Medicare drug debits May 13, 2004

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As part of PBS' By The People election 2004 coverage, Wall $treet Week with FORTUNE's May 14, 2004 broadcast examines an issue that has had politicians in both major parties gnashing their teeth lately: Medicare prescription drug coverage. Online, we take a look at why no one can figure out what it will cost:

Whatever the government guesses as the cost of Medicare drug coverage might be too low.

When Congress in December narrowly passed a law to start Medicare prescription drug coverage, senators and representatives gave their approval based on a 10-year cost estimate of roughly $400 billion -- enough money to cause deficit hawk conservatives to blanch even as they voted for the measure in conjunction with President Bush's wishes.

Their unease turned to outright dismay when the White House two months later estimated that Medicare drug benefits over the next 10 years would cost $534 billion, or 33 percent higher than the numbers originally touted by backers of the measure, including the Bush administration. Critics such as Democratic presidential hopeful Sen. John Kerry now accuse White House officials of suppressing their own analysts to get the measure passed. Although the nonpartisan Congressional Budget Office provides estimates for legislators, the White House typically relies on studies done by actuaries in the Center for Medicare and Medicaid Services, which is under the Health and Human Services Department.

Whether information was hidden or not, the fact is that estimating future Medicare costs is little more than a guessing game. Analysts can conjure up almost any estimate they want by changing their assumptions, especially for a new program. The official 2005 budget request for Health and Human Services says that the differences between CBO and White House analyses lie mainly in estimates for future drug costs, plan participation and market behavior. Congressional budget analysts, for instance, assumed that savings from having privately-managed drug plans would kick in earlier than the White House actuaries expect.

It's almost impossible to predict how many eligible people will actually enroll in the new Medicare plan, because there's no historical precedent for it. Perhaps even more difficult to predict are drug prices, because so much depends on companies' ability to introduce new products; drug research and development can be a hit and miss affair even in the best of times.

During the late '90s and early part of this decade, both drug prices and usage increased rapidly as pharmaceutical companies advertised more aggressively, says Dana Goldman, director of health economics at Rand Corp., a nonprofit policy research organization. As the population ages, drug use will probably keep rising, but some observers believe price growth could ease as patents wear off on many popular drugs, thus opening their production to generic drug makers. On the other hand, biotech firms may start rolling out products stemming from genome research or work on exotic biological agents that combat rare diseases -- and command premium prices.

Critics have described the new plan as covering too little in terms of truly critical medicine, while at the same time charging too small of a patient deductible to keep drug prices down.

"The plan they ended up with was clearly a political compromise, and the result is that from a health quality perspective and also from a cost control perspective, it doesn't make a lot of sense," Goldman says.

Predictability may be difficult, but government estimates could at least be consistent if a standard, publicly available model existed. But analysts keep their formulae to themselves. "We would like to get together and put a model on the Web, where people can plug in numbers," he says. "There is no mechanism for putting these models ... into the public domain. It's just crazy that we can't see what the differences are."

Both White House and Congressional analysts inevitably will feel political pressure to manipulate numbers. The best solution might be an objective analysis from hire an outside third party with no government ties, says Goldman. Keep in mind that his organization could be one of outside organizations.

Ultimately, no estimate might be high enough.Previous expansions of Medicare programs actually encourage greater expensees because the federal government ends up funding new, expensive technology, Goldman says. For instance, when legislators approved Medicare for chronic renal disease, for instance, it was meant as a kind gesture for patients expected to die; but the infusion of government money ultimately funded development of new dialysis machines and other kidney treatments that cost more and prolonged patients' lives, thus increasing expenses further. Notes Goldman:

"The history of these programs includes benefit expansions that ended up being much more expensive than anyone anticipated."