[lbo-talk] Goldman on the Medicare drug benefit: "employers should benefit"

[Doug Henwood]

>DAILY FINANCIAL MARKET COMMENT 11/14/03 Goldman Sachs Economics
>
>*  A House-Senate conference committee is on the verge of
>approving a Medicare drug benefit bill. Some critics claim it
>will burden the fiscally troubled program with additional
>costs that could grow even larger than many anticipate. Others claim 
>it will not provide adequate benefits to seniors.  In fact, both are 
>true.
>
>*  Despite the proposal's shortcomings and fiscal implications,
>as the single most important legislative prize up for grabs
>this year we believe there is a high likelihood the bill could
>be passed in final form by November 21, the tentative
>adjournment date for Congress this year.
>
>*  Along with Medicare eligible seniors -- the obvious
>beneficiaries -- pharmaceutical and biotech manufacturers and
>health insurers will clearly benefit from enactment.  But
>large employers outside the healthcare sector stand to gain
>nearly as much in some cases, as they shift costs to the
>government.
>
>Medicare: Solving an Old Problem and Creating a New One?
>
>The Medicare drug benefit now before Congress won't break the
>bank...for now.  The drug benefit would add a small new part to a
>large old program, but it will be a small part that grows
>quickly.  The Medicare program as it currently stands will cost
>the federal government $269 billion in 2003, and will increase at
>an annual rate of 6%-7% over the next decade, according to most
>actuarial estimates.  The Medicare drug benefit will shift 2%-3%
>of total national health expenditures - or about $30 billion per
>year - starting in 2006, but will increase by roughly 10% a year
>according to CBO estimates.
>
>Once subsidized drugs become available to seniors, we expect that
>total spending will increase even faster than the Congressional
>Budget Office (CBO) currently projects.  This conclusion is based
>on an assumption of increased utilization (Medicare beneficiaries
>have been shown to increase spending by as much as 83% when given
>drug coverage) and the potential increase in price that could
>follow.
>
>By adding a pharmaceutical benefit to Medicare, Congress is
>adding another program to the federal budget for which the growth
>in expenditures will outstrip the growth in general revenues from
>which it will be funded.  What's more, the CBO's long-term
>estimates, which show Medicare expenditures increasing from 2.5%
>to 9.2% of GDP in 75 years, indicate that only 30% of Medicare's
>projected growth will result from demographics and the aging of
>the population - the 'baby boomers' - while 70% would be the
>result of per capita growth in health spending.  Adding a drug
>benefit will only increase the significance of healthcare
>inflation assumptions to long-term fiscal forecasts.
>Employers should benefit from Congress' generosity.  This appears
>inevitable despite the best attempts of Congressional negotiators
>to keep employers from shifting retiree drug coverage to the
>government after a drug benefit is enacted.  In the short term,
>businesses, especially large companies with unionized employees
>such as the auto and steel industries, the RBOCs, and many
>airlines, will likely benefit from reduced retiree coverage.  For
>example, drug spending makes up roughly one quarter of
>automakers' retiree health benefit costs, of which as much as one
>quarter could be shifted to Medicare immediately, with even more
>shifting gradually once the benefit is up and running in 2006. In 
>fact, some companies might even adjust liability projections
>before implementation, if the future reduction in liabilities
>becomes clear.
>
>However, the longer-term implications for the private sector are
>more mixed.  Healthcare spending already makes up one quarter of
>the federal budget, and funds 45% of total US healthcare
>spending, through Medicare, Medicaid, and healthcare for federal
>employees and the military.  However, more than in the private
>sector, decisions made on coverage and reimbursements in those
>programs are driven by top-down budget decisions than by health
>policy considerations.
>
>As budget deficits grow -- we project a $5.5 trillion deficit
>over the 2004-2013 period -- reductions in healthcare
>reimbursement and coverage will eventually be made, similar to
>federal actions taken in 1990 and 1997 and state actions taken
>over the last three years as a result of weakness in state
>budgets.  Costs to employers and individuals could increase,
>driven by healthcare providers' tendency to shift costs to the
>private sector when public payments, particularly for Medicare
>services, decline or the need to raise taxes in response to rapid
>healthcare inflation and spending.  In addition, by adding
>pharmaceuticals to Medicare's list of benefits, an eventual
>clamping down on pharmaceutical spending might lead to cost
>shifting in that segment, which until now has not experienced it.
>
>What's next?  Medicare is a large political prize that Congress
>has been after for several years. However, Congress will need a
>new issue to tackle following enactment of a Medicare drug
>benefit and three are at the top of the list:  (1) long-term care
>assistance, (2) coverage for the uninsured, and (3) Medicaid
>reform. While we do not expect any of the three to occur in the
>next year, these reforms may eventually add billions more to the
>federal budget.
>
>Alec Phillips