PA RT TWO Government Expenditures and Policy i n the United States The remainder of the $2,250 of expenditure, an amount equal to $1,200 would be subsidized by the plan. This subsidy would accrue to all those enrolled in the plan. After the $2,250 coverage is exhausted, there is no coverage for drug costs between $2,250 and $5,100 per year. However, when drug costs for an enrollee reach $5,100 the plan covers 95 percent of expenditures in excess of that amount. The intent of this part of the plan is to cover catastrophic drug expenses. The gap in coverage up to this amount is an attempt by Congress to keep the costs of the plan down. Eliminating the gap in coverage would increase the cost of the plan to taxpayers by at least 60 percent. Both the deductible and the coverage gap are expected to increase after 2006.

Low-income enrollees (those with income of less than $12,123 per year in 2006 dollars with less than $6,000 in assets other than a home) are not required to pay either the premium or the deductible and are exempt from the coverage gap. It is difficult to determine the net benefit of this aspect of the plan, because some of these low-income elderly enrollees could have previously been receiving benefits under Medicaid.

Employer-Provided Drug Coverage One of the difficulties in gaining political support for Medicare drug coverage was the fear that some retirees who already had prescription drug coverage through their employer-provided health insurance could be made worse off. To discourage employers from terminating their prescription drug coverage for retired workers the legislation provides tax-free subsidies, estimated to be worth $70 billion, to employers who maintain drug coverage for retirees after the Medicare plan became effective in 2006. These subsidies are equal to 28 percent of plan drug expenditures in excess of $250 but less than $5,000 on behalf of retired workers. The maximum subsidy per covered retiree was $1,330 in 2006. The limits are adjusted each year. It can be expected that those retirees whose drug coverage under private health insurance plans is superior to that provided by Medicare will retain coverage and choose not to enroll in the Medicare plan. Apago PDF Enhancer

Public Finance of the Drug Purchase Plan The plan will cover an estimated 40 million older and disabled American citizens. The estimated cost of the Drug Purchase Plan over the next 10 years is $700 billion. However, Congress has a very poor record in projecting costs of new entitlement programs. Because the new plan will reduce out-of-pocket costs for prescription drugs, it will increase the quantity demanded. Currently, the typical retiree spends about $1,300 annually on medicine. Because the new plan subsidizes spending on medicine for the elderly, it is likely to provide incentives to increase total expenditure on prescription drugs. It is also likely to increase the incentive for health care providers to prescribe drugs for the elderly. The increase in the demand for pharmaceuticals could put upward pressure on prices. The legislation specifically disallows Medicare from negotiating price decreases on behalf of those insured under the plan. Costs to taxpayers from the plan