The Medicare bills passed by the Senate Finance Committee on June 12 and the House Ways and Means Committee on June 17 move the thirty-eight-year-old social insurance program one step closer to privatization. The committees outlined the acceptable framework for a drug benefit sorely needed by the 40 million seniors and disabled people covered by Medicare. Considering that the median income for beneficiaries is only $14,300, and a quarter of them spend more than $100 a month on prescriptions, the need for government help is obvious.

But all the talk of a drug benefit obscures the real reason Republicans are pushing hard for their brand of reform, which calls for privately run managed-care plans to provide the benefit. Adding government-subsidized drug coverage to Medicare doesn’t require managed care. Congress could simply add a Part C drug benefit and be done with it. But many lawmakers have another agenda–to get the government out of the Medicare business. To do that, they would herd beneficiaries into managed care, either HMOs or the less tightly controlled PPOs (preferred provider organizations), which would provide all benefits instead of the federal government. The government would give plans a sum of money, as it does now, to pay for care, but over time it could give less and less. Beneficiaries would have to make up the difference, which could be huge, since costs are not likely to go down. Eventually there would be no Medicare, with its social insurance cross-subsidies that make it possible to insure huge numbers of people 65 or older, who are more likely to be ill. Everyone would get benefits in the private market.

Until June 12 the Bush Administration had hoped to entice beneficiaries into HMOs and PPOs by offering drug benefits only to those willing to leave traditional Medicare. But Bush changed his mind, and under the Senate Finance Committee plan, even those who stay in Medicare will get some drug coverage. That was enough to persuade some Democrats, including Ted Kennedy, to sign on. The House bill also gives a benefit to those remaining on Medicare but would not require the government to step in with a benefit if the private plans don’t provide the coverage.

Bush has acquiesced for now, but the issue is far from dead. Health and Human Services Secretary Tommy Thompson made that clear when he was asked if the Administration was trying to change the provision in the Senate bill that called for benefit parity. He replied, “Not really at this point in time.” That leaves the door open in the House, which votes on the bill at the end of June.

To see what will happen with a managed-care strategy, we need look no further than California, where a decade ago seniors flocked to Medicare HMOs for their generous prescription-drug coverage and extra benefits for dental, vision and chiropractic care. For the past three years, the Center for Consumer Health Choices at Consumers Union, in partnership with the California Healthcare Foundation, has rated every Medicare HMO in the state for its drug coverage and overall financial value, taking benefits into account, as well as the premiums and co-payments beneficiaries pay. This continuing study shows that the value of HMO benefits has steadily declined–beneficiaries pay more and get less for their money. This year the number of top-rated plans dropped 86 percent from two years ago, and only 11 percent received a four- or five-star rating compared with 44 percent in 2001. For the first time, no HMO earned five stars for prescription drug coverage. Worse, many plans now charge complex co-payments for hospital services and deductibles as high as $2,200, which had never before been part of their Medicare benefit package. In Orange County, for example, beneficiaries can choose between Aetna, with its hospital co-payment of $100 per day for days one through five, and Kaiser, which has a $500 co-payment for any stay no matter how long. Which is the better choice?

What happened in California was predictable, given Medicare’s reimbursement rates. The 1997 Balanced Budget Act limited annual increases to about 2 percent. Congress wanted to slow the growth in the program. HMOs say that now they’re coming up short, and they’re forcing plan members to make up the shortfall. That’s exactly what will happen under a privatized Medicare system when Congress decides to spend money elsewhere. Today HMO members who don’t want to pay the extra fees can return to traditional Medicare for their benefits. But under a totally privatized arrangement, there will be no affordable fallback option.

Both sides grumble that both bills are flawed. Democrats argue that the benefit is too skimpy. Except for those with very low incomes, beneficiaries under the Senate version will have to pay a monthly premium of $35, a deductible of $275, half of all drug costs from $276 to $4,500, then all costs up to $5,800 and 10 percent of amounts above that–coverage that is likely to help only those with extraordinarily high expenses. Republicans want more people in HMOs so they can move them faster down the privatization path, and the promise of a drug benefit is the ideal vehicle for doing that. An influential Capitol Hill lobbyist says the worst fears about Medicare won’t materialize this year. Members of Congress want some bill enacted and have no appetite for a protracted fight heading into an election year. But, he warned, if Republicans widen their majority in the next election, that could mean the end of Medicare as we know it, opening the possibility for a return to the days before 1965, when the nation’s elders went without insurance and without healthcare.