Order Code RL31525
CRS Report for Congress
Received through the CRS Web
Medicare: Beneficiary Cost-Sharing Under
Proposed Prescription Drug Benefits
Updated June 17, 2003
Chris L. Peterson
Analyst in Social Legislation
Domestic Social Policy Division
Congressional Research Service ˜ The Library of Congress

Medicare: Beneficiary Cost-Sharing Under
Proposed Prescription Drug Benefits
Summary
On June 12, the Senate Finance Committee approved a proposed prescription
drug benefit for Medicare. In the House on June 17, both the Ways and Means
Committee and the Energy and Commerce Committee marked up draft Medicare
prescription drug legislation offered by Republican Members. This report examines
these proposals as well as the “Medicare Rx Drug Benefit and Discount Act of
2003,” which was introduced by Representative Charles Rangel, the ranking member
of the House Ways and Means Committee. Specifically, this report provides
background on how the cost-sharing and premium provisions under each bill would
affect the amount that a beneficiary pays annually for prescription drugs.
Each of these proposals has a different form of cost-sharing (that is, the share
of an enrollee’s drug costs that are not paid by the Medicare prescription drug plan).
Under the Senate Finance plan — which would take effect in 2006, as would the
other plans in this report — the plan would pay 50% of drug costs after the enrollee
paid the $275 deductible. After $4,500 in total drug spending (again, in 2006
dollars), the enrollee would pay for all prescription drug spending until reaching the
$3,700 “true” out-of-pocket maximum (that is, cost-sharing amounts excluding those
paid on behalf of the enrollee by private health insurance). After reaching that level
of prescription drug spending, the plan would cover 90% of spending.
In the House, the legislation marked up in the House on June 17 offered a
prescription drug proposal with a deductible of $250, after which the plan would
cover 80% of spending. After $2,000 in total spending, the beneficiary would be
responsible for all prescription drug costs until reaching the “true” out-of-pocket
maximum. Like the Senate Finance plan, the true out-of-pocket maximum in the
House Republican plan is $3,700, and private health insurance payments do not apply
toward it. However, under the House Republican plan, once the true out-of-pocket
maximum is reached, the plan would pay for all additional prescription drug
spending.
The prescription drug benefit proposed in H.R. 1199, the Rangel proposal, calls
for a $100 deductible in 2006. The plan would then pay for 80% of prescription drug
costs, until beneficiary cost-sharing exceeded $2,000, regardless of whether any cost-
sharing was paid by private health insurance, which would be met at $9,600 in total
spending. After the maximum out-of-pocket is met, the beneficiary would pay
nothing for their additional prescription drug spending.
Based on H.R. 1199's premiums and cost-sharing, the breakeven point — which
is where the amount that an individual pays for in cost-sharing and premiums is equal
to what he or she would have paid without any drug coverage — is at $475 in total
annual drug spending. Under the House Republican proposal, enrollees would
receive more in benefits from the plan than if they lacked such coverage after
spending $775 in prescription drugs. Total prescription drug spending of $1,115
would be required before beneficiaries enrolled in the Senate Finance plan would
receive more in benefits than they paid in cost-sharing and premiums.

Contents
Proposed Cost-Sharing Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Cost-Sharing Examples . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
List of Figures
Figure 1. Annual Out-of-Pocket and Premium Spending, by Total Drug
Spending, Up to $2,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Figure 2. Annual Out-of-Pocket and Premium Spending, by Total Drug
Spending, Up to $12,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
List of Tables
Table 1. Annual Premium and Cost-Sharing Under Drug Proposals . . . . . . . . . . 3

Medicare: Beneficiary Cost-Sharing Under
Proposed Prescription Drug Benefits
Providing a prescription drug benefit for Medicare beneficiaries is an important
policy issue facing the 108th Congress. One key aspect of any prescription drug
proposal is how beneficiary cost-sharing would be structured.1 Cost-sharing refers
to the amount that an enrollee in an insurance plan must pay for medical goods and
services. Cost-sharing in a plan generally entails some combination of deductibles,
coinsurance rates or copayments, and limits on beneficiary expenses. Box 1
describes some common insurance terms that relate to cost-sharing.
Box 1. Terms Used to Describe Cost-Sharing
Deductible: The amount an enrollee must pay out-of-pocket before the insurer begins paying
for prescription drug costs. Generally, the enrollee must meet this amount each year. Plans
with no deductible are usually said to provide “first-dollar” coverage.
Coinsurance rate: The percentage of prescription drug costs which are paid by the enrollee.
Copayment: A flat dollar amount that the enrollee must pay for each prescription filled. A
copayment differs from coinsurance in that the copayment amount is fixed regardless of the
price of the drug. However, copayments may vary based on the type of drug (e.g., one
copayment amount for brand-name drugs, another for generic drugs).
Coverage limit: An amount of drug expenses at which the third-party payer (federal
government, insurance plan, etc.) stops covering an enrollee’s costs. Once an enrollee’s drug
costs exceed the coverage limit, the enrollee must pay for all additional drug expenses. Some
plans with a coverage limit provide additional coverage after out-of-pocket expenses exceed a
certain threshold. Such plans are usually described as a “doughnut” plan because there is a
range of expenditures (the “hole”) where the enrollee pays 100% of expenditures.
Out-of-pocket maximum, or stop-loss amount: A limit on how much enrollees are required to
pay each year out-of-pocket (excluding premiums). Once an enrollee meets the out-of-pocket
maximum, all additional expenses for the year are paid by the third-party payer (e.g., Medicare,
private insurance plan). The Senate Finance proposal, however, requires beneficiaries to pay a
10% coinsurance after the “maximum out-of-pocket” is reached. Under the Senate Finance
proposal and the House Republican proposal, cost-sharing amounts paid by private insurers on
behalf of enrollees do not apply toward the out-of-pocket maximum.
In addition to the cost-sharing that exists under a plan, enrollees generally must
pay a premium. A premium is the fixed amount an enrollee must pay to obtain an
insurance policy. The enrollee pays this amount regardless of whether he or she
1 There are other issues associated with a prescription drug benefit, such as how much risk
would be borne by private insurance. See CRS Report RL31496, Medicare: Major
Prescription Drug Provisions of Selected Bills,
by Jennifer O’Sullivan.

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incurs drug expenses. Premiums for health care policies are usually paid on a
monthly basis. While premiums technically are not considered part of cost-sharing,
it is useful to take them into account when comparing plans with dissimilar
cost-sharing requirements.
On June 12, 2003, the Senate Finance Committee approved a proposed
prescription drug benefit for Medicare. In the House on June 17, a draft proposal by
Republican members of the House Ways and Means Committee and the Energy and
Commerce Committee was marked up. This report examines these proposals as well
as the “Medicare Rx Drug Benefit and Discount Act of 2003,” which was introduced
by Representative Charles Rangel, the ranking member of the House Ways and
Means Committee. Specifically, this report provides background on how the
cost-sharing provisions under each bill would affect the amount that a beneficiary
pays for prescription drugs. In addition, this report provides examples of how annual
cost-sharing would differ for beneficiaries with various levels of total prescription
drug spending in 2006 under the plans.
Proposed Cost-Sharing Arrangements
Under the Senate Finance plan — which would take effect in 2006, as would the
other plans in this report — the plan would pay 50% of drug costs after the enrollee
paid the $275 deductible. The coverage limit is $4,500. That is, after $4,500 in total
drug spending (again, in 2006 dollars), the enrollee would pay for all prescription
drug spending until reaching the out-of-pocket maximum. Under this plan the
maximum out-of-pocket is $3,700 and is often referred to as the “true” out-of-pocket
maximum because cost-sharing amounts paid on behalf of the enrollee by private
health insurance do not count toward the $3,700. After reaching that level of
prescription drug spending, the plan would cover 90% of spending. Under this
proposal, enrollees would pay a $35 monthly premium in 2006.2
The House Republican prescription drug proposal has a deductible of $250, after
which the plan would cover 80% of spending, until total prescription drug spending
reaches the coverage limit of $2,000. Like the Senate Finance plan, the out-of-pocket
maximum in the House Republican plan is $3,700, and private health insurance
payments do not apply toward it. However, under the House Republican plan, once
the true out-of-pocket maximum is reached, the plan would pay for all additional
prescription drug spending. Under this proposal, enrollees would pay a $35 monthly
premium in 2006.3
The prescription drug benefit proposed in H.R. 1199, the Rangel proposal, calls
for a $100 deductible in 2006. The plan would then pay for 80% of prescription drug
costs, until beneficiary cost-sharing exceeded $2,000, regardless of whether any cost-
2 In the initial Senate Finance proposal, the coverage limit was $3,450. The original
proposal and the modifications from the markup can be found at the Senate Finance
Committee’s Web site [http://www.senate.gov/~finance/sitepages/legislation.htm].
3 The draft House Republican legislation can be found at the House Ways and Means
Committee’s Web site [http://waysandmeans.house.gov/media/pdf/healthdocs/billtext.pdf].

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sharing was paid by private health insurance, which would be met at $9,600 in total
spending. After the maximum out-of-pocket is met, the beneficiary would pay
nothing for additional prescription drug spending. Under this proposal, enrollees
would pay a $25 monthly premium.
Table 1 summarizes the major cost-sharing provisions of these three
prescription drug plans.
Table 1. Annual Premium and Cost-Sharing
Under Drug Proposals
Senate Finance
House Republican
H.R. 1199 (Rangel)
Premium
$420
$420
$300
Deductible
$275
$250
$100
Cost-sharing
Single coinsurance
Single coinsurance
Single coinsurance
up to coverage limit
up to coverage limit
Cost-sharing
50% of drug costs
20% of drug costs
20% of drug costs
amounts
above deductible and
above deductible and
above deductible
up to coverage limit
up to coverage limit
Coverage limit
$4,500
$2,000
None
Range of
$4,500-$5,813
$2,000-$5,100
None
expenditures where
enrollee pays for
100% of drug costs

Out-of-pocket
$3,700 out-of-pocket
$3,700 out-of-pocket
$2,000 out-of-pocket
maximum
($5,813 total
($5,100 total
($9,600 total
expendituresa)
expendituresa)
expendituresa)
Out-of-pocket
Cost-sharing paid by
Cost-sharing paid by
All cost-sharing
payments applied
enrollee, another
enrollee, another
towards stop-loss
individual, Medicaid,
individual, Medicaid,
amount
low-income subsidy
low-income subsidy
Enrollee payments
10% of expenditures
None
None
beyond out-of-
beyond out-of-pocket
pocket maximum
maximum
Note: The table does not include some of the plans’ reduced cost-sharing for low-income beneficiaries
or increased cost-sharing for high-income beneficiaries.
a Assumes all cost-sharing is paid by the enrollee.

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Cost-Sharing Examples
The three proposals can be compared by examining how much a hypothetical
enrollee with a given level of drug costs would pay under each proposal. For a given
level of prescription drug expenses, a beneficiary’s out-of-pocket payments will vary
depending on each plan’s deductible, coinsurance, coverage limit, and out-of-pocket
maximum. The cost to the government of providing coverage will also vary
depending on these plan characteristics as well as the premium charged to enrollees.
More specifically, if a plan is designed to increase the beneficiary’s share of the cost,
the government’s share of the cost will decrease.
The following examples assume that all cost-sharing is paid by the enrollee; they
do not show the different effects that would have resulted when private health
insurance makes cost-sharing payments on behalf of enrollees. However, since the
only impact of this provision in the Senate Finance and House Republican proposals
is on the calculation of the maximum out-of-pocket, accounting for the provision
would only affect those beneficiaries for whom cost-sharing exceeded $3,700 in
2006. Also, the following examples do not take into account reductions in
expenditures that might result because of the use of the effects of formularies,
pharmacy benefit managers (PBMs), and incentives regarding the use of generic
medications.
Example 1: Enrollee has zero annual drug costs
Senate Finance
House Republican
H.R. 1199
Premium
$420
Premium
$420
Premium
$300
Total payments
$420
Total payments
$420
Total payments
$300
In Example 1, the enrollee does not have any drug expenditures, and therefore
would only pay the premiums.
Example 2: Enrollee’s annual drug costs equal $50
Senate Finance
House Republican
H.R. 1199
Deductible
$50
Deductible
$50
Deductible
$50
Premium
$420
Premium
$420
Premium
$300
Total payments
$470
Total payments
$470
Total payments
$350
In the second example, the enrollee’s annual drug expenditures equal $50. The
$50 in drug costs fall below each of the plans’ deductibles. Consequently, the
enrollee pays the entire $50 plus the premiums under all three proposals.

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Example 3: Enrollee’s annual drug costs equal $750
Senate Finance
House Republican
H.R. 1199
Deductible
$275
Deductible
$250
Deductible
$100
Coinsurance
Coinsurance
Coinsurance
(= 50% of $475a)
$238
(= 20% of $500b)
$100
(= 20% of $650c)
$130
Premium
$420
Premium
$420
Premium
$300
Total payments
$933
Total payments
$770
Total payments
$530
a Equal to total drug expenditures ($750) minus the deductible ($275).
b Equal to total drug expenditures ($750) minus the deductible ($250).
c Equal to total drug expenditures ($750) minus the deductible ($100).
In Example 3, the enrollee has $750 in total annual drug spending. This amount
exceeds the deductibles proposed by each plan. In the case of H.R. 1199, the
enrollee’s costs would exceed the deductible by $650. The enrollee would pay the
premiums, the full $100 deductible and 20% of the $650 amount. In the case of the
House Republican plan, the enrollee’s costs would exceed the deductible by $500.
The enrollee would pay the premiums, the full $250 deductible and 20% of the $500
amount. Under the Senate Finance plan, the enrollee would pay the premiums, the
full $275 deductible and 50% of the $475 amount.
Example 4: Enrollee’s annual drug costs equal $1,500
Senate Finance
House Republican
H.R. 1199
Deductible
$275
Deductible
$250
Deductible
$100
Coinsurance
First coinsurance
Coinsurance
(= 50% of $1,225a)
$613
(= 20% of $1,250a)
$250
(= 20% of $1,400a)
$280
Premium
$420
Premium
$420
Premium
$300
Total payments
$1,308
Total payments
$920
Total payments
$680
a Equal to total drug expenditures ($1,500) minus the deductible.
The fourth example illustrates enrollee out-of-pocket spending when the
enrollee’s total drug costs equal $1,500. The proposals would work the same way
in this example as in the previous example. Under the Senate Finance plan, the
enrollee would pay the premiums as well as the $275 deductible and 50% of
expenses above the deductible. Under the House Republican plan, the enrollee
would pay the premiums, the $250 deductible and 20% of expenses above the
deductible. Under the H.R. 1199 plan, the enrollee would pay the premiums, the
$100 deductible and 20% of expenses above the deductible.

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Example 5: Enrollee’s annual drug costs equal $3,000
Senate Finance
House Republican
H.R. 1199
Deductible
$275
Deductible
$250
Deductible
$100
Coinsurance
Coinsurance
Coinsurance
(= 50% of $2,725a)
$1,363
(= 20% of $1,750b)
$350
(= 20% of $2,900a)
$580
Expenditures above
$2,000 coverage
limit
$1,000
Premium
$420
Premium
$420
Premium
$300
Total payments
$2,058
Total payments
$2,020
Total payments
$980
a Equal to total drug expenditures ($3,000) minus the deductible.
b Equal to the coverage limit ($2,000) minus the deductible ($250).
In Example 5, the enrollee’s cumulative drug costs for the year equal $3,000.
Under the Senate Finance and H.R. 1199 proposals, the enrollee’s payments would
be calculated in the same manner as in the previous two examples.
Under the House Republican proposal, coverage would be limited to the first
$2,000 of drug expenses. Thus, the $3,000 in expenses generated by the enrollee
would exceed the initial coverage limit by $1,000. The enrollee would pay these
excess expenses out-of-pocket. In total, the enrollee would pay the premiums as well
as the following cost-sharing: (1) the $250 deductible; (2) 20% of $1,750, where
$1,750 equals the difference between the deductible and the coverage limit of $2,000;
and (3) those expenditures exceeding the initial coverage limit.
Example 6: Enrollee’s annual drug costs equal $4,500
Senate Finance
House Republican
H.R. 1199
Deductible
$275
Deductible
$250
Deductible
$100
Coinsurance
Coinsurance
Coinsurance
(= 50% of $4,225a)
$2,113
(= 20% of $1,750b)
$350
(= 20% of $4,400c)
$880
Expenditures above
$2,000 coverage
limit
$2,500
Premium
$420
Premium
$420
Premium
$300
Total payments
$2,808
Total payments
$3,520
Total payments
$1,280
a Equal to total drug expenditures minus the deductible ($250). Total spending of $4,500 is the
coverage limit for this plan. Thus, any additional prescription drug spending, up to the out-of-pocket
maximum, would be paid for by the enrollee.
b Equal to the coverage limit ($2,000) minus the deductible ($250).
c Equal to total drug expenditures ($4,500) minus the deductible ($100).

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In Example 6, the enrollee’s cumulative drug costs for the year equal $4,500.
The enrollee’s payments under these proposals would be calculated in the same
manner as in the previous example.
Example 7: Enrollee’s annual drug costs equal $6,000
Senate Finance
House Republican
H.R. 1199
Deductible
$275
Deductible
$250
Deductible
$100
Coinsurance
Coinsurance
Coinsurance
(= 50% of $4,225a)
$2,113
(= 20% of $1,750b)
$350
(= 20% of $5900c)
$1,180
Expenditures
Expenditures
between $4,500
between $2,000
coverage limit and
coverage limit and
$5,813d
$1,312
$5,100e
$3,100
10% of $187f
$19
Premium
$420
Premium
$420
Premium
$300
Total payments
$4,139
Total payments
$4,120
Total payments
$1,580
Note: Assumes all cost-sharing applies to the out-of-pocket maximum.
a Equal to coverage limit ($4,500) minus the deductible ($275).
b Equal to the coverage limit ($2,000) minus the deductible ($250).
c Equal to total drug expenditures ($6,000) minus the deductible ($100).
d The level of cumulative expenditures at which enrollee spends $3,700 out-of-pocket is $5,813.
e The level of cumulative expenditures at which enrollee spends $3,700 out-of-pocket is $5,100.
f Equal to total drug expenditures ($6,000) minus $5,813.
Example 7 illustrates a situation in which an enrollee’s payments exceed the
$3,700 stop-loss amounts under the Senate Finance and House Republican proposals.
Under the House Republican plan, this enrollee’s total payments for the year would
be the premiums plus the $3,700 out-of-pocket maximum, after which no additional
cost-sharing is required.
Under the Senate Finance plan, an enrollee reaches the $3,700 limit on out-of-
pocket payments once cumulative drug costs exceed $5,813 (assuming all cost-
sharing applies to the out-of-pocket maximum) plus premiums. The enrollee would
then pay 10% of all expenditures above that amount. In total, this enrollee would pay
premiums as well as the following cost-sharing: (1) the $275 deductible; (2) 50% of
$4,225, where $4,225 equals the difference between the deductible and the coverage
limit; (3) $1,312, which equals the amount of expenditures exceeding the $4,500
coverage limit but less than $5,813; and (5) $19, which equals 10% of expenditures
above $5,813.

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Example 8: Enrollee’s annual drug costs equal $12,000
Senate Finance
House Republican
H.R. 1199
Deductible
$275
Deductible
$250
Deductible
$100
Coinsurance
Coinsurance
Coinsurance
(= 50% of $4,225a)
(= 20% of
(= 20% of $9,500c)
$2,113
$1,750b)
$350
$1,900
Expenditures
Expenditures
between $4,500
between $2,000
coverage limit and
coverage limit
$5,813d
$1,312
and $5,100e
$3,100
10% of $6,187f
$619
Premium
$420
Premium
$420
Premium
$300
Total payments
$4,739
Total payments
$4,120
Total payments
$2,300
Note: Assumes all cost-sharing applies to the out-of-pocket maximum.
a Equal to coverage limit ($4,500) minus the deductible ($275).
b Equal to coverage limit ($2,000) minus the deductible ($250).
c Equal to the level of cumulative expenditures at which enrollee spends $2,000 out-of-pocket ($9,600)
minus the deductible ($100).
d The level of cumulative expenditures at which enrollee spends $3,700 out-of-pocket is $5,813.
e The level of cumulative expenditures at which enrollee spends $3,700 out-of-pocket is $5,100.
f Equal to total drug expenditures ($12,000) minus $5,813.
H.R. 1199 would limit enrollee out-of-pocket payments (excluding premiums)
to $2,000. In Example 8, the enrollee’s cost-sharing would have otherwise exceeded
this limit. With total drug expenses of $12,000, the enrollee would have had to pay
$2,480 under the 20% coinsurance rule. However, because $2,480 exceeds the plan’s
out-of-pocket limit, the enrollee would pay only $2,000 for the year. With a 20%
coinsurance rate and a $100 deductible, an enrollee would reach the $2,000 limit on
out-of-pocket payments once the enrollee’s drug expenses exceeds $9,600 for the
year. Thus, any enrollee with drug expenses above $9,600 per year would pay a total
of $2,000 plus premiums under H.R. 1199.
An individual enrollee with a certain amount of total prescription drug spending
may have very different experiences in each of these plans because of the structure
of the plans’ benefits and resulting cost-sharing. Figure 1 and Figure 2 illustrate
beneficiaries’ out-of-pocket payments at different levels of total drug spending, based
on the cost-sharing listed in Table 1. Figure 1 displays total prescription drug
spending up to $2,000. Figure 2 shows spending up to $12,000, although some
enrollees may have spending exceeding that amount. The figures assume that all
cost-sharing applies to each plan’s out-of-pocket maximum and does not account for
some of the plans’ reduced cost-sharing for low-income beneficiaries or increased
cost-sharing for high-income beneficiaries.
The line in the figures labeled “No drug coverage” represents the amount that
an individual would pay if he or she did not have any insurance coverage for
prescription drugs not presently covered by Medicare. The lines of the other plans

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cross this line at the “breakeven point” of their respective plans — that is, the point
where the amount that an individual pays for a plan’s cost-sharing and premiums is
equal to his or her total drug costs. The breakeven point could also be described as
the point where the amount that an individual pays for a plan’s cost-sharing and
premiums is equal to what he or she would have paid without any drug coverage. In
the figures, line segments to the right of the “No drug coverage” line represent levels
of drug spending where the enrollee pays less in out-of-pocket expenses and
premiums than if they had no drug coverage. In the figures, line segments to the left
of this line represent levels of drug spending where the enrollee pays more in out-of-
pocket expenses and premiums than if he or she had no drug coverage.
Based on the premium and cost-sharing outlined in H.R. 1199, the breakeven
point is at $475 in total annual drug spending. Under the House Republican
proposal, enrollees would receive more in benefits from the plan than if they lacked
such coverage after spending $775 in prescription drugs. Total prescription drug
spending of $1,115 would be required before beneficiaries enrolled in the Senate
Finance plan would receive more in benefits than they paid in cost-sharing and
premiums.

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Figure 1. Annual Out-of-Pocket and Premium Spending, by Total Drug Spending, Up to $2,000
$1,400
Senate
No drug coverage
Finance legislation
$1,200
House Republican
legislation
$1,000
$800
H.R. 1199
$600
$400
Out-of-Pocket and Premium Spending
$200
$0
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
$2,000
Total Drug Spending
Source: Congressional Research Service (CRS).
Note: The figure assumes that all cost-sharing applies to each plan’s out-of-pocket maximum. The figure does not reflect some of the plans’ reduced cost-sharing for low-income
beneficiaries or increased cost-sharing for high-income beneficiaries.

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Figure 2. Annual Out-of-Pocket and Premium Spending, by Total Drug Spending, Up to $12,000
No drug coverage
$8,000
$6,000
Senate Finance
legislation
$4,000
House Republican
legislation
$2,000
H.R. 1199
Out-of-Pocket and Premium Spending
$0
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
Total Drug Spending
Source: Congressional Research Service (CRS).
Note: The figure assumes that all cost-sharing applies to each plan’s out-of-pocket maximum. The figure does not reflect some of the plans’ reduced cost-sharing for low-income
beneficiaries or increased cost-sharing for high-income beneficiaries.

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Conclusion
The cost-sharing design and premium amounts are some of the issues that the
108th Congress is considering in developing a prescription drug benefit for the
Medicare population. Several options are available, each with particular trade-offs
in terms of cost for beneficiaries and program costs for the government.
One key decision concerns the amount of cost-sharing an enrollee should be
required to pay. Low levels of cost-sharing reduce the financial burden that enrollees
would have to bear. However, low cost-sharing makes the benefit more expensive
for the government and raises the possibility of adverse selection and overutilization.
If enrollees face low cost-sharing, the costs of providing a benefit must be picked up
by the government, third-party payers contracted by the government, or providers of
pharmaceutical goods and services.