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Key facts about H.R. 4954 House GOP Medicare Prescription Drug Bill

Tuesday, June 25, 2002

Key facts about H.R. 4954 House GOP Medicare Prescription Drug Bill

H.R. 4954, which is expected to be considered by the House in the next few weeks, is structurally flawed and will not result in the benefits that it purports to provide for Medicare beneficiaries. Its voluntary nature, its reliance on a private insurance infrastructure that lacks financial incentives to spread risks broadly, its skimpy benefit structure, and the insurance industry’s dismal track record of covering prescription drug benefits, all combine to doom it to failure. Key concerns include:
  • Under H.R. 4954, people who spend less than $775 a year on drugs will end up, after paying the premium and required copayments, with greater out-of-pocket costs if they buy coverage. In other words, the “break even” expenditure for beneficiaries is $775. Hence, many of them are unlikely to enroll.
  • Neither proposal marked-up by two House Committees guarantees any premium level. However, in order to cover higher average costs of the likely enrollees, insurers would have to charge far more than $33 to 35 per month suggested in the Republican proposals. With increased premiums, the “break even” point will increase, resulting in another round of enrollees with even higher drug costs, forcing premiums still higher.
  • This “adverse selection” would result in higher premiums and fewer enrollees, and, as a result, the benefit would not be a reality for many: its design is simply neither workable nor sustainable.
  • H.R. 4954 lacks crucial cost-cutting steps that are needed to reduce costs by closing loopholes that delay the introduction of generics, encouraging the purchase of generics, studying the cost-effectiveness of drug alternatives, encouraging the use of more cost-effective drugs, and using the purchasing power of federal government to achieve price discounts.
  • As the attached charts show, the House GOP bill would provide very little relief in terms of reduced out-of-pocket costs faced by Medicare beneficiaries: A beneficiary with total prescription drug expenditures of $500 would pay $720 for new premiums and uncovered expenses. A beneficiary with total prescription drug expenditures of $1000 would pay $820 for new premiums and uncovered expenditures. Someone with prescription drug expenditures of $2,000 would spend $1,320 on new premiums and uncovered costs. In contrast, the House Democratic alternative, as currently announced, would provide meaningful relief from out-of-pocket prescription drug expenses.
  • Although the House GOP plan would cost taxpayers $310 billion, it would provide very little relief for Medicare beneficiaries.
  • The “medigap” marketplace provides the track record of experience that proves conclusively that in a voluntary private insurance marketplace, “adverse selection” renders a prescription drug benefit that relies on voluntary participation in a private marketplace unworkable: the extra premiums charged Medicare beneficiaries for prescription drug coverage in medigap often exceed the maximum value of the benefit.

Key Numbers

Republican Plan
Democratic Plan



up to $1,000
50% $1,001 to $2,000
(maximum out-of-pocket
costs, not including premium)
$3,700 $2,000
(per month)
(but not guaranteed)
point (benefits exceed premium)
$775 $475
10-year cost estimate
least $800 billion



(1) At this time, H.R. 4954 is expected to assume that the monthly
premium will be in the range of $33 to 35. This analysis uses the figure of
$35/month. The Energy and Commerce bill had a stop-loss limit of $3,700, the
number used in this analysis, and an assumed monthly premium of $33 to $34.
The bill reported out of the House Ways and Means Committee had a stop-loss
level of $3,800 and a suggested premium of $34/month.

For more information contact: Gail Shearer or Janell Mayo Duncan, 202-462-6262