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The Facts About Medicare Beneficiaries
and Prescription Drug Coverage
National Economic Council
Domestic Policy Council
July 22, 1999
Table of Contents
Overview i
Importance of Prescription Drugs to Medicare Beneficiaries 1
Prescription Drug Spending by Medicare Beneficiaries 3
Coverage for Prescription Drugs for Medicare Beneficiaries 4
Retiree Health Coverage 5
Medigap Prescription Drug Coverage 6
Medicare Managed Care 7
Medicaid 8
Beneficiaries Lacking Drug Coverage 9
President's Proposed Prescription Drug Benefit 10
Appendix: Methodology & Endnotes 11
OVERVIEW
DISTURBING TRUTHS AND DANGEROUS TRENDS:
The Facts About Medicare Beneficiaries
and Prescription Drug Coverage
This report describes the inadequate and unstable nature of the
prescription drug coverage currently available to Medicare
beneficiaries. Prescription drugs have never been more important, but
the people who rely on them most -- the elderly and people with
disabilities -- increasingly find themselves uninsured or with coverage
that is becoming more expensive and less meaningful. This report shows
that the accessing essential prescription drugs is not only a problem
for the millions of Medicare beneficiaries without any insurance -- it
is an increasing challenge for beneficiaries who have coverage. Key
findings of the report include:
Prescription drug coverage is good medicine.
Part of modern medicine. Prescription drugs serve as complements
to medical procedures, such as anti-coagulants, used with heart valve
replacement surgery; substitutes for surgery, such as lipid lowering
drugs that reduce the need for bypass surgery; and new treatments where
there previously were none, such as medications used to manage
Parkinson's disease. In addition, as our understanding of genetics
grows, the possibility for breakthrough pharmaceutical and biotechnology
will increase exponentially.
Medicare beneficiaries are particularly reliant on prescription
drugs. Not only do the elderly and people with disabilities have more
problems with their health, but these problems tend to include
conditions that respond to drug therapy. Not surprisingly, about 85
percent of beneficiaries fill at least one prescription a year for such
conditions as osteoporosis, hypertension, myocardial infarction (heart
attacks), diabetes, and depression.
The lack of drug coverage has led to inappropriate use of
medications which can result in increased costs and unnecessary
institutionalization. Recent research has determined that being
uninsured leads to significant declines in the use of necessary
medications. The consequence of inappropriate and underutilization of
prescription drugs has also been found to double the likelihood that
low-income beneficiaries entering nursing homes. One study concluded
that drug-related hospitalization accounted for 6.4 percent of all
admissions of the over 65 population and estimated that over
three-fourths of these admissions could have been avoided with proper
use of necessary medications.
About 75 percent of Medicare beneficiaries lack decent, dependable,
private-sector coverage of prescription drug coverage.
Only one-fourth of Medicare beneficiaries have retiree drug
coverage, which is the only meaningful form of private coverage.
Over three-fourths of beneficiaries lack decent, dependable. At
least one-third of Medicare beneficiaries have no drug coverage at all.
Another 8 percent purchase Medigap with drug coverage - but this
coverage is frequently expensive, inaccessible and inadequate for many
Medicare beneficiaries. About 17 percent have coverage through Medicare
managed care. Given the projected leveling off of managed care
enrollment and actual declines in the scope of managed care drug
benefits, this source of coverage is unstable. Drug coverage in managed
care can only be assured if it becomes part of Medicare's basic benefits
and is explicitly paid for in managed care rates. The remaining 17
percent are covered through Medicaid, Veterans' Affairs and other public
programs.
Private trends: Decline in coverage and affordability.
The proportion of firms offering retiree health coverage has
declined by 25 percent in the last four years. Retiree health coverage
is declining substantially because many firms previously providing it
are opting to drop their coverage. The decline was more pronounced
among the largest employers (greater than 5,000 employees), over a third
of whom dropped coverage in this period.
Medigap premiums for drugs are high and increase with age. Medigap
premiums vary widely throughout the nation but are consistently two to
three times higher than the Medicare premium proposed by the President.
Moreover, unlike the President's proposal, premiums substantially
increase with age as virtually every Medigap plan "age rates" the cost
of the premium. This means that just as beneficiaries need prescription
drug coverage most and are the least likely to be able to afford it,
this drug coverage is being priced out of reach. This cost burden will
particularly affect women, who make up 73 percent of people over age 85.
Public drug coverage trends: managed care benefits reduced.
The value of Medicare managed care drug benefits is declining.
Nearly three-fifths of plans are reporting that they will cap
prescription drug benefits below $1,000 in the year 2000. This is part
of a troubling trend of plans to severely limit benefits through low
caps. In fact, the proportion of plans with $500 or lower benefit caps
will increase by over 50 percent between 1998 and 2000.
Participation by Medicaid eligible populations remains low.
Millions of Medicare beneficiaries under 75 percent of poverty (about
$6,000 for a single, $8,500 for a couple) are eligible for Medicaid
prescription drug coverage, but the participation rate is only about 40
percent. This contrasts with an almost 100 percent participation rate
in Medicare Part B for beneficiaries. Inadequate outreach and welfare
stigma contributes to these low participation levels and raise serious
questions about the feasibility and advisability of using the Medicaid
program to provide needed coverage for a population at higher income
levels.
Millions of beneficiaries have no drug coverage.
At least 13 million Medicare beneficiaries have absolutely no
prescription drug coverage. The number of the uninsured is not
concentrated among the low income. In fact, the income distribution of
uninsured Medicare beneficiaries is almost exactly the same for
beneficiaries at all income levels.
More than half of Medicare beneficiaries without drug coverage are
middle class. Over 50 percent of Medicare beneficiaries without drug
coverage have incomes in excess of 150 percent -- an annual income of
approximately $17,000 for couples. This clearly indicates that any
prescription drug coverage policy that limits coverage to below 150
percent of poverty, as some in Congress suggest, will leave the vast
majority of the Medicare population unprotected.
IMPORTANCE OF PRESCRIPTION DRUGS TO MEDICARE
BENEFICIARIES
Part of modern medicine. Prescription drugs serve as complements
to medical procedures (e.g., anti-coagulents with heart valve
replacement surgery); substitutes for surgery and other medical
procedures (e.g., lipid lowering drugs that lessen need for bypass
surgery) and new treatments where there previously were none (e.g,
drugs for HIV and Parkinson's). Some of the major advances in public
health -- the near eradication of polio and measles and the decline in
infectious diseases -- are largely the result of vaccines and
antibiotics. And, as the understanding of genetics increases, the
possibility for pharmaceutical and biotechnology interventions will
multiply.
Greatest need for prescription drugs. The elderly and people with
disabilities are particularly reliant on prescription drugs. Not only
do they experience greater health problems, but these problems tend to
include conditions that respond to drug therapy. As a result, about 85
percent of beneficiaries fill at least one prescription a year. Some
examples of common conditions include:
Osteoporosis: Over 1 in 5 older women have osteoporosis and about
15 percent have suffered a fracture as a result. Hazzard WR; Blass JP
(Editor); Ettinger WH; Halter JB; Ouslander JG. (1998). Principles of
Geriatric Medicine and Gerontology. New York: McGraw Hill. It is a
leading risk factor for hip fractures, which affects 225,000 people over
the age of 50. Estrogen replacement can reduce the risk of osteoporosis
as well as that of cardiovascular disease. One commonly used drug costs
$20 per month, $240 per year.
Hypertension: About 60 percent of people over age 65 have
hypertension. Centers for Disease Control and Prevention, National
Center for Health Statistics. (1993). (National High Blood Pressure
Education Working Group): Report on primary prevention of hypertension.
Archives of Internal Medicine. 153: 186. African Americans are more
likely to have hypertension. For a person over age 55, hypertension
increases the risk of a heart attack or other heart problem over 10
years by 10 percent. Wilson PWF. (1991). Established risk factors and
coronary artery disease: The Framingham Study. American Journal of
Hypertension. 7: 75. Hypertension roughly doubles the risk of
cardiovascular disease and is the leading factor for stroke. According
to one study, treatment results in a one-third reduction in the
probability of stroke and a one-quarter reduction in the probability of
a heart attack. SHEP Cooperative Research Group. (1991). Prevention of
stroke by hypertensive treatment in older patients with isolated
systolic hypertension. JAMA, 265: 3255-3264. ACE inhibitors which
typically cost $40 per month, $480 per year are commonly prescribed to
control hypertension, and are frequently used in combination with
diuretics and /or beta-blockers.
Myocardial Infarction (Heart Attack): Heart disease is the leading
cause of death for persons 65 and over. About 1.5 million Americans
each year have heart attacks, which are fatal in about 30 percent of
patients. Since people who survive heart attacks are much more likely
to have subsequent attacks, disease management including drugs can
significantly improve health and longevity. For example, a study of the
use of a lipid lowering drug by people who had an acuate myocardial
infarction found a 42 percent reduction in coronary mortality after 5
years of follow-up. Randomized trial of cholesterol lowering in 4444
patients with coronary heart disease: The Scandinavian Simvastatin
Survival Study (45). Lancet 1994; 344: 1388-1389. A common lipid
reduction drug costs about $85 per month, $1,020 per year. A
beta-blocker costs about $30 per month, $360 per year, and can reduce
long-term mortality by 25 percent. The beta-blocker heart attack trial:
Beta-Blocker Heart Attack Study Group. JAMA. 1981; 246: 2073-2074.
Adult-Onset Diabetes: About 1 in 10 elderly have Type I or II
diabetes. National Health Interview Survey. Diabetes can lead to
blindness, kidney disease and nerve damage. Glucose (blood sugar)
control can prevent or delay these conditions. Commonly used
medications include cost around $60 per month, $720 per year.
Depression: An estimated 1 in 10 to 1 in 20 community-based elderly
experience depression. Tierney LM; McPhee SJ; Papadakis MA (editors).
(1998). Current Medical Diagnosis and Treatment 1998. Appleton and
Lange. Depression can lead to institutionalization and other health
problems. From 60 to 75 percent of patients respond to drug therapy.
Tierney LM, et al.; ibid. New therapies can cost from $130 to $290 per
month or $1,560 to $3,480 per year.
Many beneficiaries need drugs but do not use them as prescribed
because they do not have well managed, affordable drug insurance. Most
research has found that drug coverage influences use of needed drugs:
Decreased use of needed medications. Elderly and disabled Medicaid
beneficiaries experienced significant declines in the use of essential
medicines (e.g., insulin, lithium, cardiovascular agents,
bronchodialators) when their Medicaid drug coverage was limited.
Soumerai SB; Ross-Degnan D; Avorn J; McLaughlin TJ; Choodnovskiy I.
(1987). Payment restrictions for prescription drugs under Medicaid:
Effects on therapy, cost and equity. The New England Journal of
Medicine, 317: 550-556. Many elderly must choose between prescriptions
and other basic household needs. Families USA, 1994.
Increased nursing home use. Medicare beneficiaries whose Medicaid
drug coverage was limited were twice as likely to enter nursing homes.
Soumerai SB; Ross-Degnan D; Avorn J; McLaughlin TJ; Choodnovskiy I.
(1991). Effects of Medicaid drug-payment limits on admissions to
hospitals and nursing homes. The New England Journal of Medicine, 325:
1072-1077.
Less protection against drug complications. Even though the
elderly and disabled take more prescription drugs and have more complex
medical problems, Medicare beneficiaries without coverage do not benefit
from drug management. This could lead to adverse drug reactions,
inappropriate use of drugs, or discontinuation of needed drugs. One
study which classified the geriatric admissions to a community hospital
found that drug-related hospitalization accounted for 6.4 percent of all
admissions among the over 65 population. The study estimated that 76
percent of these admissions were avoidable. Bero LA.; Lipton HL; Bird,
JA.. (1991). Characterization of Geriatric Drug-Related Hospital
Readmissions. Medical Care, 29 (10): 989-1003.
PRESCRIPTION DRUG SPENDING BY
MEDICARE BENEFICIARIES
Because of their greater need, the elderly and people with
disabilities have greater health care costs. The elderly's per capita
spending on drugs is over three times higher than that of non-elderly
adults. While only 12 percent of the entire population, the elderly
account for about one-third of drug spending.
Over one-third (38%) of Medicare beneficiaries will spend more than
$1,000 on prescription drugs. Less than 5 percent will spend more than
$5,000.
The average total drug costs for Medicare beneficiaries is
estimated to approach $1,100 in 2000. Over 85 percent of Medicare
beneficiaries will spend money on prescription drugs, and more than half
will spend more than $500.
Spending is higher for women. Because of their greater likelihood
of living longer and having chronic illness, women on Medicare spend
nearly 20 percent more on prescription drugs than men.
Out-of-pocket spending is also high. In 2000, Medicare
beneficiaries are estimated to spend about $525 on prescription drugs
out-of-pocket. This spending is linked to insurance coverage - it is
much higher for those with no coverage ($800) and people with Medigap
($650) than those with retiree coverage ($400).
COVERAGE FOR PRESCRIPTION DRUGS
FOR MEDICARE BENEFICIARIES
Unlike virtually all private health insurance plans, Medicare does
not cover prescription drugs. As a result, a fragmented, unstable
system of coverage has emerged as beneficiaries attempt to insure
against the costs of medications.
Only one-fourth of Medicare beneficiaries have retiree drug
coverage. Employers provide health insurance for most Americans under
the age of 65, but pay for supplemental coverage for only a fraction of
their elderly retirees. When available, this coverage tends to have
reasonable cost sharing and affordable premiums.
About 75 percent of Medicare beneficiaries lack decent, dependable,
private-sector coverage of prescription drugs. These beneficiaries
include those with:
Medigap. About 8 percent of beneficiaries purchase Medigap with
drug coverage -- but this coverage is frequently expensive, inaccessible
and inadequate for many Medicare beneficiaries.
Medicare managed care. About 17 percent of beneficiaries have
coverage through Medicare managed care. Given the projected leveling
off of managed care enrollment and actual declines in the scope of
managed care drug benefits, this source of coverage is unstable.
Medicaid and other public programs. Medicaid covers about 12
percent of beneficiaries and programs like the Veterans' Administration
cover another 5 percent of beneficiaries. Eligibility for these
programs is very restrictive.
No coverage at all. 34 percent of Medicare beneficiaries has no
drug coverage.
RETIREE HEALTH COVERAGE
About one in four Medicare beneficiaries has prescription drug
coverage through their retiree health plan. These employer-based plans
offer decent, affordable coverage.
Firms offering retiree health coverage have declined by 25 percent
in the last four years.Foster Higgins, National Survey of
Employer-Sponsored Health Plans, 1998. Retiree health coverage is
declining substantially because many firms previously providing it are
opting to drop their coverage.
The decline was more pronounced among the largest employers
(greater than 5,000 employees), over a third of whom dropped coverage
in this period.
Most serious effect will occur when the baby boom generation
retires. Although there are employers who are dropping health coverage
for current retirees, most are restricting coverage for future retirees.
This means that the access problems that are emerging now could be more
severe in the future.
Firms are increasingly moving their retirees to Medicare managed
care. To help constrain costs, a number of employers are providing
incentives for their retirees to join managed care. The number of large
employers offering Medicare managed care plans rose from 7 percent in
1993 to 38 percent in 1996. Foster Higgins, National Survey of
Employer-Sponsored Health Plans, 1996. As reported in Hewitt
Associates. (1997). Retiree Health Trends and Implications of Possible
Medicare Reforms. Washington, DC: The Kaiser Medicaid Project.
MEDIGAP PRESCRIPTION DRUG COVERAGE
Because of its high cost relative to its benefit, less than one in
ten Medicare beneficiaries purchases a Medigap plan with prescription
drugs. Three of the ten standardized Medicare supplemental plans,
(plans H, I, and J) include prescription drug coverage. All three plan
types have a $250 deductible for the drug benefit and require 50 percent
coinsurance. The H and I plans have a cap on drug benefits of $1,250
while the J plan caps the benefit at $3,000. The typical premium for a
plan with the lower cap costs about $90 per month or $1,080 per year.
Medigap is expensive, inefficient, and often uses higher prices to
discriminate against the oldest beneficiaries.
Expensive. Medigap policies that cover prescription drugs are
expensive relative to comparable policies that do not cover drugs.
Additionally, premiums vary tremendously from place to place, and from
beneficiary to beneficiary. Finally, a beneficiary cannot only pay for
prescription drugs - they must also buy the other benefits in the
package.
Inefficient. Because it is sold to individuals, Medigap does not offer
beneficiaries the kind of premiums that result from group purchasing.
This also adds to the administrative costs per policy, which are
typically two to three times more than that of group coverage.
Costs increase with age as well as health inflation. This "attained
age" pricing practice causes excessive premiums for those who need it
most - the very old. It also disproportionately affects women since
they comprise nearly three-fourths of people over age 85.
MEDICARE MANAGED CARE
The number of beneficiaries with drug coverage through Medicare
managed care has risen to 17 percent. Most Medicare managed care plans
offer prescription drugs. Drug coverage is one of the major attractions
for beneficiaries to enroll in these plans.
Drug coverage under Medicare+Choice is unstable. Managed care
plans are not required to offer a drug benefit, but can do so with any
excess Medicare payments or by charging a premium. This results in wide
variation across areas, since payments vary by area, and over time.
The value of Medicare managed care drug benefits is declining.
Nearly three-fifths of plans are reporting that they will cap
prescription drug benefits below $1,000 in the year 2000. The proportion
of plans with $500 or lower benefit caps will increase by over 50
percent between 1998 and 2000. This is part of a troubling trend of
plans to severely limit benefits through low caps.
Plans dropping out of Medicare limit access to drugs. Nearly
50,000 Medicare beneficiaries will lose access to Medicare managed care
next year as plans withdraw from particular areas or Medicare
altogether.
MEDICAID
About 12 percent of Medicare beneficiaries are also fully eligible
for Medicaid and its drug benefit. Most of these "dual eligibles"
qualify for Medicaid because they receive Supplemental Security Income
due to low income (on average, about 73 percent of poverty -- $6,200 for
a single, $8,300 for a couple in 2000). States have other options for
covering the elderly and disabled, including "medically needy" or
"spend-down" programs that extend eligibility to sick and/or
institutionalized people.
Participation by Medicaid eligible populations remains low.
Millions of Medicare beneficiaries under 75 percent of poverty (about
$6,000 for a single, $8,500 for a couple) are eligible for Medicaid
prescription drug coverage, but the participation rate is only about 40
percent.
Lack of information, ineffective outreach and welfare stigma
contributes to these low participation levels.
This contrasts with an almost 100 percent participation rate in
Medicare Part B for beneficiaries.
BENEFICIARIES LACKING DRUG COVERAGE
At least 13 million or 34 percent of Medicare beneficiaries have no
insurance coverage for prescription drugs. These beneficiaries pay
retail prices for prescription drugs, which can often be significantly
more expensive than what large firms or public programs pay for the same
drugs.
More than half of Medicare beneficiaries without drug coverage are
middle class. Over 50 percent of Medicare beneficiaries without drug
coverage have incomes in excess of 150 percent -- an annual income of
approximately $17,000 for couples. This indicates that targeting a drug
benefit only to the low-income cannot address even half of the problem.
The income distribution of beneficiaries lacking drug coverage
closely parallels that of all beneficiaries. This lack of difference
suggests that everyone is at risk of losing their health insurance.
PRESIDENT'S PROPOSED PRESCRIPTION DRUG BENEFIT
The President's plan to modernize Medicare would include a new,
voluntary Medicare drug benefit. Called Medicare Part D, it would offer
all beneficiaries, for the first time, access to affordable,
high-quality prescription drug coverage beginning in 2002. This benefit
would cost the Federal government about $118 billion from 2000 to 2009.
It would be fully offset, primarily through savings and efficiencies in
Medicare and, to a small degree, from the surplus amount dedicated to
Medicare.
Meaningful coverage. Beginning in 2002, beneficiaries would have
the option of participating in the new Medicare Part D program. It
would have:
No deductible - coverage begins with the first prescription filled
and
50 percent coinsurance, with access to discounts negotiated by
private pharmacy managers after the limit is reached.
The benefit would be limited to $5,000 in costs ($2,500 in Medicare
payments) in 2008. It would phase it a $2,000 for 2002-2003; $3,000
for 2004-2005; $4,000 for 2006-2007; and $5,000 in 2008 (indexed to
inflation in subsequent years).
Affordable premiums. Beneficiaries who opt for Part D would a pay
separate premium for Medicare Part D -- an estimated $24 per month in
2002, and $44 per month in 2008 when fully implemented. This premium
represents 50 percent of program costs. Enrollment would be optional
and, after an initial open enrollment for all beneficiaries in 2001,
would occur when a beneficiary becomes eligible for the program or when
they transition out of employer-based coverage. Premiums would
generally be deducted from Social Security checks.
Low-income protections. Beneficiaries with income up to 150
percent of poverty ($17,000 for a couple) would pay no Part D premium.
Those with income below 135 percent of poverty ($15,000 for couples)
would pay no premiums or cost sharing. This assistance would be
administered through Medicaid, with the Federal government assuming all
of the premium and cost sharing costs for beneficiaries with incomes
above poverty.
Private management. Beneficiaries in managed care plans would
continue to receive their benefit through their plan. For enrollees in
the traditional program, Medicare would contract with numerous private
pharmacy benefit managers (PBMs) or similar entities. Medicare would
use competitive bidding to award contracts for drug management. The
private managers would use the latest, effective cost containment tools,
drug utilization review programs, and meet quality and consumer access
standards. No price controls would be imposed.
Incentives to develop and retain retiree coverage. Employers that
choose to offer or continue retiree drug coverage would be provided a
financial incentive to do so.
Methodology. The Actuarial Research Corporation under contract with the
Department of Health and Human Services conducted most of the analysis.
The basis for the estimates is the Medicare Current Beneficiary Survey
(MCBS) for 1995. These data were aged to CY 2000, converted to a
point-in-time estimate, and adjusted for the increase in managed care
enrollment. This enrollment increase was estimated by moving
beneficiaries from retiree health coverage, Medigap and the uninsured to
managed care in proportion to their enrollment in those plans.
Endnotes.
Hazzard WR; Blass JP (Editor); Ettinger WH; Halter JB; Ouslander JG.
(1998). Principles of Geriatric Medicine and Gerontology. New York:
McGraw Hill.
Centers for Disease Control and Prevention, National Center for Health
Statistics. (1993). (National High Blood Pressure Education Working
Group): Report on primary prevention of hypertension. Archives of
Internal Medicine. 153: 186.
Wilson PWF. (1991). Established risk factors and coronary artery
disease: The Framingham Study. American Journal of Hypertension. 7:
75.
SHEP Cooperative Research Group. (1991). Prevention of stroke by
hypertensive treatment in older patients with isolated systolic
hypertension. JAMA, 265: 3255-3264.
Randomized trial of cholesterol lowering in 4444 patients with coronary
heart disease: The Scandinavian Simvastatin Survival Study (45). Lancet
1994; 344: 1388-1389.
The beta-blocker heart attack trial: Beta-Blocker Heart Attack Study
Group. JAMA. 1981; 246: 2073-2074.
National Health Interview Survey.
Tierney LM; McPhee SJ; Papadakis MA (editors). (1998). Current Medical
Diagnosis and Treatment 1998. Appleton and Lange.
Tierney LM, et al.; ibid.
Soumerai SB; Ross-Degnan D; Avorn J; McLaughlin TJ; Choodnovskiy I.
(1987). Payment restrictions for prescription drugs under Medicaid:
Effects on therapy, cost and equity. The New England Journal of
Medicine, 317: 550-556.
Families USA, 1994.
Soumerai SB; Ross-Degnan D; Avorn J; McLaughlin TJ; Choodnovskiy I.
(1991). Effects of Medicaid drug-payment limits on admissions to
hospitals and nursing homes. The New England Journal of Medicine, 325:
1072-1077.
Bero LA.; Lipton HL; Bird, JA.. (1991). Characterization of Geriatric
Drug-Related Hospital Readmissions. Medical Care, 29 (10): 989-1003.
Foster Higgins, National Survey of Employer-Sponsored Health Plans,
1998.
Foster Higgins, National Survey of Employer-Sponsored Health Plans,
1996. As reported in Hewitt Associates. (1997). Retiree Health Trends
and Implications of Possible Medicare Reforms. Washington, DC: The
Kaiser Medicaid Project.