Executive Summary: How to Provide Prescription Drug Coverage Under Medicare

Report Health Care Reform

Executive Summary: How to Provide Prescription Drug Coverage Under Medicare

June 16, 1999 4 min read Download Report
James Frogue
Senior Fellow and Director of Government Finance Programs

Congress is under considerable pressure to address the absence of outpatient prescription drug coverage in Medicare, the huge and financially troubled program that covers almost 40 million elderly and disabled Americans. Several bills before Congress would attempt to do this. For example, S. 841, sponsored by Senator Edward Kennedy (D-MA), and its companion bill, H.R. 1495, sponsored by Representative Pete Stark (D-CA), would require the Secretary of the U.S. Department of Health and Human Services (HHS) to contract with benefit managers, retail pharmacies, insurers, and others to provide a prescription drug benefit to Medicare's beneficiaries.

The real task before Congress, however, 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--considering the enormous potential cost of such coverage and the poor track record of previous attempts to add it. There is concern that congressional "remedies" could lead to a disruption of the prescription drug market and undermine the quality and availability of the very benefit lawmakers hope to provide. Members of Congress should recognize that:

  • Medicare is already in financial trouble, and the addition of a costly new benefit, especially if done poorly, could make its financial condition worse;

  • A new prescription drug benefit would likely increase Medicare costs dramatically; and

  • Seniors could see their Medicare premiums double, and could find themselves with duplicate coverage.

Before providing a prescription drug benefit to Medicare beneficiaries, Congress should determine how many senior citizens are experiencing difficulty in obtaining prescription drugs. Although nearly 9 out of 10 Medicare beneficiaries use prescription drugs, according to Bureau of Labor Statistics data for 1997, the average senior spent $637 annually on both prescription and non-prescription drugs--less than what the poorest seniors report spending in restaurants. A study for the National Academy of Social Insurance reports that only 10 percent of seniors have annual out-of-pocket expenditures for prescription drugs of $1,000 to $2,000, and only 4 percent report spending more than $2,000. The problem of affordability for a relatively small number of seniors is not a systemic crisis that necessitates a complete overhaul of the system.

Congress has considered adding a prescription drug benefit in the past. In 1988, with overwhelming support from the public and various interest groups, Congress enthusiastically passed the Medicare Catastrophic Coverage Act, adding a range of generous new benefits to the Medicare program that included coverage for outpatient prescription drugs. Within weeks, Congress was inundated with letters and calls from outraged seniors as they became aware of the ways in which this new law would impact their pocketbooks. Within one year, the Congressional Budget Office's estimates for the cost of the prescription drug benefit skyrocketed from $5.7 billion to $11.8 billion. By late 1989, under a powerful backlash from seniors, Congress was forced to repeal major elements of the law.

One of the proposals before Congress, S. 841 (H.R. 1495) requires the Department of HHS to contract with benefit managers, retail pharmacies, and insurers to provide a managed prescription drug benefit to Medicare beneficiaries. This approach, however, would jeopardize the supplemental drug coverage currently enjoyed by two-thirds of America's seniors, diminish the incentives seniors have to purchase Medigap or Medicare health maintenance organization policies, and make employers less likely to offer private health plans to their elderly employees. Not only is such a proposal bad policy, but its price tag of $20 billion, as estimated by Senator Kennedy when he introduced his bill, is likely to be a gross underestimate of the actual costs.

To assist lower-income seniors to obtain their prescription drugs, Congress should consider implementing the following steps:

  1. Establish a Medicare prescription drug benefit in Medicare managed care plans based on the procedure used in the Federal Employees Health Benefits Program (FEHBP).
    Nearly all the plans offered federal employees in the FEHBP include a prescription drug benefit even without a mandate to do so.

  2. Create a "Benefits Board" to determine how to include a drug benefit in the Medicare fee-for-service program.
    Congress then could vote straight up or down on the board's annual recommendations.

  3. Create an independent "Medicare Board" to negotiate on behalf of seniors for prescription drug benefits as well as other benefits.
    This board should be modeled after the Office of Personnel Management, which negotiates with private insurance companies on behalf of federal workers for prescription drugs and other benefits in the FEHBP.

  4. Establish a voucher system to assist lower-income seniors to pay for prescription drugs.
    The federal government gives the poor vouchers (food stamps) to purchase food of their choice in a freely functioning market. Medicare could provide similar vouchers for prescription drugs.

  5. Create a Medigap option exclusively for prescription drugs.
    There currently are 10 types of Medigap policies available to seniors. Only three include prescription drug coverage, and none is for drugs alone. Congress should develop one or more new Medigap plans for prescription drugs.

The majority of seniors does not experience problems in obtaining medication. Targeting those that do would cost taxpayers far less than providing 40 million Medicare beneficiaries with coverage that may duplicate their existing coverage. Members of Congress should allow senior citizens the same choices they themselves enjoy under the FEHBP and avoid mistakes Congress made in the past. In short, Members of Congress should not promise low-cost prescription drugs that they cannot deliver.

James Frogue is a former Health Care Policy Analyst at The Heritage Foundation.


James Frogue

Senior Fellow and Director of Government Finance Programs