Order Code RL31640
Report for Congress
Received through the CRS Web
Medicare Prescription Drug Coverage for
Beneficiaries: Background and Issues
Updated January 6, 2003
Specialist in Social Legislation
Domestic Social Policy Division
Congressional Research Service ˜ The Library of Congress
Medicare Prescription Drug Coverage for Beneficiaries:
Background and Issues
Medicare is a nationwide health insurance program which offers health
insurance protection for 40 million aged and disabled persons. The program provides
broad coverage for the costs of many, primarily acute, health services. However,
there are many gaps in program coverage. The most notable shortcoming is the fact
that Medicare has a very limited prescription drug benefit.
Most beneficiaries have some form of private or public health insurance to cover
expenses not met by Medicare. However, many of these plans either do not offer
drug coverage or offer very limited protection for drug expenses. Though 73% of
beneficiaries had some drug coverage in 1998, they paid approximately 44% of their
total drug expenses out-of-pocket. The total average annual drug expenditure for
Medicare enrollees living in the community was $878 in 1998. Total spending for
persons with some drug coverage was $999 compared to $546 for those with no
coverage. Furthermore, out-of-pocket costs were higher for those without coverage
($546) than those with coverage ($325).
These spending patterns have suggested to policymakers the need for better drug
coverage for the Medicare population. On several occasions, the Congress has
considered adding coverage for at least a portion of beneficiaries’ drug costs. In the
summer of 2002, the House passed a prescription drug measure. The Senate spent
several weeks debating various proposals, but were unable to come to an agreement
on a plan. The 107th Congress did not take final action on a prescription drug
measure. It is expected that the issue will be considered again early in the108th
Congress. In part, this reflects the prominence that this issue has assumed over the
last couple of years. In part, it also reflects the likely continued attention that will be
focused on the prices seniors pay for drugs and the inability of some seniors to pay
these drug bills.
There are a number of design issues facing the development of a drug benefit
for the Medicare population. First are several of broad organizational and
administrative questions. These include whether a drug benefit should be enacted
prior to or as part of overall structural reform of the Medicare program; whether the
new benefit should be part of the Medicare program itself or administered as a
separate program; and the degree of reliance that should be placed on the private
sector, both for administering the benefit and assuming a portion of the financial risk.
Another series of issues relate to benefit design. These include: whether the benefit
should be extended to the entire population or limited to particular groups such as
low-income persons and those with catastrophic expenses; how beneficiary costsharing would be structured; the level of assistance that would be provided for the
low-income population; and the definition of covered drugs. Also at issue is what
cost control strategies, if any, would be established at the federal level. The final
questions relate to the potential costs of a new benefit and how these costs would be
financed over time. This report will be updated as additional data become available.
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Sources of Existing Coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Medicare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Supplementary Coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Medicare Managed Care Organizations . . . . . . . . . . . . . . . . . . . . . . . . . 5
Private Supplementary Coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Employer-Sponsored Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Medigap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Medicaid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Other Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
State Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Drug Coverage and Spending for the Medicare Population . . . . . . . . . . . . . . . . 13
Drug Coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Coverage By Source of Supplemental Insurance . . . . . . . . . . . . . . . . . 13
Drug Coverage By Income Level . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Impact of Coverage on Utilization . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Drug Spending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Total Spending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Out-of-Pocket Spending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Out-of-Pocket Drug Spending as a Percentage of Income . . . . . . . . . . 19
Estimates of Future Spending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Drug Spending and Pricing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
National Spending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Factors Affecting Spending Increases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Consumer Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Previous Efforts to Expand Medicare’s Coverage of Prescription Drugs . . . . . . 25
Medicare Catastrophic Coverage Act of 1988 . . . . . . . . . . . . . . . . . . . . . . . 25
Health Care Reform — 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
The 1999-2000 Debate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
107th Congress Debate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Proposed Benefit: Program Design Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Structural Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Relationship to Overall Medicare Reform . . . . . . . . . . . . . . . . . . . . . . 29
Degree of Private Involvement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Administration of Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
In General; PBMs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Federal Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Benefit Design Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Persons Covered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Program Enrollment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Scope of Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Assistance for the Low-Income Population . . . . . . . . . . . . . . . . . . . . . 35
Relationship to Private Coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Employer-Based Coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Medigap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Covered Drugs; Formularies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Other Cost Control Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Payments for Drugs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Pricing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Purchasing Discounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Rebates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Prospects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
List of Figures
Figure 1. Medicare Beneficiaries with Drug Coverage by Income Category,
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Figure 2. Average Annual Per-Capita Spending for Prescription Drugs for
Medicare Beneficiaries by Presence or Absence of Drug Coverage
and by Income Category, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Figure 3. Average Annual Out of Pocket Spending for Prescription Drugs
by Medicare Beneficiaries by Presence or Absence of Drug Coverage
and by Income Category, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
List of Tables
Table 1. Medicare Beneficiaries, by Source of Supplementary Health
Insurance Coverage, Fall 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Table 2. Average Nationwide Medigap Premiums for a 65-Year Old Male,
1998, 2000, and 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Table 3. Distribution of Noninstitutionalized Medicare Beneficiaries, by
Type of Supplemental Insurance and Presence of Drug Coverage, 1998 . . 13
Table 4. Estimated Spending on Outpatient Drugs by or for Medicare
Beneficiaries, 2002-2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Table 5. Estimated Distribution of Medicare Beneficiaries and Amount
Spent on Outpatient Prescription Drugs, 2002 . . . . . . . . . . . . . . . . . . . . . . 20
Medicare Prescription Drug Coverage for
Beneficiaries: Background and Issues
The Medicare program provides significant health insurance coverage for its 40
million aged and disabled beneficiaries. The program provides broad coverage for
the costs of many, primarily acute, care services. However, many observers believe
that Medicare’s benefit structure fails to adequately respond to beneficiaries’ health
care needs. The program includes cost-sharing charges for most services, provides
only limited protection for some other costs (such as nursing home care) and includes
no protection against the costs of some other services (such as hearing aids). Further,
the program includes no upper limit (“catastrophic limit”) on cost sharing charges.
The most notable shortcoming is the fact that Medicare has a very limited
prescription drug benefit. Most beneficiaries have some form of private or public
health insurance to help cover expenses not met by Medicare. However, many of
these plans either do not offer drug coverage or offer very limited protection for drug
expenses. As a result, beneficiaries still pay over 40% of their total drug
expenditures out-of-pocket. This can pose a hardship for some beneficiaries,
particularly those with low-incomes and persons with chronic diseases. In fact,
some reports have suggested that some seniors skip medication doses or fail to get
prescriptions filled because of cost-concerns.
Many persons have recommended the establishment of a drug benefit for the
Medicare population which tends to use more drugs than the non-Medicare
population. They point out that most medium and large employers offer prescription
drug coverage for the working population under age 65. They further suggest that if
the program were being designed today, rather than 37 years ago, it would include a
The absence of an adequate prescription drug benefit has been of concern to
policymakers since the enactment of Medicare in 1965. On several occasions, most
recently in 2002, the Congress has considered adding coverage for at least a portion
of beneficiaries’ drug costs. However, to date, there has been no consensus on how
the expanded coverage should be structured. One of the key concerns is the potential
cost of a new benefit and how costs would increase over time. Another issue is the
appropriate roles of the federal government and the private sector in assuming the
financial risk of coverage and administering the benefit. A related issue is whether
the new benefit should be part of the Medicare program itself or administered as a
separate program. A further consideration is whether a major new benefit should be
added before structural reforms are made to the Medicare program as a whole.
This report provides an overview of prescription drug coverage currently
available to the Medicare population, presents information on drug spending by the
target population, and outlines some of the major issues that are being addressed as
Congress considers policy options. For a discussion of major prescription drug bills
that were under consideration in the 107th Congress, see CRS Report RL31496,
Medicare: Major Prescription Drug Provisions of Selected Bills.
Sources of Existing Coverage
Proponents of expanding Medicare’s coverage of prescription drugs cite the
uneven coverage available to the aged and disabled populations under existing public
and private programs. This chapter reviews the limited drug coverage currently
available under Medicare and outlines the types of supplementary coverage generally
available to beneficiaries. The next chapter provides data on the extent of
Medicare beneficiaries who are inpatients of hospitals or skilled nursing
facilities may receive drugs as part of their treatment. Medicare payments made to
the facilities cover these costs.1 Medicare also makes payments to physicians for
drugs or biologicals which cannot be self-administered. This means that coverage
is generally limited to drugs or biologicals administered by injection. However, if
the injection is generally self-administered (e.g., insulin), it is not covered.
Despite the general limitation on coverage for outpatient drugs, the law
specifically authorizes coverage for the following:
Immunosuppressive Drugs. Drugs used in immunosuppressive
therapy (such as cyclosporin) for individuals who have received a
Medicare covered organ transplant.2
Erythropoietin (EPO). EPO for the treatment of anemia for persons
with chronic renal failure who are on dialysis.
Most hospitals are paid under a prospective payment system (PPS); under PPS, a
predetermined payment is made per case based on the patient’s diagnosis. The prospective
payment is intended to cover all services, including drugs, provided during the patient’s stay.
Skilled nursing facilities (SNFs) are also paid under a PPS. The per diem rate that is paid
to SNFs covers the cost of most drugs. Additional payments, over the per diem amount, are
authorized for certain specified drugs.
Prior to January 1, 2001, Medicare coverage was limited to drugs provided within a
specified time frame (a minimum of 3 years) following a covered transplant. The
Consolidated Appropriations Act of 2001 (P.L. 106-554) removed the time limitation,
effective on enactment (December 21, 2000). Coverage for immunosuppressive drugs
continues only if the individual continues to be eligible for Medicare. Persons, under age
65, whose Medicare eligibility was based solely on the fact that they had end-stage renal
disease, lose their Medicare eligibility (and therefore the drug coverage) 3 years after a
successful kidney transplant.
Oral Anti-Cancer Drugs. Drugs taken orally during cancer
chemotherapy providing they have the same active ingredients and
are used for the same indications as chemotherapy drugs which
would be covered if they were not self-administered and were
administered as incident to a physician’s professional service. Also
included are oral anti-nausea drugs used as part of an anti-cancer
Hemophilia clotting factors. Hemophilia clotting factors for
hemophilia patients competent to use such factors to control
bleeding without medical supervision, and items related to the
administration of such factors.
Drugs that are necessary for the effective use of covered durable
medical equipment, including those which must be put directly into
the equipment (e.g., tumor chemotherapy agents used with an
infusion pump). 3
The program also covers the following immunizations:
Pneumococcal pneumonia vaccine.
The vaccine and its
administration to a beneficiary if ordered by a physician.
Hepatitis B vaccine. The vaccine and its administration to a
beneficiary who is at high or intermediate risk of contracting
Influenza virus vaccine. The vaccine and its administration when
furnished in compliance with any applicable state law. The
beneficiary may receive the vaccine upon request without a
physician’s order and without physician supervision.
Payments for these drugs and immunizations are made under Medicare Part B.
The payment for a drug equals 95% of the average wholesaleprice (AWP).4
Medicare pays 80% of this amount after the beneficiary has met the $100 Part B
deductible. The beneficiary is liable for the remaining 20% coinsurance charges.
These Part B cost-sharing charges do not apply for pneumococcal pneumonia or
Most Medicare beneficiaries have some form of public and/or private coverage
to supplement their Medicare benefits. This supplemental coverage may or may not
include drug benefits. Some beneficiaries have this supplemental protection
throughout the year while others may only have the protection for a portion of the
year. Different studies rely on different measurements and therefore yield somewhat
Medicare also pays for an injectable osteoporosis drug approved for treatment of postmenopausal osteoporosis provided by a home health agency to a homebound individual
whose attending physician has certified suffers from a bone fracture related to postmenopausal osteoporosis and the individual is unable to self-administer the drug.
For a discussion of the current payment system, see CRS Report RL31419, Medicare:
Payments for Covered Prescription Drugs, by Jennifer O’Sullivan.
different data.5 The most recent study looks at beneficiaries’ insurance status
coverage in the fall of 1999.
In the fall of 1999, 12.5% of noninstitutionalized beneficiaries relied solely on
the traditional fee-for-service Medicare program for their health benefits; these
persons had no supplementary drug coverage. An additional 17.3% of beneficiaries
relied on coverage provided through their Medicare managed care organization; the
majority of these persons had access to at least some supplemental drug coverage.
(See Table 1).
Most beneficiaries (70.2%) had some form of private or public health insurance
coverage to supplement Medicare in the fall of 1999. The majority (57.4%) had
private supplemental coverage. Some of these persons (33.1%) obtained this
protection through a current or former employer. Other persons (24.3%) obtained
coverage through an individually purchased policy, commonly referred to as a
“Medigap” policy. Coverage for the remaining 12.9% of the population was obtained
through public sources; 10.9% obtained coverage from Medicaid and 1.9% from
other public sources.
Table 1. Medicare Beneficiaries, by Source of Supplementary
Health Insurance Coverage, Fall 1999
Medicare fee-for-service only
Medicare managed care
Source: Laschober, Mary et al. Trends in Medicare Supplemental Insurance and Prescription Drug
coverage, 1996-1999. Health Affairs, Web Exclusive. February 27, 2002.
Note: Data is from Barrents group analysis of 1996-1999 Medicare Current Beneficiary Survey
(MCBS) Access to Care data. Beneficiaries were classified by their primary health insurance and were
counted in only one category (in hierarchical order for beneficiaries with more than one type).
Supplementary health insurance coverage may or may not include drug coverage.
The scope of benefits available to persons with supplementary protection differs
significantly by type of coverage. Many persons with supplementary coverage have
For example, Poisal and Murray looked at beneficiaries who had coverage at any point
during 1998 rather than at a specific point in time; under this study only 6.8% of the
population had no supplementary coverage during the year. (Poisal, John and Lauren
Murray. Growing Differences Between Medicare Beneficiaries With and Without Drug
Coverage. Health Affairs, v. 20, no. 2. March/April 2001.)
either limited or no protection against prescription drug costs. The next section
reviews the types of supplementary health insurance coverage generally available to
the Medicare population. It also examines whether such coverage typically includes
drug benefits. The subsequent chapter provides information on the extent of
coverage for prescription drug costs.
Medicare Managed Care Organizations. Since the early 1980s Medicare
beneficiaries have been able to enroll in health maintenance organizations (HMOs).
Beneficiaries get all their Medicare services through the HMO and Medicare makes
a monthly capitation payment to the plan on their behalf. The Medicare+Choice
(M+C) program, which became effective January 1, 1999, expanded the types of
managed care arrangements that could potentially serve Medicare beneficiaries.
However, HMOs remain the primary managed care arrangement available to them.
Traditionally, Medicare payments to HMOs varied considerably throughout the
country. In areas where payment rates were high, HMOs were typically able (and
were often required) to offer services in addition to those covered under the basic
Medicare program. Of particular importance was the ability of a number of plans to
offer prescription drug coverage at little or no additional cost to beneficiaries.
Conversely, in lower payment areas, plans typically did not offer a similar scope of
additional benefits. If they did cover additional benefits, they charged the beneficiary
a premium (which was in addition to the Part B premium which all enrollees are
required to pay).
Under M+C, the variation in payment rates across the country has been
reduced. As a result, capitation payments in many previously high payment areas
have seen relatively small year-to-year increases. The managed care industry has
argued that the changes in payment policies have resulted in inadequate
reimbursement rates. While the payment amounts may be adequate to cover the costs
of Medicare covered benefits, many plans have found it difficult to offer a range of
additional services at relatively low cost to beneficiaries. These plans have
questioned whether they could continue to be competitive if they dropped
prescription drug coverage or, alternatively, instituted significant cost-sharing
requirements for the coverage. These concerns, coupled with other business
considerations, have led a number of M+C organizations to reduce their service areas
or pull out of the program entirely.6 Thus, while Table 1 shows that 17.3% of
beneficiaries had supplementary coverage through M+C or similar plans in the fall
of 1999, subsequent reports indicate that this percentage declined to 14% in 2002.
The Centers for Medicare and Medicaid Services (the agency that administers
Medicare)7 reports that the percentage of the total Medicare population with access
to any M+C plan with drug coverage has declined. In 1999, 65% of Medicare
beneficiaries had such access; this percentage declined to 64% in 2000, 53% in 2001,
and 50% in 2002. In 2002, 63% of the Medicare population in counties that are part
For a further discussion see CRS Report RL31224, Medicare+Choice: Plans Leaving the
Program, by Paulette Morgan, Madeleine Smith, and Hinda Chaikind.
Prior to June 14, 2001, this agency was known as the Health Care Financing
of Metropolitan Statistical Area (MSA) counties had such access, while only 8.9%
of those in non-MSA counties had access. Three states (New Jersey, Illinois, and
Louisiana) saw significant declines in the availability of drug coverage for M+C
enrollees,8 though access to M+C plans themselves remained relatively stable. One
state (North Carolina) had a large increase. Access did not change in 29 states.9
Prescription drug benefits may be offered by a M+C plan as part of the basic
package or may be included in a high option package. In 2002, 71.8% of plans
available from a M+C organization included drug coverage in their basic plan, while
13% only made such coverage available in a higher priced plan. No drugs were
available in any plan offered by 15.2% of M+C organizations. Enrollment in basic
plans with drug coverage declined from 3,549,301 persons in 2001 to 3,509,936 in
2002. The number of enrollees with coverage for brand name drugs in their basic
plans declined, with generic only coverage rising sharply. CMS reports that for 2002,
unlimited coverage for brand name drugs virtually disappeared, while unlimited
coverage for generic drugs also became less common.10
Private Supplementary Coverage
Employer-Sponsored Plans. Employers may offer their retirees health
benefits. Several surveys have attempted to quantify the percentage of employers
offering this coverage. Since each survey uses a different data base, the numbers
differ somewhat. However, all show that the number offering such plans has
declined in recent years.
A 2001 survey by Mercer/Foster Higgins shows that over an 8-year period
(1993-2001) the number of employers (with over 500 employees) offering health plan
coverage to retirees (both current and future retirees) under age 65 fell from 46% to
29%, while the number providing coverage to Medicare-eligible retirees fell from
40% to 23%.11 Coverage of the Medicare-eligible population increases by size of
employer. In 2001, 17% of employers with 500-999 employees offered coverage.
This percentage increased to 25% for employers with 1,000-4,999 employees, 37%
for those with 5,000-9,999 employees, 37% for those with 10,000-19,999 employees,
and 54% for those with 20,000 or more employees.12
Louisiana had a 99% drop, Illinois a 76% drop, and Louisiana a 23% drop.
Centers for Medicare and Medicaid Services. M+C Changes in Access, Benefits and
Premiums, 2001-2002. [http://www.CMS.gov/healthplans/mplusc_changes.pdf], accessed
It should be noted that many employers report that they are grandfathering in coverage for
current retirees and those close to retirement, while cutting back on benefits for younger
Mercer, William M. National Survey of Employer-Sponsored Health Plans, Key Findings
for 2001. April 8, 2002.
A joint study done by The Kaiser Family Foundation, Health Research and
Educational Trust (HRET) and the Commonwealth Fund shows similar trends.13 From
1997 to 2001, the percentage of large employers (with 200 or more employees)
offering coverage to all retirees dropped from 37% to 34%. For Medicare-eligible
retirees, the percentage offering benefits dropped from 31% to 23%. Virtually all
(99%) of Medicare-age retirees in firms offering health benefits had prescription drug
coverage in the firm’s largest retiree plan.
Prescription drug benefits represent a large part of plan expenses for retirees.14
As a result, plans are taking a number of actions to contain these costs. The report
done by Kaiser Family Foundation, HRET, and Commonwealth Fund showed that
the majority of plans imposed either a two-tiered cost-sharing (one payment for
generic drugs and another for brand name drugs) or three-tiered cost-sharing (one
payment for generic drugs, another for brand name drugs with no generic substitute
and a third for brand-name drugs with a generic substitute). The survey reported that
additional firms were planning on increasing retiree cost-sharing requirements for
drugs in the next 2 years.15
Increasing costs of drug coverage is one factor influencing employer decisions
about retiree health coverage. For example, a 1999 Hewitt study surveyed large
employers on their expectations for retiree benefits in the future (assuming no
changes in Medicare). Most large employers (80% of those answering the survey)
said they would consider increasing premiums or cost-sharing for Medicare-eligible
enrollees. Forty percent said they would consider cutting back on prescription drug
coverage. Thirty percent said they would consider terminating coverage
prospectively for retirees 65 and older, while only 17% said they would consider
improving benefits.16 Similarly, the report done by Kaiser Family Foundation,
HRET, and Commonwealth Fund showed that a significant percentage were planning
to increase cost-sharing requirements for drugs and/or make other changes in retiree
health coverage in the following 2 years (2002-2003).17
Longer term projections suggest that employers’ contributions to retiree health
care costs will continue to decline. A recent study by Watson Wyatt Worldwide
estimates that employer financial support will shrink to less than 10% of total retiree
medical expenses by 2031. It cited a number of actions already being taken by
Henry J. Kaiser Family Foundation, Health Research and Educational Trust, and the
Commonwealth Fund. Erosion of Private Health Insurance Coverage for Retirees, Findings
from the 2000 and 2001 Retiree Health and Prescription Drug Coverage Survey. April
A 1999 study estimated that these costs represented 40%-60% of retiree plan costs for the
age 65 and older population; it further expected the percentage would rise significantly in
the ensuing years. Hewitt Associates. Retiree Health Coverage: Recent Trends and
Employer Perspectives on Future Benefits. Report prepared for Henry J. Kaiser Family
foundation. October 1999.
The Kaiser Family Foundation, HRET, and the Commonwealth Fund. Ibid.
The Kaiser Family Foundation, HRET, and the Commonwealth Fund. Ibid.
employers. Twenty percent of those studied have eliminated retiree plans for new
hires, and another 17% will require new hires to pay the full premium for coverage.
Other employers are capping their contributions, linking contributions to the retirees’
length of service or imposing stricter minimum service requirements for future
retirees. The study attributed the cutbacks to several factors including escalating
health costs, growing retiree populations, uncertain business profitability and federal
regulations that discourage employers from pre-funding retiree medical benefits.18
Medigap. Beneficiaries with Medigap insurance typically have coverage for
Medicare’s deductibles and coinsurance; they may also have coverage for some items
and services not covered by Medicare. Individuals who first purchase a Medigap
policy on or after July 30, 1992, select from one of 10 basic standardized plans,
though not all 10 plans are offered in all states. The 10 plans are known as Plan A
through Plan J. Plan A covers a basic package of benefits. Each of the other nine
plans includes the basic benefits plus a different combination of additional benefits.
Plan J is the most comprehensive. A change authorized by the Balanced Budget Act
of 1997 (BBA 97) added two high deductible plans to the list of 10 standardized
plans. With the exception of the high deductible feature, the benefit packages under
the high deductible plans are the same as under Plan F or Plan J. Reportedly, few
insurers are offering these high deductible plans.19
Only three of the standardized plans, Plans H-J, offer prescription drug
coverage. All three plans impose a $250 drug deductible. Plans H and I cover 50%
of the next $2,500 in costs up to a maximum benefit of $1,250 ($2,750 total
spending). Plan J covers 50% of the next $6,000 in costs up to a maximum benefit
of $3,000 ($6,250 total spending). The premiums for these plans are higher than
those for the other seven Medigap plans, in large measure due to the drug coverage.
There is wide variation in Medigap premiums for both drug and non-drug
policies nationwide. This reflects a number of factors including differences in the
benefits of Plan A through Plan J, differences in medical underwriting practices, and
differences in pricing structures. Periodically, Weiss Ratings, Inc., under contract
with CMS, reports on its inventory of Medigap premiums for 65-year old males.
Over the 2-year period 1998-2000, the average premium increases were 15.5% for
policies without drug coverage compared to 37.2% for policies with coverage. The
rate slowed substantially in 2002, with only a 2.4% increase recorded for all policies
over the previous year. For all 3 years, premiums, and premium increases vary
greatly by location.
Watson Wyatt Worldwide. Companies Accelerating Cutbacks in Retiree Health Benefits,
Watson Wyatt Study Finds. Press Release. [Http://www.watsonwyatt.com]. September 16,
For further information on Medigap see CRS Report RL31223, Medicare: Supplementary
“Medigap” Coverage, by Jennifer O’Sullivan.
Table 2. Average Nationwide Medigap Premiums for a
65-Year Old Male, 1998, 2000, and 2002
Without drug coverage:
With drug coverage:
Sources: (1) Weiss Ratings, Inc. Prescription Drug Costs Boost Medigap Premiums Dramatically.
Press Release. March 26, 2001; and (2) Weiss Ratings, Inc. Rate of Medigap Premiums Slows
Dramatically in 2002. Press Release, August 7, 2002 and information provided by Weiss official.
A number of observers have concluded that only those persons who expect to
actually utilize a significant quantity of prescriptions actually purchase Medigap drug
coverage. This is because there is a significant price difference between premiums
for policies with drug coverage versus those for policies without drug coverage. This
adverse selection tends to further drive up the premium costs.
A recent analysis of the Medigap market concluded that this market is not a
good source for prescription drug coverage. This study found that about 60% of
policyholders have no drug coverage. This figure includes the 90% of beneficiaries
purchasing standardized plans (i.e., Plans A- J, first purchased on or after July 30,
1992). Three out of four Medigap policyholders with prescription drug coverage are
in prestandard Medigap plans; many of these plans offer coverage that is even less
generous than that available under standard plans. Enrollees in prestandard plans are
at least 74 years old. Since in most states Medigap insurers can deny issuance of
Medigap policies after the open enrollment period at age 65, persons with
prestandard policies who wish to change plans generally have no alternative except
Plan A (if their current carrier is willing to sell them this) or Medicare+Choice (if a
M+C plan is available in their area).20
Chollet, Deborah. Senior Fellow Mathematica Policy Research Institute. Medigap
Medicaid.21 Some low-income aged and disabled Medicare beneficiaries are
also eligible for full or partial coverage under Medicaid. Medicaid is a federal-state
program which provides health insurance coverage to certain low-income
individuals. Within broad federal guidelines, each state sets its own eligibility
criteria, including income eligibility standards. Persons meeting the state standards
are entitled to full coverage under Medicaid. Persons entitled to full Medicaid
protection generally have all of their health care expenses met by a combination of
Medicare and Medicaid. For these “dual eligibles” Medicare pays first for services
both programs cover. Medicaid picks up Medicare cost-sharing charges and provides
protection against the costs of services generally not covered by Medicare. Perhaps
the most important service for the majority of dual eligibles is prescription drugs.22
In general, beneficiaries entitled to full Medicaid protection are entitled to drug
benefits. These dual eligibles typically have comprehensive coverage with only
Federal law specifies several population groups that are entitled to more limited
Medicaid protection. These are qualified Medicare beneficiaries (QMBs), specified
low income beneficiaries (SLIMBs), and certain qualified individuals. QMBs and
SLIMBs are not entitled to Medicaid’s prescription drug benefit unless they are also
entitled to full Medicaid coverage under their state’s Medicaid program. Qualifying
individuals are never entitled to Medicaid drug coverage (because, by definition,
they are not eligible for full Medicaid benefits). As discussed later in this report,
many prescription drug bills would target one or more of these population groups for
special assistance for their drug costs.
The following are the four coverage groups:
Qualified Medicare Beneficiaries (QMBs). QMBs are aged or
disabled persons with incomes at or below the federal poverty level.
In 2002, the monthly level is $759 for an individual and $1,015 for
a couple.24 They must also have assets below $4,000 for an
individual and $6,000 for a couple. QMBs are entitled to have their
Coverage for Prescription Drugs. Testimony before Senate Committee on Finance. April
For an overview of Medicaid drug coverage see CRS Report RL30726, Prescription Drug
Coverage Under Medicaid, by Jean Hearne.
Medicaid also offers coverage for long-term care — a potentially very costly item for the
population needing these services.
For a detailed discussion the various ways dual eligibles can obtain drug coverage under
Medicaid, see CRS Report RL31485, Prescription Drug Coverage for Medicare
Beneficiaries: Medicaid and State Pharmaceutical Assistance Programs, by Julie Stone and
Heidi Yacker. (Hereafter cited as CRS Report RL31485, Prescription Drug Coverage.)
The annual HHS poverty guidelines for 2002 are $8,860 for an individual and $11,940 for
a couple; the monthly figures are $738 for an individual and $995 for a couple. The
qualifying levels are higher because, by law, $20 per month of unearned income (rounded
to the next dollar) is disregarded in the calculation.
Medicare cost-sharing charges, including the Part B premium, paid
by the federal-state Medicaid program. Medicaid protection is
limited to payment of Medicare cost-sharing charges (i.e., the
Medicare beneficiary is not entitled to coverage of Medicaid plan
services) unless the individual is otherwise entitled to Medicaid.
Specified Low-Income Medicare Beneficiaries (SLIMBs). These
are persons who meet the QMB criteria, except that their income is
over the QMB limit. The SLIMB limit is 120% of the federal
poverty level. In 2002, the monthly income limits are $906 for an
individual and $1,214 for a couple.25 Medicaid protection is limited
to payment of the Medicare Part B premium (i.e., the Medicare
beneficiary is not entitled to coverage of Medicaid plan services)
unless the individual is otherwise entitled to Medicaid.
Qualifying Individuals (QI-1). These are persons who meet the
QMB criteria, except that their income is between 120% and 135%
of poverty. Further, they are not otherwise eligible for Medicaid. In
2002, the monthly income limit for QI-1 for an individual is $1,017
and for a couple $1,364. Medicaid protection for these persons is
limited to payment of the monthly Medicare Part B premium.26
Qualifying Individuals (QI-2). These are persons who meet the
QMB criteria, except that their income is between 135% and 175%
of poverty. Further, they are not otherwise eligible for Medicaid. In
2002, the monthly income limit is $1,313 for an individual and
$1,762 for a couple. Medicaid protection is limited to payment of
that portion of the Part B premium attributable to the gradual
transfer of some home health visits from Medicare Part A to
Medicare Part B. ($3.91 in 2002).
Other Sources.27 Some beneficiaries with a military service connection may
receive drug coverage through Department of Defense or Department of Veterans
This is calculated the same way as the QMB level. See preceding footnote.
In general, Medicaid payments are shared between the federal government and the states
according to a matching formula. However, expenditures under the QI-1 and QI-2 programs
are paid for 100% by the federal government (from the Part B trust fund) up to the state’s
allocation level. A state is only required to cover the number of persons which would bring
its spending on these population groups in a year up to its allocation level. Any
expenditures beyond that level are paid by the state. Total allocations are $200 million in
FY1998, $250 million for FY1999, $300 million for FY2000, $350 million for FY2001, and
$450 million for FY2002. Assistance under the QI-1 and QI-2 programs is available for the
period January 1, 1998 to December 31, 2002.
Some pharmaceutical companies have patient assistance programs that provide free
prescriptions for low-income persons without other assistance. The programs have not been
well publicized; further, the application process for many programs can be difficult and time
consuming. In an effort to address these concerns, the Health Care Financing
Administration (now CMS) announced in November 2000, that the programs would be listed
on its WEB site [http://www.medicare.gov/prescription/home.asp].
Recent action taken by the Congress significantly expanded the access of
military retirees to prescription drug benefits. On October 30, 2000, the President
signed into law P.L. 106-398, the Defense department authorization bill. This
legislation authorized a permanent comprehensive health care benefit for Medicareeligible military retirees thereby making all military retirees eligible for health care
within TRICARE, the military health care system, effective October 1, 2001. Under
the bill, Medicare pays first and TRICARE is the secondary payer, subject to a $300
deductible. Previously, individuals lost their TRICARE eligibility when they became
eligible for Medicare. The bill also authorized, effective April 1, 2001, a
comprehensive retail and mail order pharmacy benefit and a national mail order
pharmacy benefit for all eligible beneficiaries. There are deductibles for use of
non-network pharmacies and co-payments for pharmaceuticals received from the
National Mail Order Pharmacy and from retail pharmacies.
State Programs. Some beneficiaries also have coverage through state
pharmaceutical assistance programs which provide financial assistance to lowincome persons who do not qualify for Medicaid. The National Conference of State
Legislatures (NCSL) reports28 that as of August 2002, 34 states had authorized some
type of pharmaceutical assistance program with some states having more than one
program. Twenty states had subsidy programs;29 some of these programs were
limited to seniors, while others included other low-income groups. Eight states
operated pharmaceutical discount programs for the purchase of prescription drugs.30
Two additional states provided assistance under a Medicaid waiver.31
The state programs vary substantially both in design and coverage. While the
number of states offering plans has increased, some are in the initial stages of
operation. Several additional states have authorized plans but have not yet
implemented them. Programs were actually in operation in 26 states.
Virtually all states set income eligibility standards, ranging from 100% to 400%
of poverty. All plans require some level of beneficiary financial participation in the
form of premiums, deductibles, copayments, or a combination of these. The level of
coverage also varies among the states. Some set a maximum payment. Others
provide coverage only after a person has incurred a certain level of expenses (known
as a “catastrophic cap”). Some states cover all prescription drugs while others limit
coverage to those on an approved list known as a formulary.32
NCSL: [http://www.nchsl.org/programs/health/drugaid.htm], accessed August 23, 2002.
Connecticut, Delaware, Florida, Illinois, Indiana, Kansas, Maryland, Massachusetts,
Michigan, Minnesota, Missouri, Nevada, New Jersey, New York, North Carolina,
Pennsylvania, Rhode Island, South Carolina, Vermont, and Wyoming.
California, Florida, Iowa, Maryland, Maine, Massachusetts, New Hampshire, and West
Maine and Vermont.
CRS Report RL31485, Prescription Drug Coverage.
Drug Coverage and Spending for the
The previous discussion focused on drug insurance coverage potentially
available to the Medicare population. This section reviews the proportion of this
population with drug coverage and provides data on drug spending. The most
detailed information on these issues comes from the 1998 Medicare Current
Beneficiary Survey (MCBS) data on non-institutionalized Medicare beneficiaries.
Most analyses of this data shows the number of beneficiaries who had drug coverage
at any point during the year. A more recent study (by Lashober et al) of 1999 MCBS
data shows the percentage with coverage at a particular point in time, namely the fall
of 1999. As noted earlier, many beneficiaries have coverage at some point during the
year, but not throughout the entire year. The Laschober study therefore shows a
lower percentage than the MCBS analysis of the population with drug coverage. A
detailed update of the MCBS data is not yet available; later data may show different
trends from those discussed below.
In 1998, 73% of the non-institutionalized Medicare population had drug
coverage at some point during the year; the remaining 27% had no coverage. (See
Table 3.) In the fall of 1999, 62% of the non-institutionalized Medicare population
had coverage while 38% did not.33 These figures do not reflect the extent and depth
of coverage which varies widely by source of coverage.
Coverage By Source of Supplemental Insurance. The likelihood that
a beneficiary has prescription drug coverage varies by the source of supplemental
health insurance coverage. In 1998, beneficiaries enrolled in HMOs were the most
likely to have drug coverage while those in Medigap plans were the least likely to
have such coverage. (See Table 3.)
Table 3. Distribution of Noninstitutionalized Medicare
Beneficiaries, by Type of Supplemental Insurance and
Presence of Drug Coverage, 1998
Type of coverage a
With drug coverage
Without drug coverage
No supplemental coverage
Laschober, Mary et al. Trends in Medicare Supplemental Insurance and Prescription Drug
coverage, 1996-1999. Health Affairs, Web Exclusive. February 27, 2002.
Type of coverage a
With drug coverage
Without drug coverage
Source: Poisal, John A., and Lauren Murray. Growing Differences Between Medicare Beneficiaries
With and Without Drug Coverage. Health Affairs, v. 20, no. 2, March/April 2001.
Beneficiaries were classified by their primary health insurance and were counted in only one of the
categories (in the hierarchical order as shown in the table for beneficiaries with more than one
Includes persons receiving drug coverage through both their basic plans and optional coverage.
The Medicaid number reflects the percentage of all persons on the Medicaid rolls, including the
QMB-only and SLIMB-only population (who do not have drug coverage). If just the population
with full Medicaid coverage were taken into account, the percentage should be closer to 100%.
Drug Coverage By Income Level.34 In 1998, persons in higher income
brackets were more likely to have drug coverage. This reflects the fact that these
persons were more likely to have drug coverage through a former employer. Persons
below poverty had coverage levels slightly higher than persons just above poverty.
This reflects the fact that many individuals below poverty were eligible for full
Medicaid benefits which include drug benefits. The lowest levels of coverage were
for persons between 100% and 175% of poverty. These persons are the least likely
to have access to employer-based coverage or Medicaid. (See Figure 1.) The 1998
number reflects a slight improvement for the low-income population over previous
years. However, 1998 was the first year since 1992 that overall coverage levels had
not increased from the previous year.
CMS’s analysis of the 1998 MCBS (as reported in the March/April 2001 Health Affairs
article) used federal poverty threshholds. These are slightly different than the federal
poverty guidelines; federal poverty guidelines are used for the QMB and SLIMB programs,
discussed earlier in this report.
Figure 1. Medicare Beneficiaries with Drug Coverage by Income Category, 1998
Source: Data based on Posial and Murry article, Health Affairs, March/April 2001 & personal
communication with author.
Note: 1998 poverty threshold level for the aged with $7,818 for a single and $9,862 for a
couple; the correspondending figures for the disabled were $8,480 and $10,972.
136-150% of Poverty
176-200% of Poverty
301-400% of Poverty
100-135% of Poverty
151-175% of Poverty
201-300% of Poverty
Over 400% of Poverty
Impact of Coverage on Utilization. There are significant differences in
utilization patterns for persons with drug coverage versus those without it. In 1998,
the average beneficiary with drug benefits filled almost eight more prescriptions than
those without coverage (24.3 versus 16.7 per person). Utilization rates for those with
coverage increased 9% from 1997, while rates for those without coverage declined
Data for 1999 show similar patterns. Beneficiaries with drug coverage report
filling 25.1 prescriptions that year compared to 17.7 for those without coverage.
These disparities in usage were reported even for those with five or more chronic
conditions; those with drug coverage reported filling 44.4 prescriptions while those
without coverage reported filling 38.7 prescriptions.36
A recent eight-state survey found similar patterns. In 2001, one-quarter of
seniors without drug coverage reported not filling a prescription due to costs and
skipping doses to make prescriptions last longer. Only about one in 10 seniors with
coverage reported these forms of foregone care. Further, one in five seniors without
coverage reported spending less on basic necessities to pay for medicines – a rate
which was twice that for those with coverage. While these actions were reported for
all income groups, the rates were higher for the low -income. Forty-one percent of
poor seniors without coverage had not filled a prescription in the past year due to
cost, compared to 19% of poor seniors with coverage. Thirty-six percent of lowincome seniors without coverage skipped doses, while only 21% with coverage did
so. The depth of coverage was shown to be an important variable. For example,
those who had employer-based coverage were less likely to forgo care than those
with Medigap; this reflects the relatively higher out-of-pocket costs under Medigap
Total Spending. Per capita drug spending and out-of-pocket spending by
Medicare beneficiaries is available from the 1998 MCBS. Medicare beneficiaries
spent $878 per capita on drugs in 1998.38 (This figure includes amounts spent by
insurers on behalf of beneficiaries.) In that year, beneficiaries with drug coverage
averaged $999 per year, while those without coverage averaged $546. (See Figure
2.) Overall, drug spending is highly associated with the presence of drug coverage.
Higher drug spending appeared to be more closely associated with the presence of
drug coverage rather than income level.
Poisal, John A., and Lauren Murray. Growing Differences Between Medicare
Beneficiaries With and Without Drug Coverage. Health Affairs, v. 20, no. 2, March/April
Department of Health and Human Services. Medicare Program; Medicare-Endorsed
Prescription Drug Card Assistance Initiative. Final rule. Federal Register, v. 67, no. 171,
September 4, 2002. p. 56619.
Safran, Dana Gelb, et.al. Prescription Drug Coverage and Seniors: How Well Are States
Closing the Gap? WEB Exclusive. Health Affairs, July 2002.
Personal communication with HCFA official, May 2001.
Figure 2. Average Annual Per-Capita Spending for Prescription Drugs for Medicare Beneficiaries by Presence or
Absence of Drug Coverage and by Income Category, 1998
136-150% of Poverty
176-200% of Poverty
301-400% of Poverty
100-135% of Poverty
151-175% of Poverty
201-300% of Poverty Over 400% of Poverty
Source: Data based on article by Posial and Murray. Health Affairs, March/April 2001 and personal communication with author.
Note: 1998 poverty threshold level for aged with $7,818 for single and $9,862 for couple; corresponding figures for disabled,
$8,480 and $10,972.
Figure 3. Average Annual Out of Pocket Spending for Prescription Drugs by Medicare Beneficiaries by Presence or
Absence of Drug Coverage and by Income Category, 1998
136-150% of Poverty
176-200% of Poverty
301-400% of Poverty
100-135% of Poverty
151-175% of Poverty
201-300% of Poverty Over 400% of Poverty
Source: Data based on article by Posial and Murray, Health Affairs, March/April 2001 and personal communication with author.
Note: 1998 poverty threshold level for the aged with $7,818 for single and $9,862 for couple; corresponding figures for disabled, $8,480 and
Out-of-Pocket Spending. Despite the presence of insurance, beneficiaries
pay almost half of their total drug bills out-of-pocket. On average, beneficiaries paid
$384 out-of-pocket or 43.8% of their total $878 drug bill in 1998.39 The amount an
individual actually pays depends on whether or not he or she has supplementary
coverage. Figure 3 shows average annual out-of-pocket expenditures for persons by
income level and by whether or not they have coverage. Persons without coverage
paid their whole $546 bill out-of-pocket. Persons with drug coverage paid $325 outof-pocket, or roughly one-third of their total bill. Higher overall out-of-pocket costs
are more closely associated with the absence of drug coverage than with income
Out-of-Pocket Drug Spending as a Percentage of Income. Out-ofpocket drug costs represented 1% of income for covered beneficiaries and 2.2% of
income for non-covered beneficiaries in 1996. Out-of-pocket costs represented a
larger proportion of income for persons with the highest drug costs (defined as the
top 20%). Among the highest spenders, those with coverage spent 2.6% of their
incomes on drugs while those without coverage spent 8.1%. Among the highest
spenders, non-covered beneficiaries below 200% of poverty spent over one-fifth of
their incomes on drugs, while those under 100% of poverty spent over one-quarter.40
(As can be seen from Figure 1, one-quarter or more of those below 200% of poverty
were without coverage in 1998.)
Estimates of Future Spending. The 1998 spending data described in the
preceding sections were derived from the 1998 MCBS. For the last 3 years, the
Congressional Budget Office (CBO) has projected drug spending for Medicare
beneficiaries for drugs not covered by the program. This includes spending by
supplemental plans as well as beneficiaries’ out-of-pocket costs. In March 2000, the
CBO estimated that such spending would total $1.1 trillion over the CY 2001-CY
2010 period. In January 2001, CBO issued revised figures. For the same 10-year
period, it estimated spending at $1.3 trillion, or 18% higher than the previous
projection. The estimate for CY2002-2011, the then current 10-year projection
period, was approximately $1.5 trillion. In March 2002, the estimate for the
CY2002-2011 period was increased to $1.6 trillion. Estimates for CY2003-CY 2012
are $1.8 trillion. (Any new Medicare benefit would pick up a portion of these costs.)
Projection increases reflect both higher estimates of per capita drug spending over
the entire projection period and the inclusion of a new high cost year (currently 2012,
the second year of the baby boom) in the projection window.
Under the 2002 CBO estimates, mean per capita drug spending for the Medicare
population would climb from $2,149 in CY2002 to $5,816 in CY2012; this
represents an average annual rate of increase of 10.5%. Median prescription
spending would also rise at the same rate, from $1285 in CY2002 to $3486 in
CY2012. Mean spending is higher than median spending because mean spending is
highly influenced by the relatively small portion of the population with very high
U.S. Dept. of Health and Human Services. Prescription Drug Coverage, Spending,
Utilization, and Prices. [http://www.Aspe.hhs.gov/health/reports/drugstudy]. April 2000.
Total prescription spending for the Medicare population group would rise from
$86.9 billion in CY2002 to $278.3 billion in CY2012, for an average annual rate of
increase of 12.3%. (See Table 4.) The majority of the increase reflects increases in
per capita spending; the remainder of the overall increase is attributable to an
increase of 1.7% per year in the number of Medicare beneficiaries.
Table 4. Estimated Spending on Outpatient Drugs by or for
Medicare Beneficiaries, 2002-2012
Mean Per capita
Total (in billions)
Source: U.S. Congressional Budget Office. Estimates using March 2002 baseline projections.
Estimates based on data from the 1999 MCBS with adjustments to account for under reporting by
community respondents and for non-response by nursing home residents. March 2002.
Drug spending is very unevenly distributed across Medicare beneficiaries. A
relatively small proportion of the population accounts for a relatively large portion
of total spending. CBO estimates that (excluding M+C enrollees), 10.3% of
beneficiaries will have no drug spending in 2002. About three-fifths of total drug
spending will be for the 22% of the population spending $3,000 or more in the year.
Approximately 29% of spending will be for the 6% of the population spending
$6,000 or more in the year. (See Table 5.)
Table 5. Estimated Distribution of Medicare Beneficiaries and
Amount Spent on Outpatient Prescription Drugs, 2002
Percent of beneficiaries
Percent of total dollars
greater than zero
$500 or greater
$1,000 or greater
$2,000 or greater
Percent of beneficiaries
Percent of total dollars
$3,000 or greater
$4,000 or greater
$5,000 or greater
$6,000 or greater
$7,000 or greater
$8,000 or greater
$9,000 or greater
$10,000 or greater
$11,000 or greater
$12,000 or greater
Source: U.S. Congressional Budget Office. Estimates using March 2002 baseline projections.
Estimates based on data from the 1999 MCBS with adjustments to account for under reporting by
community respondents and for non-response by nursing home residents. March 2002.
Drug Spending and Pricing
One factor sparking the intense interest in coverage of drugs for the Medicare
population has been the sharp rise in drug prices in recent years. Many seniors are
particularly hard hit by these increases because they use more drugs than younger
persons, they frequently have limited insurance protection for the costs, and they
frequently pay for these drugs out of modest incomes. Further, seniors without
insurance coverage are forced to pay the highest retail prices for their drugs because
they do not have access to discounts that are available to large purchasers such as
HMOs or insurance companies. At the same time, the projected increases in
spending have raised concerns about the affordability of a drug benefit and the
potential increases in costs of the benefit over time.
Drug spending is currently the fastest growing segment of national health care
spending. CMS estimates that the population as a whole spent $87.2 billion in
1998, $103.9 billion in 1999 and $121.8 billion in 2000 on retail outlet sales of
prescription drugs. During the 1998-2000 period, spending on prescription drugs
increased at a faster rate than that for any other personal health category. Drug
spending increased 15.1% in 1998, 19.2% in 1999, and 17.3% in 2000; these
numbers were substantially higher than the increases of 5.3%, 5.2%, and 6.4% in
total personal health spending recorded over the same period. By 2000, spending on
prescription drugs accounted for 10.8% of total personal health spending.41 CMS
estimates that from 2001-2011 spending will increase at an average rate of 11.3% per
year, reaching 17.1% of personal health expenditures by 2011.42
The increases in drug spending are attributable to a number of factors including
the assumption by private insurance plans of a significant portion of the costs (with
consumers responsible for low copayments, thereby contributing to the per capita
increase in prescription use), direct-to-consumer advertising, and substitution of
newer higher priced drugs for less expensive ones. In particular, the number of new
drugs, particularly blockbuster drugs, entering the market has had a direct impact on
the increase in spending. The recent increases in drug spending are reportedly
responsible for a large portion of the increase in total health benefit costs and the
increases in premium costs for private insurers. Many third-party payers are
attempting to slow this growth by providing incentives to consumers to use lower
cost drugs. These efforts, as well as overall changes in the economy, are reflected in
slightly lower projected rates of increase than had previously been forecast.
CMS reports Medicare spending of $2.3 billion in 2000 on retail outlet sales of
prescription drugs.43 This represents a small portion of overall drug spending by
beneficiaries, since the program does not pay for most outpatient prescription drugs.
Factors Affecting Spending Increases
Several studies have attempted to quantify the components of spending growth.
While both the methodologies and findings vary somewhat among the studies, it is
clear that price increases alone are not the total explanation. A significant factor is
the introduction of new brand name drugs. Some of these new drugs replace existing
treatments, while others are for conditions for which treatment was not previously
The National Institute for Health Care Management Research and Educational
Foundation (NIHCM Foundation) analyzed spending growth from 2000 to 2001. It
reported that spending on retail prescription drugs rose 17.1% over the period. About
39% of the $22.5 billion increase in retail prescription drug spending was attributable
to an increase in the number of prescriptions dispensed. About 24% was caused by
a shift in the mix of drugs dispensed; the shift was from lower priced to higher priced
medicines, many of which were approved in the last 5 years. The remaining 37%
was caused by the 1-year increase in the price of individual drugs. The average price
Levit, Katherine, et al. Inflation Spurs Health Spending in 2000. Health Affairs, v. 21,
no. 1, January-February 2002.
Heffler, Stephen, et al. Health Spending Projections for 2001-2011: The Latest Outlook.
Health Affairs, v. 21, no. 2, March/April 2002.
Heffler, Stephen, et.al. Health Spending Growth Up in 1999; Faster Growth Expected
in the Future.
for a prescription rose 10.1% from $45.27 to $49.84. (This increase reflects both the
increase in price and the shift to more expensive medicines.)44
The NIHCM Foundation continues to report that the bulk of year-to-year
spending growth is attributable to increased expenditures among a relatively small
number of prescriptions. Half of the 2000-2001 growth occurred among just nine
categories of medicine – antidepressants, cholesterol reducers, antiulcerants, oral
diabetes, narcotic painkillers, antihypertensives, antiarthritic, oral antihistamines, and
antipsychotics. Looked at another way, sales for just 27 individual drugs accounted
for over half of the total spending growth. Sales for the 50 best selling drugs
(accounting for 44% of total spending) rose 21.4% for the period compared to 13.8%
for the rest of the market. By comparison, sales for the 50 drugs contributing most
to the 1-year spending increase rose 43.3%; sales for all other drugs increased 6.7%.45
The prescription drug debate has highlighted the fact that different consumers
pay substantially different prices for drugs. Large purchasers are generally able to
negotiate discounts, and also, in some cases, manufacturer rebates. Cash paying
customers do not have access to discounts and are therefore forced to pay the highest
The price of a drug is influenced by decisions made at each level of the
distribution chain. The most important pricing determination is made at the
manufacturing level. Manufacturers price drugs based on a number of factors
including: (1) perceived value and incremental value of a therapeutic advancement;
(2) recovery of research and development costs; (3) funding of ongoing research and
innovation; (4) financing marketing efforts to stimulate sales; and (5) generating
profits from drugs while under patent protection.46 Some studies suggest that the first
of these factors is the most important.47 Actual manufacturer pricing decisions for
a particular drug are considered proprietary and are therefore not made public.
The next stages in the distribution chain are wholesalers which distribute drug
products to pharmacies, the pharmacies themselves, and finally the consumer.
Wholesalers add a markup to their acquisition cost before selling the drug to the
pharmacist. In turn, the pharmacist adds a retail markup to its own acquisition cost.
NIHCM Foundation. Prescription Drug Expenditures in 2001: Another Year of
Escalating Costs, Report. [http://www.nihcm.org]. Revised May 6, 2002.
Sonderegger Research Center School of Pharmacy. University of Wisconsin and Kaiser
Family Foundation. Prescription Drug Trends: A Chartbook. Kaiser Family Foundation.
Lu, Z. John and William Connor. Strategic Pricing of New Pharmaceuticals. The Review
of Economics and Statistics. February 1998.
The consumer’s price depends on how payment is made for the drug.48 Prices
are highest for cash customers; these are persons without insurance or those with
indemnity insurance coverage who file a claim after the transaction is completed.
Most people with private group insurance coverage have a managed drug benefit
which is administered by a pharmacy benefit manager (PBM) or sometimes directly
by an HMO or other insurer. Payment is made by the third party at the point of sale.
These third parties may negotiate discounts from manufacturers and retailers; such
discounts may take a variety of forms including a reduction from the AWP. Little
information exists on the size of these discounts. In addition, they may receive
rebates from manufacturers; rebate agreements are confidential and good information
about them is not available.49
Some persons obtain their drugs through Medicaid which pays pharmacies using
fixed cost limits and fixed dispensing fees. In addition, the Medicaid program
receives rebates from manufacturers.50 Generally, the lowest prices paid for drugs
are for those purchased directly from the manufacturer by the Veterans
Administration (VA) and other specified purchasers under the Federal Supply
Schedule (FSS). FSS prices are negotiated with the manufacturer by the VA.51
Cash paying customers are unable to take advantage of discounts offered to
large purchasers. Cash paying customers include Medicare beneficiaries without
supplemental drug coverage. This group also includes most Medicare beneficiaries
with Medigap drug coverage. In 1999, excluding the effect of rebates, the typical
cash customer paid nearly 15% more than the customer with third party coverage; for
some drugs the difference was even greater. For the most commonly prescribed
drugs, the price difference between cash customers and those with third party
coverage grew considerably larger between 1996 and 1999.52
To address the concerns of cash-paying customers, President Bush has proposed
a Medicare-Endorsed Drug Discount Card Initiative. This program would provide
for the endorsement by Medicare of qualified privately-administered prescription
drug discount cards. Beneficiaries could obtain these cards free or for a nominal
enrollment charge; the card would provide access to discounts on prescription drugs.
While this plan would not establish a Medicare drug benefit, it was intended to
provide access to the same kinds of discounts as are available to the under age 65
population under private insurance plans. The program was viewed as an interim
For a discussion of drug pricing see: U.S. Department of Health and Human Services.
Prescription Drug Coverage, Spending, Utilization, and Prices.
[http://www.Aspe.hhs.gov/health/ reports/drugstudy]. April 2000.
For a discussion of Medicaid see CRS Report RL30726, Prescription Drug Coverage
Under Medicaid, by Jean Hearne.
For a discussion of payments under federal programs see CRS Report RS20295,
Outpatient Prescription Drugs: Acquisition and Reimbursement Policies Under Selected
Federal Programs, by Heidi Yacker.
DHHS, Prescription Drug Coverage, April 2000.
approach until a drug benefit was enacted and implemented. However, to date,
implementation of the card program has been held up by court action.53
Previous Efforts to Expand Medicare’s
Coverage of Prescription Drugs
The absence of an adequate prescription drug benefit has been of concern to
policymakers since the enactment of Medicare in 1965. The projected cost of such
a benefit, as well as differences over the appropriate role of the private sector vis-avis the public sector in administering the benefit, have been major deterrents to its
implementation. Over the 1987-2000 period, three major attempts were made to add
drug coverage to Medicare. The first attempt came in 1987 and led, in 1988, to the
passage of the Medicare Catastrophic Coverage Act of 1988. This legislation, which
included a catastrophic prescription drug benefit for the Medicare population, was
repealed the following year. The second attempt was made as part of the health
reform debate of 1994. The third attempt was made in 2000; in that year, significant
policy differences, intensified in an election year, resulted in no final action being
Medicare Catastrophic Coverage Act of 1988
The Medicare Catastrophic Coverage Act of 1988 (MCCA, P.L. 100-360) would
have phased-in catastrophic prescription drug coverage as part of a larger package
of benefit improvements. This legislation was repealed in 1989 (P.L. 101-234). The
repeal of MCCA was attributable to a number of factors. These included a
significant increase in the program’s cost estimates (particularly drug cost estimates)
made shortly after enactment and the opposition by a number of seniors to the income
tax surcharge (labeled a supplemental premium) which was to be imposed on higher
Under MCCA, catastrophic prescription drug coverage would have been
available beginning in 1991 for all outpatient drugs, subject to a $600 deductible and
50% coinsurance.54, 55 The deductible was slated to go to $652 in 1992 and be
indexed in future years so that 16.8% of beneficiaries would reach the deductible
each year. The coinsurance was scheduled to be lowered to 40% in 1992 and 20%
For a discussion of the card program see CRS Report RL31316, President Bush’s
Proposed Medicare-Endorsed Drug Discount Card Initiative: Status and Issues, by M.
The coinsurance would have been 20% for drugs used in connection with the new home
intravenous drug therapy benefit.
A limited benefit would have been available in 1990 with coverage for: (1) home
intravenous drugs, including antibiotics and other drugs approved by the Secretary,
(furnished in connection with the new home intravenous drug therapy benefit); and (2)
immunosuppressive drugs after the first year following a covered transplant. (The drugs
were already covered under Part B for the first year only. See Medicare discussion for
current coverage levels.) The 1990 deductible would have been $550.
in 1993. The benefit was to be financed through a combination of an increase in the
Part B premium and a portion of the new supplemental premium which was to be
imposed on higher income enrollees.
When MCCA was enacted in 1988, limited data were available on which to base
cost estimates for the new prescription drug program. At the time of enactment,
CBO estimated FY1990-FY1993 costs at $5.7 billion. By July 1989, the estimates
had more than doubled to $11.8 billion. The revised estimates reflected the
availability of new data which suggested that both the average number of
prescriptions used by enrollees and their average price had risen more than had been
Health Care Reform — 1994
The issue of prescription drug coverage was again considered as part of the
health care reform debate of 1994. The Health Security Act, proposed by the Clinton
Administration, would have added a prescription drug benefit to Medicare Part B
beginning in 1996. Under the bill, Medicare would have paid 80% of the cost of
each prescription once the beneficiary met a $250 annual deductible. Beneficiaries
would have been responsible for the remaining 20% with an annual limit on out-ofpocket expenses of $1,000. The Administration estimated that approximately 58%
of beneficiaries would use the proposed drug benefit each year — a much larger
percentage than the targeted 16.8% under MCCA.
As is the case for other Part B benefits, the Clinton Administration’s plan would
have been funded through general revenues (approximately 75%) and beneficiary
premiums (approximately 25%). The beneficiary share for prescription drugs was
estimated at $9 per month; this would have been added to the regular Part B
premium. The Administration estimated net federal costs, after offsetting premiums,
at $69.1 billion over the FY1996-FY2000 period. CBO estimated that the benefit
would cost $19 billion in 2000, approximately $2 billion higher than the
Administration’s estimate for that year.
The 1999-2000 Debate
The issue of prescription drug coverage for the Medicare population became a
major issue in the 106th Congress as well as one of the major issues in the 2000
presidential campaign. The debate highlighted a wide difference of opinion over how
a benefit should be structured, the degree of financial risk that should be assumed by
the public sector versus the private sector, whether a benefit should be available to
all beneficiaries, and whether or not federal resources should be focused primarily
on the low-income.
The focus of the initial debate was the National Bipartisan Commission on the
Future of Medicare. This Commission, established by the Balanced Budget Act of
1997 (BBA 97, P.L. 105-33), was charged with making recommendations on a
number of program issues. The recommendations were to be submitted to the
Congress by February 1, 1999. The Commission failed to get the required 11 of 17
Commissioners’ votes for a reform proposal. However, its deliberations focused
renewed attention on the program’s lack of a comprehensive drug benefit.
Following the conclusion of the Commission’s activities, the focus turned to the
Congress. A number of bills were introduced which would have established a
prescription drug benefit under Medicare. Some of the measures added a new benefit
to the Medicare program itself, while other proposals would have established a
separate benefit for the Medicare population outside of the Medicare program itself.56
In 1999, President Clinton outlined a plan which would have established, under
Medicare, an optional prescription drug benefit which would be available to all
beneficiaries. In 2000, he announced a revision in the implementation schedule.
Under the revised proposal, the program would have paid for 50% of a beneficiary’s
costs up to a specified limit; the maximum program payment would have been
$1,000 in 2002, rising to $2,500 in 2008 when the program was fully phased-in. In
addition, there would be a cap on beneficiary out-of-pocket payments, $4,000 in the
first year. The premium would have been set at $25 a month in the first year.
Additional assistance would have been provided for low-income beneficiaries. In
addition to the Administration plan, a number of similar measures were introduced
in both the House and Senate. Several of these bills were referred to as the
“Democratic alternatives” to the Republican bills (discussed below).
The House passed the Medicare Rx 2000 Act on June 28, 2000. Under this bill,
reliance would have been placed on private insurance companies and other private
sector entities to provide coverage. These entities would have been partially
subsidized for assuming the risk of prescription drug costs. At a minimum plans
would have had to provide “qualified coverage,” defined as “standard coverage” or
coverage that was actuarially equivalent (i.e., had an equivalent dollar value).
“Standard coverage” was defined as having a deductible ($250 in 2003), 50% costsharing up to the initial coverage limit (the next $2,100 in 2003, accounting for total
spending of $2,350), and full coverage after an annual limit in out-of-pocket
spending ($6,000 in 2003) had been reached. Additional assistance would have been
provided to low-income seniors. The drug benefit and the M+C program would have
been administered by a new Medicare Benefits Administration. The CBO cost
estimate for the new drug program, including associated administrative costs, was
$38 billion over the FY2001-FY2005 period and $148 billion over the
FY2001-FY2010 period. The bill (which passed the House on a 217-214 vote) was
frequently referred to as the House Republican plan.
A number of other approaches were presented during the 106th Congress. Some
measures would have provided assistance to states to enable them to establish, on a
voluntary basis, programs for their low-income populations.
For a discussion of the major Medicare drug bills considered during the 106th Congress,
see: (1) CRS Report RL30584, Medicare: Selected Prescription Drug Proposals, by
Jennifer O’Sullivan; and (2) CRS Report RL30593, Medicare: Side-by-Side Comparison
of Selected Prescription Drug Bills, by Jennifer O’Sullivan and Heidi Yacker.
While there were major differences between the various approaches, the
majority moved away from some of the elements that had characterized the 1988 and
1994 bills. In particular, most measures considered during the 106th Congress would
not have had the government setting drug prices. Instead, it was anticipated that such
determinations, as well as the general day-to-day administration of the benefit, would
be undertaken by pharmacy benefit managers (PBMs) or similar entities.
107th Congress Debate
The 107th Congress again considered Medicare prescription drug legislation. On
June 28, 2002, the House passed the Medicare Modernization and Prescription Drug
Act of 2002 (H.R. 4954). This measure was a modified version of the bill passed by
the House in the 106th Congress. Under H.R. 4954, a new optional benefit would be
established, effective January 1, 2005. The program would rely on private plans to
provide drug coverage and to bear some of the financial risk for drug costs; federal
subsidies would be provided to encourage participation. Coverage would be
provided through prescription drug plans (PDPs) or Medicare+Choice (M+C) plans.
Beneficiaries could purchase either a standard plan or an actuarially equivalent plan.
Low-income subsidies would be provided for persons with incomes below 175% of
poverty. A new Medicare Benefits Administration (MBA) would be established
within the Department of Health and Human Services (HHS) to administer the
benefit and the M+C program.
In July 2002, the Senate considered and passed the Greater Access to Affordable
Pharmaceuticals Act (S.812, Schumer et. al); this legislation would revise provisions
of the “Hatch-Waxman Act” concerning the timing of generic drug availability.57 S.
812 served as a vehicle for the consideration of several Medicare prescription drug
amendments. These were the Medicare Outpatient Prescription Drug Act of 2002
(S.Amdt. 4309 to S. 812, Graham et al.); the Medicare Prescription Drug Cost
Protection Act of 2002 (S.Amdt. 4345, also known as the Graham-Smith
amendment), the Voluntary Medicare Outpatient Prescription Drug Discount and
Security Program (S.Amdt 4315 to S. 812, Hagel et.al.); the 21st Century Medicare
Act (S. 2729, Grassley et al.), sometimes referred to as the “tripartisan bill.” The
“tripartisan bill”was been introduced as S. 2 and S.Amdt. 4310 to S. 812. All of the
measures failed to garner the necessary 60 votes to override a budget point-of-order.58
The 107th Congress did not take final action on a prescription drug measure. It
is expected that the issue will again be on the agenda for the 108th Congress.
See CRS Report RL30756, Patent Law and Its Application to the Pharmaceutical
Industry: An Examination of the Drug Price Competition and Patent Term Restoration Act
of 1984 (“The Hatch-Waxman Act”), by Wendy H. Schacht and John R. Thomas
For further details, see CRS Report RL31496, Medicare: Major Provisions of Selected
Bills, by Jennifer O’Sullivan.
Proposed Benefit: Program Design Issues
Several key issues are driving the prescription drug debate. These include
whether the benefit should be administered as part of the current Medicare program
or by private entities, the degree of financial risk that should be assumed by the
federal government, and what the benefit structure should look like and whether it
should be the same nationwide. The following sections provide an overview of some
of the key design questions. The first sections address some of the larger
organizational and administrative issues while subsequent sections focus on benefit
Relationship to Overall Medicare Reform. Many observers contend that
the existing Medicare program needs reform. This view is based both on the fact that
Medicare’s current financing mechanism will be unable to sustain it in the long run
as well as the view that the existing benefit structure is outdated.
Medicare is actually two programs – Medicare Part A and Medicare Part B.
When people refer to the pending insolvency of Medicare, they are actually referring
to the projected insolvency of Part A. Passage of BBA 97, coupled with improved
economic conditions, have considerably delayed the Part A projected insolvency date
(currently slated for 2030). However, the fund remains substantially out of balance
over the long term. Under the current financing mechanism, the funds are
insufficient to cover the health care costs of the baby boom generation (persons born
between 1946 and 1964) through their retirement years.
Many are also concerned that the program’s structure, which in large measure
reflects both the health care delivery system as well as political considerations at the
time of enactment in 1965, has failed to keep pace with the changes in the health care
system as a whole. A related concern is whether the program’s benefit structure
adequately responds to the health care needs of today’s aged and disabled population.
These concerns have led to a number of calls for a thorough reexamination of
the Medicare program itself. Some observers suggest that the existing program is
essentially sound and note its popularity with the senior population. These observers
recommend modifications to the current program, rather than a more extensive
overhaul. Other analysts contend that more extensive reforms are required.
The issue of Medicare reform becomes even more complex when the issue of
drug coverage is raised. Many persons have stated that it would be inappropriate to
add a new costly, benefit before the financial soundness of the basic program is
assured. Some of these observers also contend that the program’s benefit structure
should be viewed as an integrated whole. They suggest that drug coverage should not
be added until the whole benefit structure is reexamined. Other observers have stated
that seniors, particularly low-income seniors, need a drug benefit. They contend that
these persons should not be required to wait for benefits until resolution of the entire
restructuring issue. Further, some of these persons also argue that the program does
not need major structural reform.
Regardless of when a drug benefit is enacted, it would take a couple of years to
implement. In the interim, a number of persons have recommended addressing the
issue of the price seniors pay for drugs. As noted earlier, the Administration has
issued regulations which would establish a Medicare-endorsed prescription drug card
initiative. Under the initiative, private sector discount card sponsors (such as
pharmacy benefit managers, insurers, and pharmacies) could apply for Medicare
endorsement. Only sponsors that secured rebates or discounts from manufacturers
would be eligible for endorsement. Implementation of the card program has been
held up by court action.
Degree of Private Involvement. One issue that has been a major focus of
the drug debate has been the degree of reliance that should be placed on the private
sector, both for administering a drug benefit and for assuming a portion of the
financial risk of the benefit. A wide range of options has been presented. At one end
of the spectrum is the bill that passed the House in the 107th Congress.. Under this
bill, access to a drug benefit would be provided only through private insurance
companies and similar private entities that wished to offer the benefit. In general, the
private plans would be at risk for any costs in excess of federal subsidy payments and
federal reinsurance payments. (Reinsurance payments are made to cover a portion of
the costs paid by plans for individuals incurring high costs.) The Administrator of
the new Medicare Benefits Administration would administer the program in a
manner such that eligible individuals would be assured access to at least two plans.
If necessary to ensure access, the Administrator would be authorized to provide
financial incentives in addition to the federal subsidy and reinsurance payments. The
“tripartisan bill” from the 107th Congress would also rely on private entities to
provide benefits and require plans to assume some of the financial risk for the cost
of covered benefits. In order to assure access, the Administrator of the new Medicare
Competitive Agency would be authorized to provide financial incentives, in addition
to reinsurance payments, for an entity to establish a plan. Proponents of these bills
stated that the financial incentives would be sufficient to assure access throughout the
country. Opponents argued that these bills do not specifically detail what would
occur if, in spite of the incentives, plans were not available in some areas.
Unlike the measures emphasizing the private sector, several measures in the
107 Congress (the House Democratic bill, the Graham amendment, and the
Graham-Smith amendment) would have added the new benefit to Medicare. It would
be administered at the federal level like other Medicare benefits and the federal
government would bear most of the financial risk of coverage. The actual operation
of the benefit would be through contracts with private entities such as pharmaceutical
benefit managers (PBMs). PBMs currently administer the drug benefit, including
negotiating price discounts, for many private insurance plans. Under these bills, a
portion of the administrative fees for these entities would be put at risk; specifically,
an adjustment would be made in administrative payments to ensure that entities
complied with requirements relating to performance goals.
Proponents of measures that rely on private entities argue that this approach
would give consumers choice among competing plans; they suggest that this would
enable beneficiaries to obtain coverage that most directly meets their needs.
Opponents of this approach argue that the actual options available to seniors would
be limited because most private plans would be unwilling to bear the financial risk
associated with a new benefit. Proponents of the bill that passed the House in the
107th Congress noted that the bill provided for federal payments equal to an estimated
67% of the value of the standard benefit. Opponents of the private-sector approach
advocate the provision of a single benefit which would be available nationwide under
Medicare. They argue that this mechanism would assure the availability of an
affordable benefit for all beneficiaries both because the purchasing power of the
largest possible group would be maintained and because the risk would be spread
over a large population.
Administration of Benefit. There is a divergence of opinion over the
appropriate role of the federal government in assuring drug coverage for seniors.
However, virtually all of the major proposals would place responsibility on the
private sector for the day-to-day administration of the benefit.
In General; PBMs.59 It is expected that pharmacy benefit managers (PBMs)
or similar entities would handle the processing of claims, utilization review, and
similar functions. PBMs are companies which manage pharmacy benefits for private
health plans and HMO sponsors. Reportedly, PBMs administered 71% of third-party
payments for drugs in 1999.60 Typically they are charged with controlling pharmacy
costs and they employ a variety of strategies to achieve this goal. PBMs may develop
a retail pharmacy network arrangement; in this case, prices are negotiated with
pharmacies which accept discounts in return for attracting or retaining plan enrollees.
PBMs may also operate mail order pharmacies. They often utilize formularies (see
discussion below). They are also likely to operate drug utilization management
Many observers argue that using PBMs to administer drug benefits for the
Medicare population would allow them to build on purchasing strategies they have
used for the non-Medicare population. At the same time, the federal government
would be distanced from pricing decisions and day-to-day administrative functions.61
Some, however, have voiced the concern that the use of PBMs actually encourages
the use of brand name over less costly generic drugs. This is because PBMs
negotiate rebates with manufacturers for brand name but not generic drugs. The
rebates are typically shared with insurers, reducing their expenditures. Some have
argued that PBMs are motivated to boost sales of these drugs by including them as
preferred drugs in the plan’s formulary.62
For a discussion of PBMs, see CRS Report RL30754, Pharmacy Benefit Managers, by
Christopher J. Sroka.
Levit, Katherine et al. Inflation Spurs Health Spending in 2000. Health Affairs, v. 21, no.
1, January/February 2002.
For a further discussion of the issue see: Cook, Anna, Thomas Kornfield, and Marsha
Gold. The Role of PBMs in Managing Drug Costs: Implications for a Medicare Drug
Benefit. Mathematica Policy Research report prepared for Henry J. Kaiser Family
Foundation, January 2000.
Levit, et.al. Ibid.
A number of questions have been raised regarding what level of savings PBMs
could achieve if they managed a drug benefit for the Medicare population. A key
consideration is the degree of flexibility individual PBMs are given. The flexibility
that PBMs have will depend, to a considerable degree, on the level of federal
involvement in defining covered drugs, establishing prices for drugs, setting
utilization criteria, and establishing appeals processes for noncoverage decisions.
Arguably, if a single drug benefit is established under Medicare, it would be
politically difficult to allow a wide variation among PBMs (for such items as covered
drugs and appeals procedures), particularly if only one PBM is administering the
benefit in a geographic area. However, it should be noted that even under the current
Medicare program, there is some variation in local coverage policies (for example,
when a new procedure or supply is considered a covered service).
A number of observers have suggested that PBMs could have more flexibility,
and therefore be more effective in controlling costs, if more than one operated in a
geographic area. In this case, beneficiaries could potentially choose between PBMs
based on such factors as size of discounts obtained from participating pharmacies,
accessibility of pharmacy networks, and drugs included on the formulary. The range
of choices could potentially be greater if PBMs were administering the benefit on
behalf of a private insurer which had contracted with Medicare rather than
administering a single nationwide Medicare benefit.
While the potential for cost savings is potentially larger if the multiple PBM
approach is selected, it would be difficult to avoid adverse selection. Adverse
selection could occur because competing PBMs could attempt to design their benefit
packages (for example, through the use of restrictive formularies) as well as
marketing strategies, to appeal to those with low drug costs. Those with potentially
higher drug costs might not be able to find an affordable package that met their
Compounding the question of PBM design is the degree of financial risk that
these entities would assume. If PBMs assumed little or no financial risk, they would
have little incentive to aggressively pursue cost control strategies. Conversely, there
would be significant incentives to pursue such strategies if they assumed a substantial
portion of the risk. In this case, mechanisms would have to be developed to assure
that all beneficiaries, regardless of their spending profile, continued to have access
to affordable benefits.
Federal Administration. The Centers for Medicare and Medicaid Services
(CMS) is the federal agency which is charged with the administration of the
Medicare program. Some proposals would establish a new agency which would
assume responsibility for any of the functions assigned to the federal government
under a new program. In addition, some of these proposals would also transfer to
the new agency the administration of some other functions such as administration of
the Medicare+Choice program. Proponents of establishing a new agency cite
perceived inadequacies in the current CMS administration of Medicare. Other
observers contend that CMS’s shortcomings are primarily attributable to inadequate
resources. Further they suggest that splitting responsibility for Medicare between
two agencies would cause serious problems. They question how coordination with
the rest of Medicare would be achieved and how duplication could be avoided.
Benefit Design Issues
Persons Covered. Some observers have recommended extending
prescription drug coverage to the entire Medicare population. Other observers have
recommended that the federal role be limited to assuring coverage for those most in
need, with need generally defined on the basis of income. Regardless of which
approach is taken, virtually all proposals would specify an income level below which
a beneficiary would be liable for little or no costs in connection with covered
services. (See discussion on Assistance for Low-Income Population, below.)
If a new benefit were limited to those below a specified income threshold, the
income level chosen would directly determine the percentage of persons who would
benefit under the plan. Based on information from the 1998 MCBS, a cut off at
135% of poverty would provide protection for the 29% of beneficiaries with incomes
below 135% of poverty. At the same time, it would extend benefits to the 36% of the
population without supplementary drug coverage (i.e., those with Medicare coverage
only or those who have supplementary coverage without drug benefits). A cutoff at
150% of poverty would provide protection for the 34 % of beneficiaries with incomes
below 150% of poverty and extend benefits to 42% of those without drug coverage.
These percentages would rise to 51% of beneficiaries and 58% without other drug
coverage, if the cut off was set at 200% of poverty.63 These percentages would, of
course, be lower if an assets test were imposed. Most of the pending bills would use
the assets test used for the current QMB and SLIMB programs ($4,000 for an
individual and $6,000 for a couple).
Proponents of setting an income cut-off argue that, given the potential cost of
a new drug benefit, it is appropriate to limit it to those most in need of assistance.
However, others argue that the benefit should not be restricted to the low-income
since many persons without supplemental coverage or with high drug costs would
exceed the income thresholds. Further, any threshold has the potential for
establishing a sharp cut off point for coverage. Some have suggested that as a first
step, the new program could target the benefit on the low-income population and
those persons with catastrophic expenses (see discussion below). This is the general
approach included in the Graham-Smith amendment.
Program Enrollment. Virtually all proposals would specify that enrollment
in a new drug benefit would be optional. However, the proposals vary on whether
or not this enrollment opportunity could be exercised only once. Some view onetime enrollment as necessary to avoid adverse selection. Adverse selection would
occur if only those who think they would use the benefit in a given year actually sign
up. This would drive up the per capita costs, making the benefit more unaffordable
for future enrollees. If one-time enrollment were offered, this would generally occur
Definitions of poverty are based on poverty guidelines. CRS estimate based on 1997
when an individual first became entitled to Medicare, or, for current beneficiaries,
when the drug benefit first went into effect.
Instead of limiting eligibility to those that enroll at the first opportunity, a
penalty could be imposed for late enrollment. This is the approach currently used for
Medicare Part B.64 The Part B program has successfully avoided adverse selection,
because virtually the entire eligible population has enrolled voluntarily. It is not,
however, clear what the enrollment levels would be for a new optional drug plan.
The final benefit design (including beneficiary liability for premiums and costsharing charges) would have a direct effect on beneficiary enrollment decisions.
Scope of Benefit. There are a number of issues related to benefit design.
The first is whether there should be a uniform national benefit or, alternatively, a
minimum benefit level. Generally, those advocating a uniform national benefit
would provide the coverage through Medicare. Conversely, those advocating a
minimum benefit would rely primarily on private entities to provide the coverage.
Under the latter option, beneficiaries could potentially select from alternative benefit
packages provided the coverage was at least actuarially equivalent to (i.e., had the
same dollar value as) the minimum benefit.
A second series of issues relate to the scope of coverage offered under either a
uniform or minimum benefit package. Items to be addressed include the amount of
the deductible, if any; the amount of required beneficiary cost-sharing; and the total
value of the benefit package. A deductible is a specified out-of-pocket amount (e.g.,
$250) which a beneficiary has to meet before the program begins making payments.
Cost sharing charges could take the form of copayments (e.g., $10 per prescription)
or coinsurance (e.g., 20% or 50% of the cost of a prescription). The value of the
package could be limited by setting an annual per capita limit on federal spending
A related issue is whether a catastrophic benefit would be included. A
catastrophic benefit would provide coverage for all drug costs once a beneficiary had
reached a certain dollar threshold. The higher this threshold is set, the fewer people
that would benefit in any given year. Some observers have suggested that, with the
exception of assistance for the low-income population, the new benefit should be
limited to catastrophic coverage. They suggest that the limited federal dollars should
be targeted toward those most in need.
A catastrophic benefit (with or without other coverage) is potentially very
expensive. While the number of beneficiaries is potentially small, they represent a
disproportionate amount of spending. As noted earlier, the CBO has estimated that
in 2002, 35.6% of beneficiaries (excluding M+C enrollees) would spend $2,000 or
more per year on drugs, accounting for 77.7% of drug spending for the Medicare
population. In the same year, an estimated 9.0% of fee-for-service beneficiaries
would spend $5,000 or more on drugs, accounting for 36.8% of drug spending for the
group. These number increase dramatically by 2012. In 2012, 63.5% of beneficiaries
(excluding M+C enrollees) would spend $2,000 or more per year on drugs,
See CRS Report 98-7, Medicare: Part B Premium Penalty, by Jennifer O’Sullivan.
accounting for 95.7% of drug spending for the Medicare population. In the same
year, an estimated 36.4% of fee-for-service beneficiaries (excluding M+C enrollees)
would spend $5,000 or more per year on drugs, accounting for 80.2% of drug
spending for the Medicare population.
Some proposals (including the House-passed bill and the “tripartisan” plan from
the 107th Congress) have what has been labeled a “doughnut.” Under these
proposals, program assistance is provided until an individual’s drug spending reaches
a specified dollar amount (e.g., $2,000 under the House plan), then no coverage until
a beneficiary’s expenses reach a specified “catastrophic threshold” level ($3,700 outof-pocket costs with $4,800 in total spending). At this point, all costs (or virtually
all costs) would be assumed by the program. The range of spending for which no
program spending is provided is labeled a doughnut.65
Assistance for the Low-Income Population. Most of the recent drug
proposals would require beneficiaries to pay a monthly premium for program
coverage. In addition, beneficiaries would be responsible for cost-sharing charges
when they used covered services.
Most proposals would exempt the low-income population from some or all of
these payments. Most proposals would set the minimum income cut-off level at
135% of poverty ($11,961 for an individual and $16,119 for a couple in 200266).
This is generally the QMB/SLIMB population.67 Some plans would provide partial
or full low-income assistance to persons at higher income levels. Persons meeting
the minimum income criteria, and not eligible for full Medicaid benefits, would have
their premium and cost-sharing costs paid (generally in full) by the federal
Those eligible for full Medicaid benefits (including drugs) would typically have
the new program pay first with Medicaid picking up costs not paid under the new
federal program. This would include premium and cost-sharing charges as well as
any costs above the federal program’s benefit limit. The current federal-state
matching rate for Medicaid services could apply; alternatively, the federal
government could assume a larger share of these costs.
One concern with an income limit, is that some persons would have a fairly
generous benefit while persons with incomes slightly above the income cutoff would
have no assistance with premiums and cost sharing charges. A number of proposals
have responded to this concern by providing a phase-out in coverage. For example,
full coverage would be offered for those below 135% of poverty. Those between
135% and 150% of poverty ($11,961-$13,290 for an individual in 2002) would have
a sliding scale subsidy for the premium but no coverage for cost-sharing charges.
For a discussion of how benefit design affects beneficiary out-of-pocket costs, see CRS
Report RL31525, Medicare: Beneficiary Cost-Sharing Under Proposed Prescription Drug
Benefits, by Christopher Sroka.
CRS Report RL31485, Prescription Drug Coverage.
See discussion of QMB/SLIMB population under discussion of supplementary coverage
State Medicaid programs could potentially save some costs because some drug
spending would be picked up under a new federal program. However, they could
also face increased costs because of increased enrollment in the QMB/SLIMB
programs. Enrollment in these programs has traditionally been low, though the
enrollment in the QMB program has recently increased. It is likely that enrollment
would increase substantially if drug coverage were offered for this population group.
Under current law, this would have the effect of increasing federal and state costs for
the basic QMB/SLIMB benefits (i.e., cost-sharing and premium charges associated
with non-drug benefits). Some proposals would provide full federal funding for
these additional costs.
Relationship to Private Coverage. Questions have been raised regarding
the role of existing private coverage (i.e., employer-based and Medigap) with the
implementation of a new drug benefit.
Employer-Based Coverage. The addition of a new benefit could result in
savings for employers who currently offer drug benefits to their retirees. Some
employers might choose to supplement the federal benefit, for example by paying
some of the cost-sharing charges.
In order to contain federal costs, some proposals would encourage employers
to continue to provide their current benefit package to retirees instead of having these
individuals enrolled under the federal plan. Under these proposals, a premium
subsidy would be provided to employers who offered coverage at least as good as
that under the new federal plan. It is difficult to determine how many employers
would elect to continue to provide coverage under their own plans.
A recent study suggests that in the short term (3-5 years) most large employers
would not terminate coverage solely in response to a new benefit; rather, they would
continue coverage by wrapping around the new benefit.68 However, it is difficult to
predict employer actions over the longer term. As noted earlier in this report,
employers are cutting back, and in some cases discontinuing retiree health coverage,
particularly for new hires.
Medigap. If a new drug benefit were enacted, the existing standardized
Medigap packages would need to be revised. Decisions would need to be made
regarding whether packages with drug benefits should continue to be offered.
Covered Drugs; Formularies. Drug proposals offered in recent years
would generally provide coverage for outpatient prescription drugs approved by the
Food and Drug Administration (FDA) as well as biologicals and insulin. Many bills
link the definition to that applicable under the Medicaid program.69
Hewitt Associates for Henry J. Kaiser Family Foundation. The Implications of Medicare
Prescription Drug Proposals for Employers and Retirees. July 2000.
The Medicaid law permits exclusion of certain categories of drugs including those for
weight loss or cosmetic purposes and those for smoking cessation. Some Medicare
proposals would include coverage of drugs for smoking cessation.
Many proposals contemplate the use of formularies which could potentially
restrict coverage to certain drugs. Formularies are lists of drugs which are preferred
for use by a health plan. A plan that has adopted an “open formulary” allows
coverage for both formulary and non-formulary medications. A plan that uses a
closed formulary limits coverage to the specified drugs. Another approach,
increasingly utilized by private insurers, involves the use of an open formulary,
coupled with higher copayments for use of off-formulary drugs. Some plans use
“tiered copayments” with the lowest copayment level applied to generic drugs (drugs
no longer having patent protection), a middle level applied to brand-name drugs on
the formulary and the highest level applied to off-formulary brand-name drugs. A
similar approach could be applied for the Medicare population.
Many proposals would either explicitly or implicitly leave the specification of
drugs included on a formulary to the PBM or other entity administering the benefit
in the area. This approach raises the possibility that different formularies could apply
in different geographic regions. How restrictive a formulary is may depend, in part,
on whether there is more than one PBM in an area. If there is only one PBM, it is
less likely that it would be able to significantly restrict coverage. If, however, more
than one PBM operated in a region (as would be the case if the benefit were offered
by private insurers) each could potentially compete on the basis of what was included
in its formulary.
The ability of a formulary to restrain costs is dependent, in part, on how easy it
is to obtain off-formulary drugs. Some proposals would essentially permit the use of
off-formulary drugs in any case where the physician certified that the use of the drug
was medically necessary. Other proposals would make the use of off-formulary
drugs more difficult by, for example, requiring appeals of non-coverage decisions.
Other Cost Control Strategies. Formularies and tiered copayments are
just two of the cost control strategies that could be utilized by a PBM or other
administering entity. There are a number of other strategies which could be
employed. In broad terms, these could be mandated by law or left to the discretion
of individual PBMs. Possible strategies include utilization management and
implementation of quantity limits (for example drugs limited to a 30-day or 60-day
supply and/or a limit on the number of refills in a specified period). A number of cost
control strategies could also be designed to assure quality of services provided to
Payments for Drugs. Perhaps one of the more contentious issues underlying
the prescription drug debate is how payments for drugs would be determined. Under
the current Medicare program, payments for covered services are based on federal
laws and regulations. The resulting policies, which vary by service category, have
been labeled administered pricing. Critics of this approach claim that it is
cumbersome and results in micro-managing at the federal level. In fact, administered
pricing is cited by many as the main argument for overall Medicare restructuring.
Pricing.70 None of the major proposals considered in the 107th Congress,
including those establishing a nationwide benefit under Medicare, would have set
detailed federal rules for drug payments. In part, this reflects the very strong
opposition by the pharmaceutical industry to federally determined payment policies.
The industry has registered its strong opposition to price controls and argues that
such controls would stifle research and innovation. It argues that in order to develop
new drugs, stockholders must be willing to invest in companies that are conducting
research; and that, in many cases, this necessary research does not lead to new drugs.
However, there must be at least the possibility of financial return to attract investors.
Other observers contend that there will still be sufficient money for research. They
point both to the rapid increases in drug spending and the large profits of the
Many observers contend that it is unrealistic to suggest that a new program,
involving substantial federal dollars, could be implemented without some way to
control costs. While most proposals would leave pricing decisions to the PBMs, they
do attempt to limit the overall federal exposure or risk, for example, by limiting the
per capita federal expenditure. Other approaches would encourage the use of less
costly generic drugs. For example, S. 812 as passed by the Senate in the 107th
Congress, would have provided for an accelerated date of approval for a generic drug
However, controlling overall expenditures (in the absence of a specific dollar
limit) may be a difficult task. There are a number of factors that will affect potential
program costs, many of which are difficult to predict at this juncture. For example,
what will be the increased use of drugs (known as induced demand) that will result
from the addition of a new benefit? How effective will PBMs be in negotiating
discounts? How will pricing and coverage decisions be made for new breakthrough
drugs? Finally, if a catastrophic benefit is included, how would this affect utilization
and expenditures. The answers to these and related questions will affect the overall
cost of the program.
Purchasing Discounts. One of the issues driving the discussion of a
Medicare drug benefit is the concern that seniors without supplementary drug
coverage pay higher prices than other persons for the same drugs. Most proposals
presume that PBMs will be able to negotiate purchasing discounts for Medicare
beneficiaries. Some proposals also require that beneficiaries continue to have access
to discounted prices, even when their spending exceeds the limits of the federal
program (and no program payments are being made). At this point it is difficult to
predict the size of the discounts which could be expected. It is also difficult to
Some of the bills before the 107th Congress deal directly with the prices seniors pay for
drugs; however, they do not add a new benefit for this population group. For a discussion
of these measures see: (1) CRS Report RL31503, Importing Prescription Drugs, by
Blanchard Randall, IV and Donna U. Vogt; (2) CRS Report RL30756, Patent Law and Its
Application to the Pharmaceutical Industry: An Examination of the Drug Price Competition
and Patent Term Restoration Act of 1984 (“The Hatch-Waxman Act”), by Wendy H.
Schacht and John R. Thomas; and (3) CRS Report RL30373, The Cost of Prescription
Drugs for the Uninsured Elderly and Legislative Approaches, by Resources, Science, and
Industry Division, Transportation and Industry Analysis Section.
predict the response of the industry to the discounts. For example, would prices to
other purchasers be raised to offset some of the losses from discounts for the
Rebates. One potential method for controlling program expenditures is that
of rebates. Rebates are a monetary return to a health insurer or payer from the
manufacturer. The amount of the rebate is based on the utilization of drugs by
program recipients or drug purchases by providers. The federal-state Medicaid
program uses rebates. Manufacturers are required to enter into rebate agreements in
order to have their drugs paid for under the program. However, some of the pending
drug proposals would specify that the Medicaid rebate provisions would not apply
if a state elected to use the prices negotiated under a new Medicare Part D program
for its Medicaid program.
If a rebate approach were adopted for Medicare, the program itself (or individual
insurers or PBMs) would end up recouping some costs. The savings would not
necessarily be passed along directly to consumers. If they were not, consumers could
still be paying coinsurance charges on the basis of the pre-rebate price. However,
overall program costs would be lower. If the program were financed in part through
beneficiary premiums, lower program costs should translate into lower premium
As noted earlier, CBO has estimated prescription drug benefit spending for the
Medicare population at $1.6 trillion over the 2002-2011 period and $1.8 trillion over
the 2003-2012 period. A drug benefit for this population is potentially very costly;
the actual cost of a plan is dependant on what portion of overall costs is assumed
under a new program. To date, a consensus has not been reached on the funding
sources for a new program. Possible sources include a combination of federal
general revenues and beneficiary premiums. Previously, some observers had
recommended using a portion of the projected budget surplus for a drug benefit;
however, this is no longer an option. It should be noted that under virtually all
proposals, beneficiaries would continue to be responsible for a portion, and in some
cases a substantial portion, of their drug costs themselves.
As noted, during 2002, the House passed a prescription drug measure, but the
Senate was unable to come to an agreement on a plan. Thus, the 107th Congress did
not take final action on a drug benefit. It is expected that the 108th Congress will
again consider prescription drug legislation; at this point it is difficult to predict
whether it will be able to develop a consensus package.