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Pros and Cons of prescription drug benefit changes. (Prescription Drugs).

In 2000, several Medicare HMOs notified the federal government of their intention to leave the Medicare program (Part C, also known as Medicare Plus Choice) effective January 1, 2001, placing nearly one million beneficiaries in several geographic markets back into the traditional fee-for-service program.

Up to that point, many Medicare beneficiaries were attracted to managed care plans because of the outpatient drug benefits. Many of the HMOs that chose to remain in the program reduced the annual pharmaceutical benefits by drastically restricting formularies and implementing annual or quarterly caps.

Attempts by the Bush Administration to lure managed care plans back to Medicare during 2001 were unsuccessful for two reasons. Congress could not agree on a premium increase and the September 11th terrorist attack and its aftermath wiped out the budgetary surplus. The ensuing recession and the diminished returns on retirement investments and savings placed a heavy financial strain on many Medicare beneficiaries.

A 2002 Harris Poll indicated that 48 percent of all adults see the provision of a new Medicare drug benefit as extremely important, while 77 percent see it as extremely or very important.

In 2001, Florida and several other states promulgated rules requiring pharmacies that participate in the state Medicaid programs to offer the same pricing to all Medicare beneficiaries regardless of financial need. However, a Rand Corporation health study released in March 2002 by the California HealthCare Foundation found that only 75 percent of enrolled pharmacies gave seniors the discount. And in more than half the pharmacies, seniors had to ask for the discount. (1)

The Pharmaceutical Research and Manufacturers of America (PhRMA), an industry trade organization, sued the Florida, Michigan, and Maine state governments over this new policy. (1) Ironically, Pfizer, Lilly and the Together Rx Consortium--Abbott, AstraZeneca, Aventis, Bristol-Myers Squibb, GlaxoSmithKline, Janssen, Novartis, and Ortho-McNeil--are implementing prescription savings programs that provide savings of approximately 20 to 40 percent to Medicare enrollees based upon a financial need. Eligibility is based on 200 to 300 percent of federal poverty and requires that beneficiaries have no other pharmaceutical coverage.

At the federal level, the Bush administration has embarked upon a Medicare-Endorsed Prescription Drug Card Initiative and Congress is once again considering several proposals for adding a defined prescription drug benefit, which will be known as Part D, to the Medicare program. (2, 3)

It's important to examine the social, economic, ethical and political/legal contexts of the prescription drug benefit issue and consider all policy options. Also let's look at various recommendations for addressing prescription drug benefits from a long-term perspective.

Social context

Patient care has increasingly moved outside of traditional health care facilities. While Medicare typically covers pharmaceuticals for inpatient care, the benefits have not kept pace with this trend.

The current cohort of retirees and newer Medicare beneficiaries became accustomed to the prescription coverage offered by their employers since the mid-1970s. In the United States, it's the elderly who most use prescription drugs. More than a third of them, on any given day, have no insurance to pay for those medications. (4)

Many Medicare beneficiaries enrolled in managed care plans during the 1990s in order to obtain outpatient drug benefits. Recently, HMOs have restructured their pharmaceutical benefits with either quarterly or annual caps, causing some beneficiaries to go uncovered in some months and encouraging others to voluntarily unenroll from health plans. (5)

In some geographic markets, HMOs exited the Medicare Plus Choice Program altogether, involuntarily forcing beneficiaries back into traditional Medicare. The American public expects prescription drug coverage with their health care benefits package.

Economic context

The pharmaceutical industry invests great sums of money to research and develop new medications. In return, they enjoy a 17-year patent in the United States before a drug becomes classified as a generic. An effective medication has the potential to become a cash cow for manufacturers.

Manufacturers worry that a Medicare Part D benefit will effectively create a purchasing cartel with price controls and affect profits. (6) Pharmacies operate on slim pricing margins based upon the average wholesale price (AWP); any discount plan is likely to affect their profitability.

"Families USA found that the average number of prescriptions (including refills) for seniors annually increased by 45 percent from 1992 to 2000 (from 19.6 to 28.5), while the prescription price increased by 49 percent, from $28.50 to $42.50. (1)

Although nearly nine out of 10 Medicare beneficiaries use prescription drugs, according to the Bureau of Labor Statistics for 1997, the average senior spent $637 annually on both prescription and non-prescription drugs. (6)

Ethical context

As Americans enjoy increased longevity, they are also faced with chronic diseases. Once a disease is diagnosed, the medical profession has the obligation to treat the patients to prevent exacerbations and further deterioration. Pharmaceuticals are an essential part of care.

As better case management through the judicious use of medications prevents costly hospitalizations and surgery, the savings need to be shared with the outpatient sector.

Political/Legal context

In addition to market pressures, public pressure on federal agencies and state legislators has led to the funding of numerous studies on the need for prescription drug benefits and the impact of various proposals.

The American Association of Retired Persons (AARP) has 35 million members, many of whom are active registered voters and are politically active. (1)

"The real task before Congress is not so much whether to provide prescription drug coverage to Medicare beneficiaries, but rather how to assist those seniors who really need help in obtaining prescription drugs, and how to finance it." (6) Professional groups such as the American College of Physicians-American Society of Internal Medicine support these initiatives.


In all of the prescription drug benefit proposals, the key stakeholders are the pharmaceutical manufacturers. Although they have pressures to reduce costs, they need to maintain a positive public image so that they can continue to enjoy their patents and profitability.

Hospitals, which have traditionally been at the center of the health care system, are experiencing declining revenues. Patients are remaining healthier on oral medications and are often enrolled in outpatient disease management programs.

Physicians, nurses and allied health professionals have a stake in the quality of patient outcomes, many of which depend upon patient access to medications. The public has a stake because pharmaceutical costs affect them directly in premiums and out-of-pocket costs, and indirectly, through the payroll and income taxes that finance the Medicare program.

Employers and insurers have a stake because costly pharmaceuticals result in higher insurance premiums. Legislators and regulators are stakeholders because they must demonstrate concern for the public on this issue and because the government is the largest single payer of health care.

In short, prescription drug benefits affect everyone.

Results of analysis

Clearly, according to the scorecard, maintaining the status quo is the worst option. It is really a race between the pharmaceutical industry and the Bush Administration to create a temporary fix before a broader Part D benefit is passed should a window of opportunity be created by an escalating crisis.

Political feasibility favors the Bush plan at this point. From a practical matter, the government cannot afford a Part D amendment at this time and similar efforts in 1988 were repealed by worried seniors.

The pharmaceutical drug benefit issue is once again a symptom of a broken health care system. Physicians need to be at the forefront of advocating for prescription drug benefits for their patients. They also need to encourage patients to participate in disease management programs.

The optimal use of pharmaceuticals is the cornerstone to better quality of life and to controlling overall costs to the health care system.
Option 1

Status quo

Medicare beneficiaries without any prescription drug benefits or with
limited coverage will face higher out-of-pocket outlays and may go
without medications.

Cost containment

Pro In general, maintaining the status quo will
 save the government money in the short term
 on an already troubled Medicare program.

Con In the long run, pharmaceutical costs will
 remain on an upward spiral and health care
 costs will continue to skyrocket as those
 without medications experience hospital
 readmissions and surgery.


Pro None

Con Quality will suffer as some beneficiaries
 experience sub-therapeutic care.


Pro None

Con In the long run, costs will continue to
 increase, thereby decreasing access. Patient
 assistance programs are voluntary and

Political Feasibility

Pro None. The average American is becoming aware
 of the crisis.

Con Many legislators have constituents--i.e.
 AARP--who want a change.

Option 2

Industry-driven drug discount programs

Industry should be given the opportunity to regulate itself.

Cost containment

Pro The government will save on outlays
 to the needy.

Con The industry will ultimately
 continue to determine the price
 of pharmaceuticals.


Pro Disease progression and costly
 hospitalization/surgery will be
 averted for some.

Con Not all manufacturers are
 participating. Some medications,
 particularly controlled
 substances, are excluded. Too
 many programs create confusion.


Pro The needy will have access to many

 The program is restricted. Those
 beneficiaries with limited
 prescription coverage may not be
 eligible for assistance for the
 remainder of their medications.

Political feasibility

Pro Generates goodwill for the industry
 and may delay legislative efforts.

Con Cynics will not be satisfied.

Option 3

Medicare-Endorsed Drug Discount Programs

The Bush Administration can implement rules faster than Congress can
amend Medicare.

Cost containment

Pro All seniors will save 20 to 40
 percent off retail, regardless
 of need.

Con Funny money. These "discounts"
 are already enjoyed by
 commercial HMOs. Pharmacy
 benefits managers will need in
 administrative fee.


Pro Virtually all medications will
 be included

Con There will still be some confusion
 as beneficiaries choose between


Pro Universal. No need based criteria.

Con There will still be some needy
 seniors who may fall through
 the cracks.

Political feasibility

Pro Quick fix for the Bush
 Administration in Preparation
 for 2004.

Con PhRMA and retail/community
 druggist lobbies are opposed.

Option 4

Legislative Amendment to the Medicare Program Part D

When there is a market failure, legislation is often necessary.

Cost containment

Pro Better care will result in Part
 A and possibly Part B savings.

Con A new Part D benefit could further
 strain Medicare. Some beneficiaries
 may end up with duplicate coverage.


Pro A legislative mandate may offer
 an increased quality of care.

Con Blanket mandates can impede
 innovation and quality will suffer
 in long run if new pharmaceutical
 research and development is


Pro Universal coverage for all

Con None.

Political feasibility

Pro Legislative action is
 appealing to frustrated

Con Ill-conceived laws can be
 difficult to repeal.

Policy Alternatives Scorecard

 Status Industry Govts. Part D
 Quo Discounts Endorsement

Containment - +/- +/- -

Quality - +/- +/- +

Access to - +/- +/- +

Political - +/- + +/-


(1.) Kemper, V. Stage Set for Drug Benefit Battle. Los Angeles Times. March 31, 2002.

(2.) Goldman, DP, Joyce, GF and Malkin, JD. "The costs of a Medicare Prescription Drug Benefit: A comparison of alternatives." RAND Publications, 2002.

(3.) Health care Financing & Organization. "Structure of Prescription Drug Benefit May Help Medicare Beneficiaries Budget Prescription Drug costs More Effectively." HCFO Web Brief, October 2001. URL current as of 10/29/02.

(4.) National Public Radio. "Managing Prescription Drug Costs." April 5, 2002. URL Current as of 10/29/02.

(5.) Rector, TS. "Exhaustion of Drug Benefits and Disenrollment of Medicare Beneficiaries from Managed care Organizations." JAMA. 283(16), 2163-7.

(6.) Frogue, J. How to Provide Prescription Drug Coverage under Medicare. The Heritage Foundation Backgrounder. Number 1293: June 16, 1999.

RELATED ARTICLE: Issue statement.

What is the best way to provide prescription drug coverage for Medicare beneficiaries?

Policy options

Policy alternatives for prescription drug benefits include:

(1) Status quo. Do nothing and let the current situation escalate.

(2) Industry-driven prescription drug discount programs with financial eligibility guidelines.

(3) Medicare-endorsed drug discount card for all beneficiaries regardless of need.

(4) Legislation to add a Part D benefit to Medicare.

Evaluation of options

The criteria by which these policy alternatives will be judged are:

(1) Cost Containment

(2) Quality of Care

(3) Access to Medications

(4) Political Feasibility

Joseph T. Doyle, MD, EdS, MBA, MPH, MPA, is regional associate medical director at Cigna Group Insurance Disability Management Solutions in Tarrytown, N.Y. He is pursuing a PhD in public policy at Florida Atlantic University in Boca Raton, Fla., and is a medical consultant with MRO America, Inc. in Naples, Fla. He can be reached by phone at (914) 524-1164 or by e-mail at
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Author:Doyle, Joseph T.
Publication:Physician Executive
Date:Jan 1, 2003
Previous Article:Teaching clinic lowers pharmacy costs: how to achieve more cost-effective prescribing. (Prescription Drugs).
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