Heritage Foundation Leadership for America

Many Medicare beneficiaries could pay up to 50 percent more for their medicines -- in some cases $600 more per year -- under the Senate’s Medicare drug entitlement.

Members of Congress should target a prescription drug benefit to those who really need it, rather than costing millions of low-income seniors significantly more than they pay now.

An Unfocused Medicare Drug Benefit
While some Medicare beneficiaries lack coverage for prescription drug costs, some form of insurance -- including their out-of-pocket drug expenditures -- covers many seniors.[1] For example, nearly one-third of Medicare-eligible retirees received some form of health insurance coverage from their former employers in 1999.[2] Retiree health insurance coverage often includes generous coverage for prescription drugs.

At present, seniors who have prescription drug benefits from their former employers are able to fill their prescriptions upon payment of a small copayment (usually less than $10 per prescription) or a minimal yearly coinsurance amount.

The Medicare legislation that has been enacted by both the House and Senate threatens to shrink dramatically the number of beneficiaries who currently enjoy employer-provided prescription drug benefits. This is especially the case with the Senate legislation (S. 1): The Congressional Budget Office (CBO) estimates that 37 percent of Medicare beneficiaries with existing prescription drug coverage stand to lose their benefits if the Senate legislation is signed into law.[3]

That means that millions of seniors would be dumped, regardless of their personal preferences, into the new Medicare entitlement. While this would help them pay for their medicines, it would also increase—in some cases significantly—the amount of money they must pay out-of-pocket.

What the Senate Budget Committee Staff Analysis Shows
Senate Budget Committee staff, using data and analysis supplied by the Center for Medicare and Medicaid Services (CMS), recently completed a study of the impact of the Senate Medicare legislation on seniors’ out of pocket costs. Their analysis estimates the out-of-pocket costs that Medicare beneficiaries with existing drug coverage would have to pay under the Senate bill in 2006 (the year the prescription drug benefit would take effect) and compares this figure with the amount beneficiaries would pay in 2006 under their existing drug coverage.[4]

Higher Personal Costs. CMS estimates that the average Medicare beneficiary with existing prescription drug coverage will consume approximately $3,080 worth of prescription drugs in 2006. Given his/her existing prescription drug coverage, however, this senior will only pay an average of $1,057 in out-of-pocket costs (plus any plan premiums) for prescription drugs in 2006.

However, the Senate Budget Committee staff analysis reveals that under the Senate legislation, the average Medicare beneficiary would have to pay approximately $1,678 in out-of-pocket costs (plus plan premiums) for prescription drugs during 2006 – an increase of almost 60 percent over the amount they would pay under their existing drug coverage.  To put this figure into perspective, realize that the extra $621 that the average Medicare beneficiary will have to spend on prescription drugs in 2006 is more than the amount the average American spent in 2001 on dairy products, fruits and vegetables, and cereals and bakery products combined.[5]

While the poorest Medicare beneficiaries would see some improvement in their out-of-pocket costs under the Senate bill, many low-income seniors would see their prescription drug costs rise. Take, for example, the Medicare beneficiary who has existing prescription drug coverage and whose annual income in 2006 will be somewhere between $14,506 and $16,923.^[6] Under his/her existing prescription drug plan, this senior will pay an average of $1,223 in out-of-pocket costs for prescription drugs during 2006. Under the Senate bill, it is expected that these out-of-pocket costs would rise approximately 35 percent, to an average of $1,652. And the news is even worse for seniors who make slightly more: a Medicare beneficiary with existing drug coverage whose annual income in 2006 is between $19,341 to $24,175 can expect to pay, on average, over 50% more in out-of-pocket costs for prescription drugs. (see Figure 1)

Hurting Seniors
Despite the fact that the Senate Medicare bill would cost federal taxpayers almost $400 billion, it might actually hurt more seniors than it would help. Rather than targeting a prescription drug benefit to those who really need it, Members of Congress, in both houses, have chosen instead to pass a universal entitlement that would end up costing millions of seniors significantly more than they pay now.

Figure 1 provides a graphic comparison of the out-of-pocket costs that Medicare beneficiaries with existing drug coverage will face in 2006 under their existing coverage and under the Senate legislation.

Analysis courtesy of the Center for Medicare and Medicaid Services (CMS) and the majority staff of the Senate Budget Committee. The analysis is based primarily on the 2000 Medicare Current Beneficiary Survey. Finer income splits reflect data from the March 2001 Current Population Survey (CPS). Per capita growth estimates in prescription drug spending based on CMS January 2003 NHE projections. Estimated poverty guidelines for 2006 provided by the Senate Budget Committee staff and based on an assumed price inflation using most recent Congressional Budget Office forecasts and projections (May 20, 2003). Senate Budget Committee staff estimate that the poverty threshold for 2006 will be $9,670.

Lanhee J. Chen is Winnie Neubauer Visiting Fellow in Health Policy Studies at The Heritage Foundation.