactions, inappropriate use of drugs, or discontinuation of needed drugs.

  • Medicare beneficiaries' spending on prescription drugs is high. In 1997, spending on prescription drugs accounted for 16 percent of total out-of-pocket medical expenditures by Medicare fee-for-service beneficiaries, higher than any other single spending category except payments for Medicare Part B and supplemental premiums. Over one-third of Medicare beneficiaries 30 percent pay more than $1,000 each year for prescription drugs. Notably, out-of-pocket spending for drugs is growing more rapidly than any other type of medical expenditure by the elderly.
  • Drug spending is a larger financial burden. Elderly without private insurance for drugs spend about twice as much out-of-pocket for drugs than those with drug coverage. This burden is on average 35 percent higher for rural than urban elderly since they are less likely to have coverage for drugs. Women's average out-of-pocket costs as a percent of income is 20 percent higher than men because many are widowed, have lower income, and are disproportionately chronically ill.
  • Elderly without coverage pay higher prices. Because they do not benefit from drug purchasing programs, Medicare beneficiaries without drug coverage pay prices that are at least 15-30 percent higher than large HMOs and employers. One study found that, for the 10 most prescribed drugs, seniors are often charged twice as much as other payers.

Medicare Prescription Drug Benefit

The President's plan to modernize Medicare would include a new, voluntary Medicare drug benefit. Called Medicare Part D, it would offer all beneficiaries, for the first time, access to affordable, high-quality prescription drug coverage beginning in 2002. This benefit would cost about $118 billion over 10 years. It would be fully offset, primarily through savings and efficiencies in Medicare and, to a small degree, from the surplus amount dedicated to Medicare.

  • Meaningful coverage. Beginning in 2002, beneficiaries would have the option of participating in the new Medicare Part D program. It would have:
    • No deductible – coverage begins with the first prescription filled and
    • 50 percent coinsurance, with access to discounts negotiated by private pharmacy managers after the limit is reached.

    The benefit would be limited to $5,000 in costs ($2,500 in Medicare payments) in 2008. It would phase it a $2,000 for 2002-03; $3,000 for 2004-05; $4,000 for 2006-07; and $5,000 in 2008 (indexed to inflation in subsequent years).

  • Affordable premiums. Beneficiaries who opt for Part D would a pay separate premium for Medicare Part D – an estimated $24 per month in 2002, and $44 per month in 2008, when fully implemented. This premium represents 50 percent of program costs. Enrollment would be optional and would occur, after an initial open enrollment for all beneficiaries, when a beneficiary becomes eligible for the program or when they transition out of employer-based coverage. Premiums would be deducted from Social Security checks.
  • Low-income protections. Beneficiaries with income up to 150 percent of poverty ($17,000 for a couple) would pay no Part D premium. Those with income below 135 percent of poverty ($15,000 for couples) would pay no premiums or cost sharing. This assistance would administered through Medicaid, with the Federal government assuming all of the premium and cost sharing costs for beneficiaries with incomes above poverty.
  • Private management. Beneficiaries in managed care plans would continue to receive their benefit through their plan. For enrollees in the traditional program, Medicare would contract out with numerous private pharmacy benefit managers (PBMs) or similar entities. Medicare would use competitive bidding to award contracts for drug management. The private managers would use the latest, effective cost containment tools, drug utilization review programs, and meet quality and consumer access standards. No price controls would be imposed.
  • Incentives to develop and retain retiree coverage. Employers that choose to offer or continue retiree drug coverage would be provided a financial incentive to do so.

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