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Contact Us Fall 2000; Volume 1, Number 1
Health Highlights

Medicare Prescription Drug Coverage: Reviewing the Terms of the Debate
Kristina Hanson
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The traditional Medicare benefits package does not include cover age of outpatient prescription drugs. This gap is significant because the Medicare population is disproportionately likely to need such coverage; the elderly account for one-third of all prescription drug expenditures, and 85 percent of Medicare enrollees receive at least one prescription drug each year.1 Spending on prescription drugs is increasing faster than any other single national health spending category, with some estimating the annual growth rate at 18 percent for the 1997-98 period.2 In many ways, this rise in spending is not surprising given that pharmaceuticals are playing an increasingly prominent role in health-care treatment, with prescription drugs often serving a preventive purpose or substituting for inpatient care altogether. More detailed research on rising prescription drug expenditures has cited a number of causal factors, including higher utilization stemming in part from demographic changes in the population, drug price inflation, the proliferation of new and more expensive drugs, increases in direct-to-consumer advertising, and the greater ease with which prescriptions may be administered due to improved electronic claims processing.

Currently, enrollees may obtain assistance with the cost of outpatient prescription drugs in several ways. They may rely on employer-sponsored supplemental coverage included in their retiree benefits package. They might enroll in Medicare managed care plans that include a prescription drug benefit, thus building on the traditional Medicare benefits package. They may, at their own expense, purchase "Medigap" coverage, which provides financial assistance with some of the out-of-pocket costs incurred through traditional Medicare and may also pay for new services altogether (e.g., prescription drugs). If eligible, Medicare enrollees may also obtain coverage through the Medicaid program (while not mandatory, prescription drug coverage is included in every state's Medicaid benefits package) or other public programs offered by the Department of Veterans' Affairs, Department of Defense, or State Pharmaceutical Assistance.

Enrollees who do not, or cannot, take advantage of any of these alternatives must pay out-of-pocket for prescription drugs. In addition, many of those with the sources of coverage described above only enjoy partial coverage. Approximately one-third of Medicare beneficiaries lack prescription drug coverage altogether. As a result, about 50 percent of annual expenditures on prescription drugs for the Medicare population were paid out-of-pocket by the beneficiaries themselves in 1995. This share dropped to 34 percent among beneficiaries with some prescription drug coverage.3 In regard to total out-of-pocket health-care spending by the noninstitutionalized elderly population in 1997, prescription drugs accounted for 16 percent of those costs across all program beneficiaries.4 Meanwhile, many existing sources of coverage (e.g., employers who offer retiree health benefits) are scaling back these benefits or dropping them altogether in response to rising costs of prescription drugs and growing concerns about adverse selection. (The elderly most likely to need coverage for these costs are also most likely to choose supplemental plans that provide it.5)

As might be expected given the many changes in the health-care delivery system, the insurance market and the demographics of the population at large, we are witnessing a renewed attempt to add a prescription drug benefit to the standard Medicare benefits package. Presented below are detailed data concerning the existing state of affairs with respect to coverage and an overview of some of the many proposals that have been offered as a means of addressing this critical gap in the Medicare program serving 39 million elderly and disabled Americans.

Variations in Supplemental Coverage
Beneficiaries supplement the standard fee-for-service Medicare benefits package in various ways. And, as suggested above, the ease with which enrollees may obtain prescription drug coverage varies as a function of the type of supplemental coverage they have (see Figure 1).
Thumbnail of Figure 1
click to enlarge
Given the benefits included in the traditional Medicare benefits package, enrollees without supplemental coverage of any kind have no prescription drug coverage whatsoever. This benefit is relatively uncommon among those with individually purchased Medigap coverage as well. While Medigap policies are sold by private insurers, the benefit packages offered fall into one of ten standardized plans (A through J) that are defined by law. Given that only three of the ten provide outpatient drug benefits—and that their costs are comparatively high—only 29 percent of those with individually purchased Medigap policies in 1995 had drug coverage.

Of the 68.8 percent of Medicare beneficiaries with some drug coverage in 1996, 44.6 percent had supplemental coverage provided by a previous employer, 11.9 percent were enrolled in Medicare HMOs that provided it, 15.2 percent were enrolled in private Medigap plans, 15.3 percent were dually eligible individuals qualifying for Medicaid, and 13 percent fell into an "other" category composed of those who had switched sources of coverage within the year or were enrolled in other public programs.6

It is also important to note that, while 65 percent of enrollees have some prescription drug coverage, this number conceals a wide diversity in coverage in terms of benefit caps, deductibles, copayments, and continuity of coverage. Generally speaking, while coverage offered through retiree benefit packages and Medicare managed care plans tend to include relatively generous coverage, those offered by individually purchased Medigap plans often involve high copayments and deductibles. Disparities in coverage by income level are particularly dramatic given that individuals who cannot afford supplemental coverage are not only going to incur prescription drug costs that consume a larger share of their incomes than are their wealthier counterparts, but they are also less able to purchase drugs at the volume discounts available to health plans. As a result, they are likely to pay more in absolute terms for prescription drugs as well.

Coverage Under Medicare Managed Care
The Balanced Budget Act of 1997 established the Medicare+Choice program, which broadened the array of managed care products available to the Medicare population. While prescription drug coverage is not included in traditional, fee-for-service Medicare, these benefits are relatively common among the 6 million beneficiaries (16 percent of the Medicare population) enrolled in some type of managed care plan. In 1998, 74 percent of Medicare beneficiaries enrolled in HMOs were offered at least some prescription drug coverage.7

The generosity of prescription drug benefits offered by Medicare managed care plans varies dramatically across plans, managed care products, and market areas. As suggested above, the presence of some level of coverage does not necessarily protect enrollees from shouldering substantial out-of-pocket costs. While 25 percent of Medicare enrollees in managed care plans that provide prescription drug coverage enjoy an unlimited benefit, 11 percent are limited to $600 of coverage annually. In 1999, the average limit imposed by managed care plans serving the Medicare population was $1,149. Copayments for prescriptions also vary across plans, ranging from $5 to $10 for generic drugs. The average copayment for brand-name drugs is $13.15 per prescription.8 Expanding the use of managed care to the 84 percent of enrollees who remain in fee-for-service Medicare has figured centrally in proposals to expand prescription drug coverage and Medicare coverage in general.

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