Issue Brief

July 2001

Prescription Drugs and Medicare - Part II 

 THE CHALLENGE

In my last newsletter I spent a great deal of time discussing the Medicare program, its financial condition, and its problems in particular with regard to a prescription drug benefit for seniors.  In this newsletter I would like to describe some of the proposals that are being offered regarding a new drug benefit for seniors.  

I.  Introduction
Before we begin to discuss the various legislative proposals for a prescription drug benefit for seniors, however, we need to understand exactly what the problem is.

There are those who would have us believe the "sky is falling" and vast numbers of seniors are being forced to choose between paying for needed prescriptions and paying for food.  There are others who insist the problem is minor since "most seniors have drug coverage anyway".  In fact, neither of those positions is correct but they both contain a "kernel of truth". 

II.  The Problem
Since 1992, the Centers for Medicare and Medicaid Services (CMS) - previously named the Health Care Financing Administration-has conducted an annual survey of a representative sample of the Medicare population.  The survey -- called the Medicare Current Beneficiary Survey - interviews respondents every four months and asks them to record their drug purchases. 

According to John Poisal, a statistician who has analyzed these data, this research has produced two main findings regarding drug coverage among the elderly.  First, the proportion of Medicare beneficiaries with drug coverage increased annually throughout the 90's until 1998 when it remained the same as 1997.  Second, there is a major gap in the level of use and spending on prescription drugs between seniors with drug coverage and those without.  And this gap widened in 1998, the most recent year of the survey.  Since prescription drug costs are rising at an incredible rate - 19 percent per year - that is not surprising.  

A.  Who lacks coverage?  
In 1998 more than a quarter (27%) of all Medicare beneficiaries --10.2 million seniors -- had no drug coverage at all.  The remaining 73% had some drug coverage during the year but that coverage was very unstable and only half of all Medicare beneficiaries had coverage throughout the entire year.  Further, when the data are analyzed in more detail we learn that there are unique characteristics to the seniors that don't have coverage. 

Seniors who live in rural areas are more likely to be without drug coverage than their urban counterparts.  Seniors who are over 85 are more likely to be without drug coverage than those between 65 and 74, and seniors who are slightly above poverty level are more likely to be without coverage than their friends below the poverty line or way above it.  These people have a unique vulnerability because their incomes are too high for them to qualify for Medicaid but too low for them to afford a Medigap policy with drug coverage on their own.

B.  Why does it matter?
Prescription drugs have become increasingly important in treating a variety of health problems and soon will exceed payments to doctors as the second largest cost item in health care -- hospitals are first.  The use of medications increases with age along with increases in chronic and acute health problems.  Yet, drug coverage is the last major benefit still excluded from Medicare and the elderly are the last major insured group without drug coverage.  Although many seniors have some type of supplemental drug coverage, this coverage is getting increasingly costly and its benefits are becoming more and more limited. 

In 1998, the Minority Staff of the House Committee on Government Reform and Oversight studied the five brand name prescription drugs with highest sales to the elderly in 20 Congressional districts around the country.  They found that the average senior citizen pays twice as much for these medications as "favored customers" (i.e. large insurers and HMO's).  They assumed this might have been caused by "volume differentials" but when they analyzed price differentials for other goods, they discovered that the drug price differential was more than four times greater than the average price differential for other consumer goods.  Clearly, this places uninsured seniors at an extreme disadvantage in the market place.  

Further, national spending for drugs has tripled in the last decade and is expected to more than double in the next.  While Medicare beneficiaries are only 14% of the US population, they account for 43% of the nation's total drug bill. 

When one looks at the ever-expanding use of drugs for treating the problems of the elderly, the extremely high increase in drug prices, the declining coverage for drug costs in the Medicare population, and the startling price differential they face when trying to pay for drugs on their own, it comes as no surprise that there is strong pressure on Congress to address this matter. 

III.  Proposed Solutions
Whenever a problem stems from the fact that a necessity of life costs too much there are two ways to solve it.  One is to create a situation where the price goes down enough to make the needed goods affordable and the other is to provide more money to help people pay for the needed goods.   

A.  Managing Costs
When it comes to prescription drugs, both of these approaches have been debated in Congress over the last few years and are still being proposed in various legislative initiatives.  As most people are aware, we have had a raging controversy over the fact that prescription drugs that were developed and manufactured in this country are sold at much lower prices in Canada, Mexico, and Europe.  In fact, during last year's campaign many candidates for office in border states made a point of helping seniors travel to Mexico or Canada to buy medications at lower prices.

This discussion continues and, in fact, Senator Tim Johnson of South Dakota has introduced two bills, which would require drug manufacturers to lower their prices.  In one proposal he would require the manufacturer to make covered drugs available to pharmacists for Medicare beneficiaries at a price equal to the price they charge the federal government or their best price, whichever is lower.  And in his other bill, he requires manufacturers to make the drugs available to Medicare beneficiaries at a price no greater than the average foreign price.   Congressman Tom Allen of Maine has introduced similar legislation in the House.  

On July 11, Minnesota Congressman Gil Gutknecht offered an amendment to the Agriculture Appropriations Bill in the House, which would effectively end the ban on individuals importing FDA-approved medications that have been manufactured in accordance with federal standards.  The FDA could still stop businesses from importing drugs but it could no longer stop individuals who wanted to import cheaper medications so long as those drugs were not narcotics, were FDA-approved, and had been manufactured safely.  The amendment passed overwhelmingly on a vote of 324-101.  The proposal is now pending in the Senate.

President Bush has proposed a different idea that would also lower the cost of drugs for seniors and would not require legislation.  It will be discussed with his other proposal in the next section.

While all these proposals might be helpful, they would not solve the problem for seniors who have so many medication needs they won't be able to afford their medications, even at lower prices.  For these people, the only hope is some form of assistance in the purchase of medications, either through the Medicare program or outside it.

B.  Providing a Drug Benefit  
A year ago, when I wrote about this issue there were two competing proposals for a prescription drug benefit on the table and it was pretty clear that neither would prevail  (See NIHP Newsletter, Prescription Drug Benefits in Medicare, August 2000).  Now we face the issue with a new Congress and a new Administration.  The one thing that is not new is the fact that solving this problem will require a great deal of money.  This year's budget resolution set aside $300 billion to deal with the problem but it is not clear that will be enough.  However, the fact that a special pot of money has been set aside is a first step and demonstrates that most political actors regardless of party or philosophy feel the need to at least try to address the problem.

Several different approaches have been suggested by policy experts.  They include:

1. Provide coverage only for those with low incomes, either as a first step or as the entire program;
2. Provide universal coverage, but only in combination with other changes such as relying on private insurance plans to serve Medicare beneficiaries;
3.  Provide universal coverage with no conditions and let other Medicare reforms occur outside the context of this change; and
4. Overhaul the entire Medicare program and transform it into something similar to the Federal Employee Health Benefit Plan model.  This would include an updated fee-for-service Medicare program as well as competing private plans. 

C.  The President's Plans
Earlier this year, President Bush appeared to favor the first approach when he proposed his Immediate Helping Hand (IHH) prescription drug proposal. This proposal would have given a block grant to the states to subsidize all or a portion of the cost of a comprehensive drug benefit for low-income Medicare beneficiaries who do not qualify for Medicaid.  To date, the proposal has not been pushed in legislative form and Governors have expressed grave reservations about states being asked to shoulder the burden of running a drug benefit for the federal government.  Without leadership from the White House and HHS it may not be pursued further. 

On July 13, the President announced a new interim plan to help Medicare beneficiaries get discounts on prescription drugs starting January 1.  Under this proposal the federal government would approve drug discount cards issued by private companies that meet federal standards.  The companies would negotiate discounts from pharmacies and drug manufacturers by pooling the buying power of Medicare beneficiaries.  A senior citizen on Medicare could participate in the plan by paying a one-time enrollment fee of $25.  The Secretary of Health and Human Services, Tommy Thompson, has said he hopes the discounts will cut retail prices by 15 to 25 percent.

Five private health care companies - AdvancePCS, Express Scripts, Caremark Rx, Merk-Medco, and WellPoint - have endorsed the plan.  They will form a consortium to run the discount program for beneficiaries initially, although government officials believe eight to fifteen companies will eventually meet the criteria necessary to participate in the program as pharmacy benefit managers.

The Administration believes this program can be implemented without legislation.  Pharmacists and drugstores, however, are very opposed to the idea as it has been described by the President.  It will be interesting to watch this program develop because they will certainly be necessary participants if the plan is to succeed. 

NIHP Vice Chairman, Bryan Dowd, Ph.D. who is a health economist at the University of Minnesota, was an invited guest at the White House last week when President Bush unveiled his new plan.  All of us at NIHP will be watching this new proposal and future Medicare changes with unusual interest this year.

D.  Congressional Plans
A handful of bills have been introduced in the House and the Senate that follow the second and third approaches suggested by the experts.  Senator Tom Daschle of South Dakota, the new Majority Leader in the Senate, has introduced the Medicare Prescription Drug Coverage Act of 2001 (S.10), which is similar to the Medicare prescription drug benefit proposal supported by former President Clinton last year.  This proposal would add a new Part D (Outpatient Prescription Drug Benefit Program) to Medicare to provide Medicare coverage of outpatient prescription drugs for people enrolled in either Part A or Part B of the Medicare program 

Senators John Breaux and Bill Frist have introduced two bills that deal with prescription drug benefits.  The Medicare Prescription Drug and Modernization Act of 2001 (S.358) sets up a new prescription drug benefit and the Medicare Preservation and Improvement Act of 2001 (S.357) creates a new Medicare structure making a new prescription drug benefit and stop-loss coverage available to Medicare beneficiaries who choose high-option Medicare plans.  This bill follows the fourth approach listed earlier.

Senator Paul Wellstone of Minnesota combines several ideas in his proposal, the Medicare Extension of Drugs to Seniors Act of 2001 (S.925).  In this package he 

1.      proposes a voluntary insurance program to provide prescription drug benefits,

2.      asks the Secretary of Health and Human Services to develop a program to encourage employers to provide adequate drug benefits for retirees,  and

3.      proposes that drug manufacturers who receive patents for drugs which are  developed from federally-funded research make reasonable pricing agreements with the government as a condition of receiving the patent.   

Congressman Pete Stark of California has offered the Medicare Modernization and Solvency Act of 2001 (H.R.803).  This bill proposes extensive changes in the Medicare program including benefit enrichment, in particular with a strong prescription drug benefit and access to Medicare for displaced workers between the ages of 55 and 62.  It also strengthens Medicare's funding through increased beneficiary cost sharing, increased taxes, and improved efficiencies from providers.  Some of these provisions (i.e. dedicating estate and gift tax revenues to Medicare) have already been made moot by actions taken in the passage of the tax bill.

Throughout all the discussions of a Prescription Drug benefit for seniors it is useful to remember that when this issue was debated last year there were huge divisions in the industries affected by the bill.  The pharmaceutical industry was vigorous in its opposition to including any drug benefit in the Medicare program arguing for a separate drug insurance program for the elderly.  At the same time, the insurance industry was vigorously opposed to bearing the burden of this type of program and wanted any new drug benefit for seniors folded into the Medicare program.  There is little reason to believe these positions have changed in the last year.

IV.  Conclusion
Later this year, after the Patients' Bill of Rights controversy settles down, there will be renewed efforts in Congress to develop a lasting prescription drug benefit for seniors.  Whether this will happen in the context of a broader Medicare reform package or on its own remains to be seen.  Although the $300 billion contained in the Budget Resolution is unlikely to be enough for a comprehensive drug benefit, there will still be pressure to use it for at least a partial benefit.  And there will continue to be political pressures to restrain the drug manufacturers in their pricing practices, which appear to be very arbitrary to the average voter.  

It will be interesting to watch this saga unfold.  For those of us who have spent time making policy, it is a little difficult to watch.  The ideal benefit structure comes as part of a reform of the Medicare program, but getting agreement on that this year appears nearly impossible.  And next year is as important an election year as we’ve seen since 1982.  

Providing drug access for those 10.2 million seniors without coverage, as well as better, more affordable access for all seniors is pressure that is being underscored. Because of this pressure and the limited flexibility in the budget, President Bush’s senior discount card plus and a program like the immediate Helping Hand will seem much more attractive in the short term.