The Medicare Prescription Drug Plan
An Update for users of Public Finance: A Contemporary Application of Theory to Policy, 8th Edition, by David N. Hyman
In November 2003 Congress passed historic new legislation to provide citizens over the age of 65 with subsidized prescription drug insurance. The Medicare Prescription Drug and Modernization Act of 2003 will provide Medicare beneficiaries with a voluntary drug purchase plan that will result in government subsidization of pharmaceuticals for those enrolled in Medicare. In 2006 participants can sign up for a separate drug plan or choose to enroll in a prescription drug plan provided by a comprehensive health plan. Beginning in the Spring of 2004, a temporary plan will be put into effect that will allow those over the age of 65 to purchase a “discount drug” card for $30 per year that will enable them to purchase pharmaceuticals at an estimated 14 percent discount. For a typical elderly person who was not previously covered by insurance to pay for prescription drugs the annual subsidy could amount to as much as $300. Low-income elderly would receive an additional $600 per year subsidy during the interim period to further reduce their drug costs. The Drug Purchase Plan: How it Will Work When fully effective in 2006 Medicare beneficiaries who choose to enroll in the plan will pay an estimated premium of $35 per month. Private insurance companies will administer the plan under contract with the federal government. There will be a standard benefit. The actual details of how these companies will provide the insurance remains to be seen. The plans will cover drugs using a deductible and coinsurance. After beneficiaries incur a “deductible” of $250 of expenses for prescription drugs each year, the Medicare insurance plan would pay 75 percent of drug costs up to a maximum of $2,250 per year. The “coinsurance” for the plan up to this level of expenditure in excess of the $250 deductible would therefore be 25 percent. An enrollee with no previous drug insurance coverage spending $2,250 annually for prescription drugs would therefore incur the following expenses out of pocket: Insurance Premiums: $420.00 Deductible: $250.00 Coinsurance: $500.00 Total $1170.00
The remainder of the $2,250 of expenditure, an amount equal to $1,080 would be subsidized by the plan. This subsidy would accrue to all those enrolled in the plan.
After the $2,250 coverage is exhausted, there will be no coverage for drug costs between $2,250 and $5,100 per year. However, when drug costs for an enrollee reach $5,100 the plan would cover 95 percent of expenditures in excess of that amount. The intent of this part of the plan is to cover “catastrophic” drug expenses. The gap in coverage up to this amount is an attempt by the Congress to keep the costs of the plan down. Eliminating the gap in coverage would increase the cost of the plan to taxpayers by at least 60 percent. Both the deductible and the coverage gap and expected to increase after 2005. Low-income enrollees, those with income of less than $12,123 per year with less than $6,000 in assets other than a home will not be required to pay either the premium or the deductible and would be exempt from the coverage gap. It is difficult to determine the net benefit of this aspect of the plan, because some of these low-income elderly enrollees could have previously been receiving benefits under Medicaid.
Employer-Provided Drug Coverage One of the difficulties in gaining political support for Medicare drug coverage was the fear that some retirees who already had prescription drug coverage through their employer-provided health insurance could be made worse. To discourage employers from terminating their prescription drug coverage for retired workers after the Medicare drug purchase plan becomes effective the legislation provides tax-free subsidies, estimated to be worth $70 billion, to employers who maintain drug coverage for retirees after the Medicare plan becomes effective in 2006. These subsidies will be equal to 28 percent of plan drug expenditures in excess of $250 but less than $5000 on behalf of retired workers. The maximum subsidy per covered retiree will be $1330 in 2006. The limits will be adjusted each year. It can be expected that those retirees drug coverage under private health insurance plans that is superior to that provided by Medicare would retain coverage and choose not to enroll in the Medicare plan. Public Finance of the Drug Purchase Plan The plan will cover an estimated 40 million older and disabled American citizens. The estimated cost of the Drug Purchase Plan over the next 10 years is $395 billion. However, Congress has a very poor record in projecting costs of new entitlement programs. Because the new plan will reduce out-of-pocket costs for prescription drugs it will increase the quantity demanded. Currently, the typical retiree spends about $1,300 on medicines. The amount could easily double now that coverage is available before the gap beginning at $2,250 of spending is encountered. It is also likely to increase the incentive for health care providers to prescribe drugs for the elderly. The increase in the demand for pharmaceuticals could put upward pressure on prices. The legislation specifically disallows Medicare from negotiating price decreases on behalf of those insured under the plan. Costs to taxpayers from the plan could be grossly under estimated. It remains to be seen how much the plan will actually cost.
This issue of price controls and protection of incentives for development of new pharmaceuticals loomed large in the political bargaining preceding passage of the legislation. The law prevents government authorities from negotiating discounts with drug makers. The concern was that such government mandated discounts could affect supply incentives. Also to prevent price declines for suppliers the legislation specifically will not pay for re-imported drugs previously exported to Canada. Costs of the plan will also depend on how many elderly citizens sign up for the Medicare prescription drug plan and the extent to which the private insurers that will be administering the plans will be able to negotiate discounts with pharmaceutical suppliers. Competition among private insurers administering the plan could also affect costs. If administrative costs are held down and good discounts are obtained then the cost of the premium to those enrolled in the plan can be kept low. If administrative costs are higher than expected and discounts are lower than expected then the premium charges to enrollees might end up higher than the estimated $35 per month. Higher premiums will discourage people from enrolling in the plan. Although subsidies will encourage employers to maintain their existing drug insurance plans, it remains to be seen how the new federal program will actually affect incentives of employers to provide drug coverage under their existing plans. Part of the costs will be offset by higher premiums for Medicare Part B out-of-hospital health insurance enrollees. The premium increases will begin in 2007 and be phased in over a 5-year period. Enrollees with incomes below $80,000 per year will still pay only 25 percent of the actual cost of the coverage. However, those with annual incomes in excess of $80,000 will pay higher percentages of the cost of the insurance topping out at 80 percent for those with annual incomes in excess of $200,000. The deductible for part B will also rise from $100 to $110 in 2005 and thereafter be indexed to the growth rate in Part B spending. Medigap Insurance for Drugs is Banned The new Medicare bill specifically bans the sale of “medigap” insurance to pay the portion of drug expenses not covered by the Medicare prescription drug plan. This provision is designed to control the costs of the plan and avoid a situation where the entire cost of drugs for those eligible for the plan is paid by third parties. In other words, the ban on medigap insurance for pharmaceuticals will guarantee that beneficiaries pay as coinsurance at least some of the price drugs they use. The plan could also limit coverage only to a list of preferred medicines to further control costs. Drugs left off the list would not be covered by the plan and users would have to pay the full price. Private insurance to cover drugs not on the preferred list would also be banned and purchases of such drugs would not be counted toward the deductible or other limits. The bill also requires that low-income elderly who previously received medications through Medicaid will now have to enroll in the new Medicare prescription drug plan and Medicaid will be prohibited from supplementing the Medicare plan unless State governments paid the entire cost of extra coverage.