What Seniors Should Know About Government Restrictions

Report Health Care Reform

What Seniors Should Know About Government Restrictions

November 4, 2002 17 min read

Authors: Robert Goldberg, Susan Ph.D. and Frederick Goodwin

Seniors have a large stake in the design of a Medicare prescription drug benefit. If they think that they will be able to have any drug that they need, without restriction, through most of the proposals for Medicare that are currently being considered, they are gravely mistaken.

All of the major Medicare prescription drug bills that are now under consideration in Congress focus on controlling the cost of medications. To accomplish this, they would rely upon three basic methods: restricting new drugs in favor of generic drugs; limiting patients to one or two drugs of a particular kind (based on the assumption that all medicines in a group are more or less interchangeable); and replacing the judgments made by physicians and their patients with those of a committee far removed from the actual medical problem.1

In most cases, the drug limitations would be devised and enforced by formulary committees--committees that develop lists of preferred drugs that would be available to Medicare patients. Based on experience with health maintenance organizations (HMOs) and other restrictive private-sector plans, the primary concern of such committees typically is neither the total cost of disease treatment, nor the long-term well-being of the patient, but rather the price and cost of the medicines. These formulary committees are usually made up of pharmacists, physicians, economists, and accountants who decide which drugs patients and doctors can receive immediately, and which medicines should be categorized as non-formula, requiring approval before a health plan covers their payment.

Members of Congress who favor making drug cost-containment a centerpiece of Medicare prescription drug coverage often argue that they are simply following the model of successful programs in the private sector. A recent article in the New York Times favorably observed "Insurers around the country are trying to...shift from brand-name to generic drugs as a way to slow the rapid growth in spending on prescription medicines. They have had some success. Almost every proposal in Congress to add drug benefits to Medicare would strongly encourage the use of generic medications. Otherwise, according to lawmakers, Medicare could not afford the new benefit."2 The Times report notes that such initiatives "offer important lessons for federal officials seeking ways to help the elderly with drug costs."3

Congressional supporters of these restrictions fail to note that many patients enrolled in these private-sector plans do not have the right to move to a health plan that is better able to meet their needs, since their choices are limited by their employers. Their situation contrasts with that of individuals enrolled in the Federal Employees Health Benefits Program (FEHBP), which covers Members of Congress and federal workers and retirees. FEHBP enrollees have many options to choose from and can drop plans that have overly restrictive drug formularies that do not satisfy their needs in terms of coverage or quality of care.

Members of Congress who support formularies are ignoring studies that suggest that limiting the elderly to older drugs or restricting their access to certain medications would compromise their health and ultimately increase their total health care costs. Conversely, while the most expensive drug is not always the best drug for a medical condition, research clearly shows that the introduction of new drugs has been associated with a general improvement in patients' well-being, better care, and a decline in total treatment costs in dealing with numerous diseases--including depression, schizophrenia, cancer, HIV, heart disease, and even ear infections.

The formulary committees that confine seniors' choices to one or two drugs in a particular therapeutic class, such as those envisioned in the Graham-Kennedy-Miller bill (S. 2625), the leading Senate Democratic bill, ignore individual differences in response to treatment and medicines. This is especially true in cases of brain diseases where many elderly patients suffer needlessly from one-size-fits-all care. The congressional proponents of formulary committees also ignore the facts that many seniors are on multiple medications and that physiological changes in older persons affect the absorption, distribution, metabolizing, and elimination of medications. Because of greater physiological variability, the elderly often respond to drugs less predictably than younger adults. Comparable doses of drugs may have enhanced, diminished, or different effects for the elderly than they would for the non-elderly.

Patient Choice vs. Government Dictates

To ensure quality health care, Congress should encourage physicians and patients to use the best medicines to prevent and control disease in ways that improve health and lengthen life, rather than relying on the Medicare bureaucracy to devise drug formularies. The only proposal that comes close to ensuring that people will get the best care they need, without government interference and without fear of a huge financial burden, is a plan proposed by the Galen Institute and the American Enterprise Institute, the Prescription Drug Security (PDS) plan. The PDS proposal combines the key elements of earlier proposals: a low-income subsidy, a discount card, and catastrophic insurance protection. As in earlier proposals, seniors with private health insurance and drug coverage would keep their plans, but low-income seniors would receive immediate financial assistance to enable them to purchase routine medications. They would also receive private catastrophic coverage for large drug expenses. However, there are important differences between the PDS plan and other proposals. Under the PDS plan,

  • Low-income beneficiaries would receive a cash subsidy of up to $600 per year for medicine. Individuals would access this subsidy through a PDS debit card. This card would also automatically qualify the beneficiary for discounted prices at a pharmacy. Unspent balances in the PDS account would be rolled over to the following year, giving seniors a greater opportunity to choose the drugs they want.
  • Catastrophic insurance would pay 80 percent of beneficiaries' drug costs that are between $2,000 and $6,000 a year, and would provide full coverage for drug expenses that are above $6,000. Beneficiaries receiving the full cash subsidy would pay no more than $2,200 in out-of-pocket costs for medicine throughout one year; those who are not subsidized would pay no more than $2,800. Low- and middle-income people would receive a premium subsidy up to the full cost of the insurance.
  • Those who have higher incomes and are not eligible for the full cash subsidy could make their own tax-deductible contributions to the PDS card funds. Premium payments would also be tax-deductible.
  • The program would build on the existing coverage that many seniors now have, rather than replacing that coverage, and would be modeled after the Federal Employees Health Benefits Program. Beneficiaries would be able to choose from a variety of private drug plans and a wide range of medications, rather than being limited to a single government plan and a government formulary.4

How Formulary Restrictions Hurt Senior Citizens

Formulary restrictions are likely to provide only "second-best" drug therapy, especially in the case of the elderly. Restricted formularies limit the choices a patient has within a particular class of drugs, and, in some cases, could force seniors to choose a drug that leads to other illnesses that require a doctor's attention--or worse, hospitalization.

In 1996, Dr. Susan Horn conducted a study of 13,000 patients from six HMOs, titled the Managed Care Outcomes Project. This study found that more restrictive drug formularies were correlated with an increase in patients' use of more expensive medical services, treatment in emergency rooms and hospitals, and visits to doctors' offices.5 Thus, formulary limitations and therapeutic substitution (to ensure the use of formulary agents) not only place the elderly at particular risk, but also ultimately increase the total cost of their medical care.

Adjusting for differences in the severity of illnesses and other variables, the significant associations between formulary restrictions in a drug class and the greater utilization of health-care services were often significantly greater for elderly patients.6 For example,

  • In comparison with younger patients, seniors who were faced with formulary restrictions were twice as likely to be hospitalized or to go to the emergency room for treatment.
  • The fewer drugs seniors were able to choose from, the more likely they were to use inappropriate and more expensive medical services.
  • Greater limitations for the drug class of anti-ulcer drugs were associated with higher total drug costs for both elderly and non-elderly patients. However, greater limitations within the drug classes of propionic acids, immediate-release theophylline, and diuretics were associated with higher medical costs for elderly patients, but not for non-elderly patients.

The Danger of Limiting Access to New Prescription Drugs

The use of drug therapy to treat depression provides a case in point regarding the dangers of limiting access to a variety of prescription drugs. Selective serotonin reuptake inhibitors (SSRIs) are used to treat depression and a variety of affect disorders. While there are more than a dozen existing SSRIs, under all the proposed Medicare plans, seniors suffering from depression and related disorders would be limited to one or two SSRIs. The three most commonly prescribed SSRIs--fluoxetine, sertraline, and paroxetine--are among the 10 most frequently prescribed agents in the U.S. market. It is understandable that those who manage pharmacy acquisition and delivery would consider purchasing a single agent as an attractive option, particularly if the exclusive purchase of one agent resulted in lower costs and more efficient handling by the pharmacy. However, placing only one SSRI on a formulary assumes that SSRIs are interchangeable. This is not the case; there is evidence that different agents are not interchangeable. The comparative acquisition costs of drugs should not result in limiting the drugs that are available for seniors. While acquisition costs are significant, pharmaceutical costs represent only 10 percent or less of the overall cost of treating depression.

The practice of having a single SSRI on the formulary for a health plan has proven to be ill-founded. In one study, approximately 25 percent of the patients who received an antidepressant did not respond to, or could not tolerate, the drug on the formulary.7 When the drug prescribed through the single-agent formulary was ineffective, many of those who did not respond were sent for psychiatric therapy, others were prescribed an alternative drug, and those remaining dropped out of treatment. It is possible that patients who must discontinue one SSRI (either because of a lack of tolerability or a failure to respond) can often be treated effectively with an alternative SSRI. However, the patients in the study who switched antidepressants remained in treatment 50 percent longer than those whose doctors had a choice of antidepressants, including SSRIs.

Allowing physicians to choose among several antidepressant drugs for their patients can increase the possibility of continuing their treatment in a primary-care setting. An exclusive focus on the acquisition costs of medication ignores the benefits of offering options that will enhance the potential to effectively treat depression--including fewer hospitalizations, fewer adverse reactions to the prescribed drug, reduced durations of medication therapy, and a greater likelihood of taking appropriate therapeutic doses of medication. In sum, a cost-conscious, short-sighted approach can ultimately result in increased total costs for patient care.8

A Flawed Model

The Medicare drug benefit proposed in the Senate's Graham-Miller-Kennedy bill (S. 2625) would establish restrictive formularies modeled after those of the Department of Veterans Affairs (VA). Regrettably, under the VA approach that limits options to only the cheapest drugs, patients often suffer ineffective treatment with older medicines before they are prescribed newer drugs. For example, though studies show that such patients hospitalized for schizophrenia experience a better quality of life when they are treated with newer drugs, the drug prescribed to them through the formulary is an older one. If a new drug is prescribed, only one type is allowed because of price concerns--despite evidence that individuals respond differently to various drugs.

The VA formulary regarding the newer antipsychotic drugs provides a prime example of the way in which a Medicare formulary such as that proposed in S. 2625 would adversely affect patient care. Although the VA guidelines do not specifically restrict a treating physician from prescribing any "atypical" antipsychotic drug that he believes will best meet a patient's needs, in an environment that prioritizes cost control, a doctor's options are effectively limited. Both formally and informally, physicians are discouraged from prescribing more costly atypical drugs. In some cases, pharmacists have called physicians to ask that they change their prescriptions to a less costly drug to comply with federal "guidelines." Specific plans have been outlined to monitor physician practices, ensure that more costly medications are prescribed less often, and effectively penalize physicians who persist in prescribing an atypical drug that is not designated in the formulary.9

Why Medicare Patients Should Have Access to All New Drugs

Patients' access to new drugs is critical to their health and beneficial in reducing overall health-care costs. A recent study by Susan D. Horn showed an association between greater use of newer asthma drugs and lower overall drug costs and fewer physician visits. The study also found correlations between the greater use of newer asthma drugs and fewer hospitalizations and emergency-room visits. Newer non-asthma medications were also associated with fewer emergency-room visits.10

The findings from Horn's patient-level research are consistent with findings of a study by Professor Frank Lichtenberg, an economist at Columbia University. Lichtenberg found that hospital stays, bed-days, and surgical procedures declined fastest for patients with the greatest increase in the total number of drugs prescribed, and for those with greatest increase in the use of new drugs. Within the sample studied, an increase of 100 prescriptions was associated with 1.48 fewer hospital admissions, 16.3 fewer days spent in the hospital, and 3.36 fewer in-patient surgical procedures. A $1 increase in pharmaceutical expenditure was associated with an approximately $4 reduction in other health expenditures.11

Professor Lichtenberg also found that "in the absence of pharmaceutical innovation, there would have been no increase, and perhaps even a small decrease, in mean age at death," and that "new drugs have increased life expectancy, and lifetime income, by about 0.75 percent to 1 percent per annum. Some of the more conservative estimates imply that a one-time R&D expenditure of about $15 billion subsequently saves 1.6 million life-years per year, whose annual value is about $27 billion."12 In addition, Lichtenberg found that, among the Medicare population, the use of newer drugs reduces non-drug expenditures by all payers 8.3 times more than it increases drug expenditures, and it reduces Medicare non-drug expenditure 6.0 times as much as it increases drug expenditure. The study also found that the more new drugs there are in a class, the greater the reduction in non-drug expenditure and the greater the impact on patients' survival and well-being.13

Real Medicare Reform Based on Patient Choice

Most of the recent congressional legislative proposals providing for Medicare drug benefits would not seriously improve the performance of the Medicare program or guarantee senior citizens access to new prescription drugs. These proposals focus almost exclusively on providing drug benefits with conventional, flawed, cost-containment mechanisms such as restrictive formularies, and they fail to use drugs with an eye toward reducing total health care costs or the long-term well-being of people. Most of these proposals would limit patient choice and would take the decisions regarding the drugs that should be prescribed out of the arena of physician-patient consultation. Such provisions for prescription drugs in Medicare would have adverse outcomes: total health care costs would rise and the well-being of millions of Americans would be jeopardized.

Congress should go back to the drawing board to develop a plan to provide prescription drug coverage to Medicare patients. Rather than tinkering with restrictive formularies and trying to design a stand-alone benefit with separate premiums and co-payment arrangements, legislators should work to integrate prescription drug coverage into existing insurance plans, allowing the health plans to develop a regimen of disease-management programs that incorporate drug treatment. In other words, Congress should enact real Medicare reform.

While formularies exist in the private sector, restrictions on choice vary and change in response to patients' needs and consumer choice. There is a critical difference between formularies dictated by an insulated government bureaucracy and those developed in response to consumer choice and market forces. To engender authentic reform and positive development within Medicare, a prescription-drug benefit should enhance consumer choice and put the patients, in consultation with their physicians, in the driver's seat, allowing them to make key treatment decisions. A model for such Medicare reform already exists in the Federal Employees Health Benefits Program, the consumer-driven health program that covers Members of Congress and federal workers and retirees. All of the health plans of the FEHBP provide prescription drug coverage, and the enrollees can choose the specific prescription drug coverage that best meets their needs.

Senior citizens should recognize that the medical decisions made by the bureaucracies of Medicare and the Department of Veterans Affairs are slow to change and cookie-cutter in design. Medical progress emerges through a free market, where the choices and observations of clinicians can be expressed most freely. When the freedom of the marketplace is curtailed so too is medical progress.


The recent array of Medicare proposals on Capitol Hill focus on the provision of prescription drugs. While this sounds desirable, seniors should be aware that most of these proposals also include restrictive drug formularies, or preferred drug lists, which would restrict their access to new and effective prescription drugs.14 Although the purpose of these formularies is to control costs, a strong body of research has shown that, in fact, restrictions on prescription drugs will increase overall health care costs; drive up the utilization of other medical services, including hospitalization; and result in adverse outcomes for patients' health. The evidence also indicates that restrictive drug formularies have a greater negative impact on senior citizens than the younger cohorts of patients. Finally, there is strong evidence that access to new drugs can reduce health care costs, including hospitalization and other medical services, and improve the health outcomes for patients.

The best way to ensure seniors' access to new and effective drugs is to transform Medicare into a new system based on patient choice and market competition. Short of that, Congress should target funding to low-income seniors who have financial difficulty in purchasing prescription drug coverage.

As the Medicare program is reformed, it should be restructured to restore and enhance the doctor-patient relationship, acknowledging that decisions regarding the choice and use of medicines are among the most critical elements of this relationship. In contrast, the proposed drug formulary restrictions contained in Congress's current major Medicare prescription drug proposals would significantly restrain that crucial relationship and obstruct medical progress.

Congress can do much better for America's senior citizens.

--Robert Goldberg, Ph.D., is Senior Fellow and Director of the Center for Medical Progress at the Manhattan Institute. Susan Horn, Ph.D., is Senior Scientist at the Institute for Clinical Outcomes Research in Salt Lake City, Utah. Fred Goodwin, M.D. is host of the nationally syndicated radio show, The Infinite Mind, professor of psychiatry at the George Washington University Medical School and former director of the National Institute of Mental Health.

1. Throughout this paper, we refer to formularies and formulary committees that would create or define new therapeutic classes of drugs covered by the Medicare drug benefit and determine which drugs would receive immediate reimbursement. Such formularies are incorporated in the following bills: Graham-Miller-Kennedy Outpatient Prescription Drug Act (S. 2625); 21st Century Medicare Act, sponsored by Senators Charles Grassley (R-IA), John Breaux (D-LA), and James Jeffords (I-VT); and the Medicare Prescription Drug Costs Protection Act, put forth by Senators Graham (D-FL), Gordon Smith (R-OR). By comparison, the prescription drug bill passed in the House of Representatives, the Medicare Modernization and Prescription Drug Act of 2002, does not mandate the use of formularies, but allows private pharmacy benefit managers to use them and does establish a national formulary or formulary committee.

2. "Virginia Blue Cross Plan Leads Shift to Lower-Cost Drugs," The New York Times, August 18, 2002, p. A-8

3. Ibid., p. A-3.

4. Joseph R. Antos and Grace-Marie Turner, "What Congress Should Do About Prescription Drugs for Seniors," The American Enterprise Institute, September 5, 2002.

5. S.D. Horn, P.D. Sharkey, D.M. Tracy, C.E. Horn, B. James, and F. Goodwin, "Intended and Unintended Consequences of HMO Cost-Containment Strategies: Result from the Managed Care Outcomes Project," American Journal of Managed Care, Vol. 2, No. 3 (March 1996), pp. 253-264.

6. S.D. Horn, P.D. Sharkey, C. Phillips-Harris, "Formulary Limitations in the Elderly: Results from the Managed Care Outcomes Project," American Journal of Managed Care, Vol. 4, No. 8 (August 1998), pp. 1105-1113.

7. P.L. Hensley and H.G. Nurnberg, "Formulary Restriction of Selective Serotonin Reuptake Inhibitors for Depression; Potential Pitfalls," Pharmacoeconomics, Vol. 19, No. 10 (2001), pp. 973-982.

8. Ibid.

9. National Alliance for the Mentally Ill, Letter to VA Secretary Anthony Principi Regarding Access to Medications for Veterans, July 23, 2001.

10. S.D. Horn, P.D. Sharkey, H.W. Kelly, and D.L. Uden, "Newness of Drugs and Use of HMO Services by Asthma Patients," Annals of Pharmacotherapy, Vol. 35 (September 2001), pp. 990-996.

11. F. Lichtenberg, "The Effect of Pharmaceutical Utilization and Innovation on Hospitalization and Mortality," National Bureau of Economic Research, Working Paper No. 5418, January 1996;

12. Ibid.

13. F. Lichtenberg, "Benefits and Costs of Newer Drugs: An Update," National Bureau of Economic Research, Working Paper No. w8996, June 2002.

14. The one exception is the prescription drug bill passed in the House of Representatives, the Medicare Modernization and Prescription Drug Act of 2002, which does not mandate the use of formularies but allows private pharmacy benefit managers to use them and does establish a national formulary or formulary committee.


Robert Goldberg

Policy Analyst, Transportation and Infrastructure

Susan Ph.D.

Policy Analyst

Frederick Goodwin

Policy Analyst, Transportation and Infrastructure