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Medicare prescription drugs: a benefit whose lime has come. (Health Policy Update).

When the Medicare program was started in 1965, an outpatient drug benefit was not included. At that time, drug benefits were not a common component of private insurance plans, and the need for coverage tended to be more for inpatient drugs. In addition, there was significant opposition to this benefit from the pharmaceutical industry. Since that time, the role of pharmaceutical therapy has grown substantially and our health care delivery system has become more outpatient based. In addition, there are a growing number of seniors that need prescription medications, but are unable to afford them. (1)

This was an issue of intense debate during the 1988 Medicare Catastrophic Coverage Act, during President Clinton's 1993 health care reform proposal, and most recently during deliberations by the Bipartisan Commission on the Future of Medicare.

Two thirds of Medicare beneficiaries have prescription drug coverage through a retirement health plan, a Medigap or other private insurance policy, a Medicare HMO, or through Medicaid. Despite this level of coverage, many have less access today to prescription drugs because of the rising costs of pharmaceuticals. Health plans have responded to these sharp price increases by reducing drug coverage and restricting their formularies. The increase has also resulted in cost shifting to seniors through increased out-of-pocket costs, including higher co-pays, deductibles, and premiums. In some cases, out-of-pocket costs can run as much as $300 monthly.

Even the existing federally approved Medigap policies offer little relief since seven of the ten do not cover outpatient prescription drugs. In many rural communities, this has been compounded by the recent pullout of several Medicare HMOs that had offered an outpatient prescription drug benefit.

The cost of an outpatient benefit

The National Academy of Social Insurance recently estimated the annual cost of adding an outpatient drug benefit at 7 to 13 percent of Medicare costs or from $17 to $24 billion. Others have estimates between $10 and $30 billion. Nationally, overall retail drug spending has doubled from $49 billion to more than $94 billion from 1992 to 1998. Predictions suggest that this trend will continue, supporting the view that Medicare drug costs will be even higher in the future. Factors driving up these costs include a plethora of new drugs from expensive development programs, a quicker FDA approval process, an expanding and aging population, increased access to drugs, and increased direct marketing of pharmaceuticals to patients. Savings are expected to occur as new therapeutics reduce the role of traditional, more costly therapies. The extent of the savings from this shift in therapies remains to be seen.

Unanswered policy questions

Several important policy questions have emerged during the debate on adding a prescription drug benefit such as:

* Should any benefit be linked to fundamental reform in Medicare?

* Should individuals in the fee-for-service Medicare plan have access to this benefit?

* How do we pay for the benefit?

* How broad should the formulary be?

* Should there be price controls on pharmaceuticals'?

* Should the government use pharmacy benefit managers?

* Should we means test any benefit?

Legislative action

Congressional action to address this important problem has begun. Several Congressional Democrats led by Senator Edward Kennedy (D-MA) have recently introduced legislation. (2) Their bill would cover $1,700 a year in prescription drug costs and be managed through retail pharmacies or benefit managers. It is expected to cost between $10 and $25 billion a year. Additional components include a $200 deductible, a co-pay of 20 percent after the deductible is met, and an annual stop loss of $3,000.

Another approach introduced by Representatives Benjamin Cardin (D-MD), William Coyne (DPA), Pete Stark (D-CA), and Sander Levin (D-MI) would "provide Medicare beneficiaries a prescription drug benefit for certain chronic conditions: hypertension, diabetes, congestive or ischemic heart disease, major depression, and rheumatoid arthritis." (3) This program is modeled after the pharmacy assistance programs in many states that cover needed prescription drugs for underserved populations. It would have a $250 deductible and co-payments, but no co-payment for generic drugs, and would allow a charge of not more than 20 percent of the cost of non-generic drugs. Specific Low Income Medicare Beneficiaries (SLMBs) would be excluded from deductibles and co-payments. The program would be managed through a system of regional pharmacy benefits managers.

The federal Agency for Health Care Policy and Research (AHCPR) would be tasked to review knowledge on chronic diseases and therapies that affect them. The Institute of Medicine (IOM) would then review the science on an annual basis and make recommendations concerning the scope of chronic conditions and prescription drugs that should be covered. This yearly review would also determine the effectiveness of the pharmaceutical benefit in terms of cost, the annual saving to the Medicare program, and reduction in acute services.

President Clinton is also planning to announce a Medicare reform proposal in the near future. It is anticipated that he will include an outpatient prescription drug benefit. Some Republicans in Congress have raised concerns about the costs of adding prescription drug coverage, while others have offered cautious support for the idea.

The future

The pressure appears to have lessened for comprehensive Medicare reform because of new savings projections that extend the insolvency date of the trust fund. However, the need to do something to ensure access to prescription drugs continues and may actually have the effect of forcing the reform issue back to the table. Additional factors that will Influence this decision include the status of the economy, future defense costs, and the desire of some in Congress to seek a tax cut.

The role of special interest groups such as the pharmaceutical industry will also impact the potential form of any benefit. Their concern remains about the potential of price controls over time as government uses its buying power to ratchet down costs. One wonders if cost controls are inevitable, since drug costs are growing at such a rapid rate and the potential to make up lost earnings through volume is more likely as the baby boom generation enters senior-hood.

Despite the hearty price tag, savings from preventing unneeded hospitalizations or other institutional care, dollars available from budget surpluses or new tobacco taxes may be available to fund this benefit.


As Congress debates the merits of adding a prescription drug benefit to the Medicare program, one fact remains clear. Pharmaceutical therapy for chronic diseases such as arthritis, hypertension, diabetes, and ischemic heart disease can prolong life and delay morbidity. Significant cost savings can be achieved as well with appropriate and timely therapy if we improve access to needed pharmaceuticals. Barriers to the availability of pharmaceuticals must be removed to have an effective reform plan. It's a pay now or pay later decision.


The stated views are those of die author and do not represent those of the State of Maryland or the Department of Health and Mental Hygiene.


(1.) Soumeral, S. and Ross-Degnan. D. Inadequate Prescription-Drug coverage for Medicare Enrollees--A Call to Action, NEJM Vol. 34C, No. 9, pp. 722728. 1999.

(2.) Welch, W. Medicare plan helps prescription costs, USA Today April 21. 1999.

(3.) "Medicare Chronic Disease Prescription Drug Benefit Act," Rep. Benjamin Cardin ID-MD). Rep. William Coyne (D-PA), Representative Sander Levin (D-MI). and Rep. Pete Stark ID-CA). May 13. 1999.

Georges Benjamin, MD, FACP, is the Secretary of the Department of Health and Mental Hygiene in Baltimore, Maryland. He can be reached by calling 410/767-6505 or via email at
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Author:Benjamin, Georges C.
Publication:Physician Executive
Geographic Code:1USA
Date:Jul 1, 1999
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