A second opinion: examining medical reform.

The centerpiece of last year's Medicare modernization act is an outpatient prescription drug benefit that will go into effect in 2006. Politically savvy, this new benefit was used to sell a number of other major provisions in the bill that will change Medicare as we have known it. The ramifications of the bill will become clearer with time--as will the costs. Already the White House has estimated that the price tag will be a third higher than Congress believed when it passed the bill.

Forty years ago, when Medicare was created, prescription drugs were an inexpensive and relatively minor part of medical care. Now they are both expensive and an integral part of front-line medicine. Over the intervening years, Medicare's lack of drug coverage became an increasingly heavy burden on seniors, especially those lacking insurance through previous employers or unable to afford Medigap plans that included prescription benefits.

The new law attempts to address this glaring need. Starting in 2006, risk-bearing private insurance plans will offer drug coverage, either as stand-alone plans or as part of comprehensive managed-care insurance, and Medicare beneficiaries will be able to select annually among competing plans. The standard benefit will have a $250 deductible, plus 25-percent coinsurance (out-of-pocket payment on each prescription) up to $2,250. Coverage will then cease until out-of-pocket costs have reached $3,600 (or $5,100 in total drug spending), after which drug coverage kicks in, this time with 5-percent coinsurance. The Bush administration estimates a $35 monthly premium for such coverage, but since all the figures are indexed to the growth of medical spending, costs are likely to double by 2013.

As a first step in implementing coverage, Medicare prescription-drug discount cards come on line later this year, and will remain in effect until full implementation in 2006. Seniors without drug insurance may purchase the card for a small annual fee and save an estimated 15 percent on their retail pharmacy costs.

The new prescription-drug benefit is a victory of sorts, particularly for the poor--those who subsist at or just above the official poverty level. They will receive a $600 subsidy this year and next on the new drug cards, and in 2006 they become eligible for full prescription coverage. Moreover, the law waives their premiums, deductibles, and copayments. This feature can be improved in future years, by making the cut-off point for the subsidy (135 percent of the poverty level) more realistic. However, there is uncertainty whether those now eligible under both Medicaid and Medicare will be better off, since states will cut back their current Medicaid drug coverage. The results will vary by state. Minor adjustments in the law could help fix the problems that emerge.

Although the new prescription coverage is technically voluntary, various provisions will make it difficult for seniors to turn it down, even those who already have adequate coverage. Still, the complexity of the new arrangement, not to mention the expense of premiums, copayments, and coverage limits, is likely to frustrate many. At the same time, copayments and gaps in coverage mean that many middleand upper-income retirees will receive little or no advantage over their present coverage.

The big winners under the new law are highly profitable drug manufacturers and insurers that specialize in pharmacy benefit plans. They will reap billions of dollars for their products and administrative services--all without effective cost control or oversight. Furthermore, the new bill will inflate an already record-high federal budget deficit, whose future burden will fall on young working adults. Virtually all of the $540 billion now estimated by the White House for just the next ten years will be borrowed money.

Another provision of the law that has been criticized by opponents is what they call the first step toward the privatization of Medicare. In the hope of enticing more insurance companies to offer alternatives to traditional Medicare, the new law enhances managed-care insurance payments. Medicare has traditionally been a "defined-benefit" program; that is, recipients are entitled to a full range of benefits, for which the government pays. The new law would like to shift the balance toward "defined-contribution" plans. Such plans appropriate a specific sum for each beneficiary to purchase the insurance most suitable to the individual's needs, now made affordable because of the government subsidy. Starting in 2010, the reform creates a six-year experiment with defined-contribution plans. People with higher incomes would supplement the Medicare contribution in order to purchase better benefits. This will subject Medicare to competitive bidding from insurance companies, in the hope that market competition will produce better coverage at a lower, more predictable rate.

The problem with such privatization is that potentially it undermines Medicare's foundation as a system that covers all seniors equally and alike. Instead of all beneficiaries being similarly covered, different forms of insurance will eventually play a greater role in different income groups. Still, there is something to be said for trying such experiments, especially if they are reversible. The defined-contribution experiment could fail utterly, as did Medicare+Choice between 1998 and 2003. If this part of the legislation was the price for getting better drug coverage for our poorest seniors, it may prove worth it. Future presidents and congresses will have to assess how well the experiment works.

Another aspect of the new law that deserves more attention than it has received, one which was critical for its passage, is increased payments for "border" medical facilities, those that treat numerous immigrants, and for "disproportionate-share hospitals," those that treat large numbers of uninsured patients. Hospitals, physicians, rural health facilities, and home health care also received higher (and needed) reimbursements, and these provisions will tend to make Medicare payments fairer across the board.

A further aspect of the new bill promotes what conservative health-policy analysts and their Republican allies have long sought, the transformation of American health coverage through Health Saving Accounts (HSAs). Formerly called Medical Savings Accounts, they had limited success in the 1990s. The new bill's HSA provision gives conservatives a major victory, in that HSA accounts will be open to persons of any age willing to purchase (with or without employer assistance) high-deductible health insurance (minimum deductible of $2,000 for family coverage). HSA contributions are tax-favored (similar to IRAs), up to a maximum of $4,500 per year for families. They roll over from year to year and earn tax-free interest, as long as withdrawals are used only for qualified medical expenses.

The essence of insurance is to pool resources and share risk. The problem with HSAs is that they extract resources from the common pool, leaving fewer dollars to pay for the pool's overall medical care. Proponents argue that HSAs will make consumers more cost-conscious, leading to greater economic self-discipline. It is unlikely, however, that the money saved by those who can afford HSAs will make up for the resources lost to those in the general pool. The sick and the less well-off financially will find it more difficult to obtain insurance at a fair price. Since HSAs benefit primarily the healthy and financially secure, they fragment the health-insurance system, increase expenditures for insurance marketing and administration, and undermine what is already a weak infrastructure of medical social solidarity.

Making any judgment of the new law more complicated, though, is another provision of the act that limits hospital construction. It restricts construction of investor-owned, limited-service hospitals specializing in the most highly reimbursed procedures, mainly orthopedic and cardiac. These hospitals attract the best-paying patients, leaving general hospitals to treat Medicaid, uninsured, and Medicare patients disproportionately. The new law puts an eighteen-month moratorium on the building of such facilities, a clear victory for the common good.

What comes next? One reason for optimism about the new law is that it clears the legislative table. At most, Congress can deal with one major health-care issue at a time. No significant progress could be made on reducing the appalling number of Americans without health insurance until the prescription-drug legislation was finalized. Although there is no guarantee of progress, the Medicare law creates a "Citizens' Healthcare Working Group" to initiate a national debate on assuring coverage for all. Presidential and congressional elections through 2012 should help keep the issue in front of legislators.

Clarke E. Cochran is professor of political science at Texas Tech University. His most recent book (with David Carroll Cochran) is Catholics, Politics, and Public Policy: Beyond Left and Right (Orbis).