Introduction

Congressional Democrats and Republicans continue to spar over how to add a prescription drug benefit to Medicare. Neither party, however, has offered a credible plan for modernizing Medicare itself.

It is true that Medicare needs to catch up with private health insurance plans and offer a prescription drug benefit for seniors. But simply adding drug coverage will not cure what ails Medicare.

The more fundamental problem is this: Medicare is not prepared for the medical challenges posed by the coming retirement of 77 million baby boomers. Medicare is basically a system that pays seniors' medical bills. It needs to become a system that promotes healthy aging in a rapidly graying society.

Over the last century, we have made tremendous progress against acute or life-threatening illnesses. Americans today routinely survive conditions -- strokes, heart attacks, and even cancer -- that used to cause quick death. Now it is time to focus on the next big health care challenge: preventing, treating, and reversing the course of chronic health problems that arise later in life. This is the key to successful aging.

By 2030, one out of every five Americans will be over the age of 65. Age-related chronic conditions such as arthritis, Alzheimer's, heart disease, diabetes, osteoporosis, and breast and prostate cancers are growing concerns. Unless we focus Medicare on healthy aging, the boomers' retirement will be blighted by preventable illnesses, and future taxpayers will be swamped by unnecessary costs.

Medicare was designed in the 1960s based on the health insurance models of the time. In those days, insurance was mainly intended to shield people from ruinous hospital bills. Both health care and health insurance were "after the fact." They kicked in only after a crisis -- such as a heart attack or stroke -- had already occurred.

Today, health insurance still pays doctor and hospital bills, but the actual practice of medicine is gradually switching to an emphasis on early diagnosis and continuity of monitoring and treatment of chronic illnesses. Some private health plans are taking steps in this direction -- they are establishing so-called "disease management" or "care management" programs that help people with chronic ailments monitor their conditions and avoid severe crises. Care management entails arranging for health care professionals to help patients care for themselves through jointly developed treatment plans; self-monitoring and reporting to identify problems or trends early so they can be tackled before hospitalization becomes necessary; assessment of risk factors and methods of risk reduction; optimized drug therapy (especially for patients with multiple prescriptions); improved diets and proper exercise; and even group treatment of chronic illness.

Because Medicare covers seniors and workers with long-term disabilities -- precisely the people most likely to have chronic or ongoing health problems -- Medicare beneficiaries have the most to gain from continuity of care and comprehensive, coordinated care management systems.

However, Medicare has not kept pace with the movement toward care management -- in fact, Medicare's traditional fee-for-service program has separate and uncoordinated payment rules for inpatient and outpatient hospitalization, physician services, lab tests, and other items, which are in themselves impediments to comprehensive care of chronic illnesses.

Instead of targeting insurance payments to encourage innovations in care management that could help seniors preserve their health, Medicare's fee-for-service program is constrained by decades of regulations that have locked in old, inefficient ways of paying for care. Consider this absurdity: Medicare will pay for an expensive and intrusive bypass operation, but not for the drugs that could prevent it. Medicare will pay for an amputation, but rarely provides the education and continuous monitoring services that can prevent people with diabetes from losing limbs.

It is time to recast the prescription drug debate in light of the larger challenge of improving Medicare's ability to promote healthy aging. The main task facing Congress is to focus Medicare's fee-for-service program on prevention and treatment of chronic diseases; on equipping seniors to manage their own health better; and on linking disjointed benefits into a seamless web of coordinated care. At the same time, seniors' choices of alternative private health plans should be expanded and enriched. New benefits for prescription drugs should be a catalyst for both types of improvements to Medicare.

At its deepest level, modernization means establishing a fundamental basis of accountability for improving Medicare's performance, and seniors' health quality and outcomes. No budgetary shortfall should stop us from making the structural reforms necessary. It is wrong to say that because we no longer have enough money for a generous add-on drug benefit, we should therefore do nothing. On the contrary, we must reform Medicare and create a new results-based management structure, which in turn will be able to accommodate the introduction of new benefits designed to improve health outcomes, if the budget permits.

The ABCs of Modernizing Medicare

The PPI Medicare proposal has three interdependent parts. We believe these essential ABCs of Medicare reform would be more powerful in combination than taken alone, and that together they would remake Medicare to face the challenge of healthy aging.

Accountability. Medicare officials should be held accountable for measuring and improving the health of older Americans. They should be given the freedom to make improvements at the local level, like establishing care management programs appropriate to local needs, with clear public disclosure of results and congressional oversight.

Benefits. Medicare should have a drug benefit that will help improve its performance in treating chronic disease, not further fragment its payment systems. Within that general theme, PPI believes the drug benefit should have three priorities: help the sickest, help the poorest, and help all other seniors get better choices.

First, all Medicare beneficiaries would get basic catastrophic coverage for very high drug expenditures; there would be no premium to pay, and for most beneficiaries the catastrophic benefit would simply be added to their current supplemental coverage. All seniors would get discounts on every prescription as part of the catastrophic benefit. Second, Medicare would give more extensive drug benefits to seniors with incomes below approximately 150 percent of the poverty line. Third, Medicare would provide modest premium subsidies to help beneficiaries with incomes above that level purchase comprehensive drug coverage, either through private health plans like HMOs and preferred provider organizations (PPOs), or from a new, more affordable version of Medigap coverage with drug benefits.

This basic set of drug benefits is universal, progressive, and affordable. It offers all seniors automatic, no-hassle protection against ultrahigh drug costs, subsidizes drug coverage for the needy, creates new opportunities for private drug coverage, and comports with fiscal reality. It would reinforce (not replace) existing "retiree" drug coverage provided by employers and drug assistance programs run by states. Because of its universal, high-deductible coverage, the PPI drug proposal would create in Medicare comprehensive information on seniors' drug purchases, which could be used to launch the Medicare program into a new era of results-oriented management and quality improvements.

Choices. Medicare should engage seniors in managing their own health by creating a "Medicare Menu" of choices to spur competition and innovation. The menu would highlight specific care management programs available to beneficiaries; offer "New Medigap" options for coverage of drugs plus other benefit gaps in Medicare's fee-for-service program in an all-in-one package; and provide a central clearinghouse for alternative private health plans -- including HMOs, PPOs, and new comprehensive care management programs -- in which Medicare beneficiaries could enroll.