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The battle for a prescription drug benefit.

Congressional negotiators are debating terms of the largest change in the Medicare program in history.

Medicare costs approximately $269 billion a year but does not contain an outpatient prescription drug benefit. At a cost of $400 billion over 10 years, these new legislative plans attempt to fix what many believe is the most serious flaw in the program for our nation's seniors and the disabled.

When Medicare was started in 1965, outpatient prescription drugs were not a common benefit in private insurance programs. As the standard of care moved to the outpatient setting, and with the explosive growth in pharmacological interventions, the absence of an outpatient prescription drag benefit became a glaring hole in the Medicare program.

Recently, both houses of Congress passed their versions of bills to solve this problem and are being encouraged to pass a bill that the president can sign into law later this fall.

Benefit D

Both the House and Senate bills create a new benefit called Medicare Part D on January 1, 2006. The benefit would be delivered through private risk-bearing plans but managed by a new federal agency within the U.S. Department of Health and Human Services.

It is unclear whether it will be within the Center for Medicaid and Medicaid Services (CMS) that currently manages the Medicare and Medicaid programs or a stand-alone agency in Health and Human Services. The administrative cost to create this new agency is estimated to be about $10 billion over 10 years.

Medicare beneficiaries who are entitled to Part A services and enrolled for Part B are eligible to enroll. The Senate bill excludes people eligible for Medicaid while the House bill allows individuals on Medicaid to enroll in the Medicare Part D plan.

In the House version, states may require dually eligible beneficiaries to enroll. It also allows states to phase out of the program altogether. This would allow states to opt out of the prescription drug benefit for dual-eligible individuals at significant savings to the state.

The state could, however, maintain Medicaid pharmaceutical benefits as wrap-around services for a person eligible for Medicaid and Medicare. This provision concerns groups that support the dually eligible because they believe it could result in an actual reduction in pharmaceutical benefits for low-income seniors or the disabled.

Both approaches require plans to offer a defined standardized benefit package or its actuarial equilivant. This benefit uses the Medicaid pharmaceutical benefit package as a base and all vaccines licensed under Section 351 of the Public Health Service Act.

Both bills allow for therapeutic formularies developed by pharmacy and therapeutic committees and nonpreferred drugs are available on appeal through both bills. Over-the-counter medications and drugs covered under Medicare Parts A & B are generally excluded. Plans can offer a more enriched pharmacy benefit and there are small differences in how each piece of legislation handles this.

The House bill contains a provision for a premium support program starting in 2010. This program would allow all fee-for-service plans in Medicare to compete with a new entity called the Enhanced Regional Fee For Service plans (EFFS) and Medicare Advantage plans (the old Medicare+Choice) through a premium support program.

This program would give a defined benefit and allow fee-tot-service beneficiaries to pick between the various plans. This is a highly volatile issue because it fundamentally changes the way Medicare fee-for-services operates and moves it to a model like the federal employee benefit program.

Because the program does not start until 2006, a discount prescription drug assistance program is proposed from 2004 until the new program begins. These cards charge an annual enrollment fee and are means tested.

Both proposals also reform the insurance market by changing the types of Medigap policies that can be sold with drug coverage. This change may be resisted by the insurance industry.


Congress set aside up to $400 billion in budget authority for this new program over 10 years. The Congressional Budget Office estimated both bills would slightly exceed this target, although earlier estimates were well within the $400 billion allocation.

The program, in effect, subsidizes the cost for prescription drugs for Medicare beneficiaries including those in some private retirement programs; the cost differences in each bill are based on the mix of premiums, deductibles and co-payments in each proposal.

Drivers of these fiscal policies are the need to stay within the budget cap, the philosophical differences over entitlements and the amount each uses to address the needs of low-income seniors. The amount paid to the health plans varies and is a complicated set of risk-bearing calculations designed to encourage plan participation and manage risk.

Both bills contain the "doughnut hole." This is a total gap in coverage after a person reaches a certain threshold of expenses. While the size of the gap is different between the two bills the problem is:

* (Senate version): After paying an initial deductible ($275), monthly premiums ($35) and half of all expenses to around $4,500, the individual pays 100 percent of all costs until approximately $3,700 in out-of-pocket expenses have been paid. After this, Medicare pays 90 percent of all costs.

Many legislators would like to close this gap but the budget cap does not support funding this problem under the current proposal.


The Medicare reform debate has historically been over whether to do comprehensive structural reform including a drug benefit or add a drug benefit and then restructure the system.

Many believe that if a drug benefit is added first, the pressure would be off for major reform of the Medicare system. The bills currently being debated by Congress focus on a drug benefit, but the makings of fundamental reform of the entire system are there as well.

The undercurrent for fundamental change remains strong with conservatives and the lack of a consensus could derail any chance for compromise.

There is also a basic battle brewing over the concepts of a defined benefit versus a defined contribution. This is more than a battle over cost but one over how much government should pay for what many believe is an entitlement program.

This debate is pushed by those who believe the plan will cost more than the estimated $400 billion over 10 years because of case mix and potential cost shifts by both states and the private sector.

These shifts could occur if large numbers of private companies or states change the benefits offered under retirement plans as a way to save money, removing many eligible beneficiaries from their prescription drug programs.

Another group believes that the fiscal relief benefits too few people to be of much real help and that the coverage gap is a significant problem for people with moderate drug expenses.

What's next?

Various stakeholder groups are voicing concerns about the adequacy of either plan as currently written. Congress will have to compromise and be creative to make this work.

Adding a Medicare prescription drug benefit is an essential public health goal. It's hoped that Congress can find the prescription to this difficult problem. Only then can the 40 million Medicare beneficiaries finally get the help they need.


(1.) Health Policy Alternatives/The Henry J. Kaiser Family Foundation, Prescription Drug Coverage for Medicare beneficiaries: A Side-by-Side Comparison of S. 1 and H.R.1, July 24, 2003.

(2.) Altman, D, "Some doubts about logic of Senate plan for drug aid." New York Times, June 14, 2003.

(3.) Pear, R., "Subsidies to poor pose a hurdle to compromise on Medicare bill." New York Times, July 21, 2003.

(4.) Abelson, R., "Fewer Retirees get drug coverage from employers." New York Times, July 23, 2003.

(5.) Adams, R., "Medicare overhaul on horizon, but real questions are deferred." Congressional Quarterly Weekly, Vol. 61, No. 25, 2003

Georges C. Benjamin, MD, FACP, is executive director of the American Public Health Association in Washington, D.C. He can be reached by phone at 202-777-2430 or by e-mail to
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Title Annotation:Health Policy Update
Author:Benjamin, Georges C.
Publication:Physician Executive
Geographic Code:1USA
Date:Sep 1, 2003
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