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Adding Prescription Drug Benefit Would Increase Medicare Costs 7 To 13 Percent Over Next Decade

For Immediate Release:
April 13, 1999

Contact: Jill Braunstein



WASHINGTON, DC - With several members of Congress preparing their own proposals on Medicare reform to include coverage for prescription drugs, the nonpartisan National Academy of Social Insurance has released a study of the financial burden prescription drugs now place on Medicare beneficiaries, as well as the costs and implications of a Medicare prescription drug benefit.

The study concluded that outpatient drug coverage could add between 7 and 13 percent per year to Medicare costs during the program's first ten years. At the low end of this range are benefit designs that would pay for drugs only up to a set limit each year. At the upper end of the range are benefit designs that would pay all drug costs above a certain annual amount.

"Outpatient prescription drugs have played an increasingly important role in health care over the last 30 years, yet they are not covered by Medicare," said Michael E. Gluck, Ph.D., director of health policy studies for the National Academy of Social Insurance. "Facing this fact when the nation is trying to maintain adequate financing for the existing Medicare program means policymakers will have to make difficult choices in deciding whether and how to add drugs to Medicare's benefit package. This analysis clarifies some of those choices and their implications."

The Academy's blue-ribbon study panel on Medicare Financing, chaired by Marilyn Moon of the Urban Institute, commissioned the Actuarial Research Corporation to estimate the costs of five different drug benefits. One would provide no more than $2,000 a year in drug reimbursements for each beneficiary, while the other four would pay all drug expenses once beneficiaries had incurred maximum out-of-pocket liability ranging from $1,000 to $3,000. While half of all beneficiaries have current out-of-pocket drug expenses of less than $200 a year, about 14 percent (4.5 million beneficiaries) incur costs of $1,000 or more, and four percent (1.3 million beneficiaries) have costs of $2,000 or more.

All five options would require beneficiaries to pay annual deductibles and coinsurance for the drugs, but the specific amounts vary across the five plans. The plans also assume that the government would realize a discount from amounts currently paid by beneficiaries for drugs and that a Medicare benefit would lead to increased use of pharmaceuticals.

"This analysis allows policymakers to consider a variety of designs," said Moon. "By estimating several scenarios, we've provided information about the benefits of increasing access to prescription drugs to Medicare beneficiaries, as well as the associated costs."

To show the role of outpatient prescription drugs in the lives of Medicare beneficiaries, the study cites data showing:

More drugs are available for outpatient treatment. The number of new drugs approved by the Food and Drug Administration was 140 percent higher between 1994-1998 than it was in the first five years of the Medicare program (1966-1970). Some of these new drugs substitute for expensive treatments such as hospitalization or surgery, while others offer treatments where none existed before.

Drug costs are rising faster than other heath spending, and therefore costs to beneficiaries are rising as well. According to recent projections using Health Care Financing Administration data, in 1999, drug costs are expected to rise between 14 and 18 percent, while overall health spending will increase only 5.3 percent. Between 1992 and 1998, spending on drugs in the United States almost doubled from $49 billion to $93 billion.

One-third of Medicare beneficiaries currently have no insurance coverage for prescription drugs. Furthermore, the Academy report points out that those beneficiaries who do receive outpatient prescription drug coverage through supplemental insurance, such as employer-sponsored coverage, Medicare+Choice plans, "Medigap" policies, or Medicaid, are finding their coverage is increasingly becoming less generous. And those without coverage face higher prices because they are not eligible for the bulk discounts negotiated by health plans.

"Despite clear indications that out-of-pocket drug costs are an escalating financial burden on Medicare beneficiaries, there are no easy solutions," said Gluck. "Even if a prescription drug benefit were added, policymakers would have to decide how universal to make the benefit and how to administer it."

The Academy's analysis outlines key choices policymakers would have to make in designing and implementing a prescription drug benefit. Questions considered include who should benefit from prescription drug coverage; who should administer the program; how much should be paid for each drug; and whether Medicare should provide subsidies to help low income beneficiaries who do not qualify for Medicare to pay any deductibles or copayments required to them as part of a prescription drug benefit.

The study panel on Medicare Financing is one of four committees whose work makes up the Academy's initiative on Restructuring Medicare for the Long Term. The Robert Wood Johnson Foundation provided grant support for the analysis.

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The National Academy of Social Insurance is a nonprofit, nonpartisan organization of the nation's experts on social insurance. It conducts research and enhances public understanding of social insurance, develops new leaders, and provides a forum for exchanging ideas on issues regarding social insurance.

View the full issue brief on
www.nasi.org.
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