May 27, 2003 | Backgrounder on Health Care
Many Members of Congress have promised seniors high-quality prescription drug coverage through traditional Medicare and argue that it would be superior to alternatives that rely on the private sector to price and deliver drugs. They also tell seniors that Medicare has a superior record of cost control and that seniors would get a much better price for prescription drugs through Medicare than from a new public-private partnership modeled on the Federal Employees Health Benefits Program (FEHBP), which serves federal employees and retirees.
However, seniors may not realize that the traditional government health programs that cover prescription drugs most often control prescription drug costs by limiting reimbursement and supply of available drugs. These supply limitations are often complex and take various forms, but they can degrade the quality of care, particularly for senior citizens.1
Senior citizens need look no further than Medicaid, the huge government program that covers the poor and the indigent, for examples of supply limitations to reduce costs. Medicaid is run by the Centers for Medicare and Medicaid Services (CMS), the same federal bureaucracy that runs the Medicare program.
Beyond cost considerations, Congress must
decide how to administer a prescription drug benefit for the
Medicare population. One option is to deliver prescription drug
coverage through a pluralistic system of competitive private
similar to the way in which drugs are routinely delivered to most Americans enrolled in private health insurance plans.
Another leading option is simply to add a drug benefit to the existing Medicare program, prescribing drug coverage, the conditions of drug access, and pricing through a system of direct government control and regulation--similar to how other benefits are tightly controlled by law and government regulation in the current Medicare program.
One possible compromise is to combine the best features of the private sector (patient choice and market competition) with the best features of the public sector (security and predictability) in a public-private partnership. A good model for a public-private partnership already exists in the Federal Employees Health Benefits Program (FEHBP).
In the FEHBP, drug coverage is universal and fully integrated into private health insurance plans. Moreover, all of the competing health plans in the FEHBP are subject to the administrative authority of the U.S. Office of Personnel Management (OPM), the federal agency that administers civil service law.2 Thus, federal employees and retirees have a choice of coverage and can seek better plans and benefits if they are dissatisfied with their drug coverage or any other benefit coverage. The President and leading Members of Congress from both political parties have embraced this well-tested model.
Medicare faces formidable financial pressures. The Congressional Budget Office (CBO) projects that Medicare spending between 2004 and 2013 will amount to $3.9 trillion, including $271 billion for 2004.3 By 2013, when the first wave of the 77 million baby boomers has retired, the Hospitalization Insurance (HI) trust fund will be running a cash deficit, based on assumptions under current law, and these deficits will deepen for each following year during the entire period of the baby-boomers' retirement.4
Medicare's projected deficits and the looming insolvency of the HI trust fund will place increasing demand on general revenues from the taxpayers to keep the program afloat. According to Thomas Saving, a professor at Texas A&M University and Medicare trustee, this means that by 2026, when the HI fund is exhausted, 20 percent of all federal income taxes will be required to finance Medicare alone.
Adding a prescription drug program to Medicare dramatically increases the financial pressures on taxpayers. According to the CBO, "For the period 2004 through 2013, CBO estimates that spending for prescription drugs by and on behalf of the Medicare population will total $1.8 trillion, or nearly 50 percent of the projected $3.9 trillion in Medicare outlays over that same period."5
As noted, many Members of Congress strongly oppose private-sector delivery of prescription drug coverage and would legislate a universal government-run drug benefit, effectively displacing the existing private market that delivers prescription drugs to the senior population. The costs of any future Medicare drug benefit would, of course, depend on its design and the incentives created by that design.
According to Professor Saving, adding a new Medicare drug benefit that pays just 25 percent of prescription drug costs would require 24 percent of all federal income tax revenue to pay for the entire Medicare program in 2026.6 A far more generous drug benefit paying 75 percent of drug costs would increase total Medicare costs to an estimated 35 percent of federal income tax revenue in 2026.7
Given the huge financial pressures on traditional Medicare, both Congress and the Medicare bureaucracy would be under relentless political and economic pressure to cut costs in such a Medicare prescription drug program.
While Medicare faces long-term financial problems, Medicaid's financial difficulties are more immediate. States, which pay a large portion of Medicaid funding, are facing major financial problems because of the economic downturn and record spending increases in recent years. Medicaid enrollment is increasing, partially because of the downturn in the economy, and Medicaid spending is consuming ever-larger chunks of state budgets. Medicaid spending as a percent of state expenditures increased from just over 10 percent in 1987 to 20.4 percent in 2002.8
Unlike Medicare, Medicaid already covers outpatient prescription drugs. Medicaid is funded jointly by the federal government and the state governments, with the federal government providing the majority of the funding. State government officials determine, within federal limits, eligibility requirements and the precise configuration of benefits.
Like other Medicaid benefits, prescription drug benefits are subject to various pricing and regulatory restrictions. Faced with sharply rising costs, Medicaid is a showcase of how government officials can and do control prescription drug costs by limiting the available supply of drugs to patients.
Attempting to control Medicaid costs, a number of states have started cutting back on prescription drug coverage for the poor. According to a major report of the Kaiser Commission on Medicaid and the Uninsured, 45 states impose various controls on prescription drugs.9 State officials have devised a variety of ways to implement restrictive prescription drug policies, including formularies, prior authorization requirements, and complicated reimbursement arrangements.
As states battle to control the cost of Medicaid, state officials see reducing the price of prescription drugs as a way to slow spending growth. In many states, in order to have a drug covered by Medicaid, pharmaceutical companies must agree to sell their products to the state at a discounted price--either "the greater of 15.1 percent of the average manufacturer's price (AMP) or the difference between the AMP and the manufacturer's best price and...an additional rebate for any price increase for a product that exceeds the increase in the Consumer Price Index (CPI-U)" for innovator drugs and 11 percent AMP for generic drugs.10
Some states, such as Florida and Michigan, are requiring additional rebates for listing drug companies' products in their drug formulary. If drug companies refuse to offer a rebate on a particular drug, patients in the affected state will have difficulty accessing that drug--assuming they can do so at all.
These Medicaid experiences are directly relevant to the upcoming debate on adding a prescription drug provision to Medicare. Price controls, while invariably appealing to politicians as a quick fix to rising costs, have enormously negative health and economic consequences. Members of Congress and senior citizens to whom they have promised artificially cheap drug coverage through traditional Medicare should be fully aware of these trade-offs. A poorly designed Medicare drug benefit would undoubtedly be accompanied by formidable pressures that drive up costs and result in political pressure to impose some form of price control system at least as strict as the pricing measures currently employed in Medicaid.
While Medicaid beneficiaries are faced with reduced prescription drug coverage, solid evidence from several industrialized countries indicates that pricing regulations and negotiations over government pricing compromise the availability of new drugs.11 A study by the Boston Consulting Group in 1999 found significant delays in accessing new drugs in countries with price controls compared to those with relatively few. Belgium and Greece had an average delay of 12 months; France and Switzerland had an average delay of 10 months for new drugs to reach the market compared to the minimal delays in the United States, the United Kingdom, and Germany, which have significantly fewer market interventions.12
If Members of Congress promise current and future Medicare beneficiaries a cheap or low-cost prescription drug benefit through traditional Medicare, they will be tempted to control costs through price regulation of one form or another. If they resort to price regulation, Medicare patients can be expected to have difficulty accessing the latest, most effective drugs. In some cases, the effects of government price fixing will eat up precious time that sick Medicare patients do not have.
Formularies are preferred drug lists, the official lists of drugs made available to patients. Formularies exist in conventional employment-based health insurance in the private sector, but state officials also use them in the Medicaid program. Of the 43 states surveyed, 40 exclude some drugs from their formularies.13
The Kaiser Commission has reported that Medicaid officials in 16 states require the use of generic drugs over brand-name drugs because they are generally cheaper than brand-name drugs.14
In some states, officials require doctors to obtain prior authorization when prescribing newer or more expensive drugs before Medicaid will pay for them. Under the prior authorization process, state government officials require physicians to fill out burdensome paperwork, justify their decisions to a state board, and/or try less expensive generic drugs first (until they fail) before Medicaid will pay for certain (often brand-name) drugs. According to the Kaiser Commission, "Authorizations usually have several possible levels of review, with clerks or interns often making initial, simple decisions."15 Prior authorization is required for some drugs in 36 states.16
In some cases, officials even restrict the size of drug dosages, the number of prescriptions allowed in a month, and even the number of pills covered in a certain period of time. In addition, Medicaid takes an average of 20 months after a new drug is approved by the Food and Drug Administration (FDA) to add it to the Medicaid list of approved drugs. The picture is even bleaker for Medicaid patients: Amounts of medication per prescription, number of prescriptions per month, and number of refills are limited in 41 states.17
While the various forms of drug limitation may save the government money in the short term, the accumulated costs to patients and taxpayers over time can be high. Serious costs result from potentially ineffective treatment, treatment delay, the inevitable worsening of mistreated medical conditions, and repeated visits to doctors or medical specialists. Hence, many professional medical organizations and disease groups have gone on record against this method of cost control.18
Medicaid has imposed prescription drug restrictions that affect millions of poor and indigent persons enrolled in Medicaid. Under Medicare, patients' access to medical technology is already limited,19 and Medicare itself is administered by one of the most poorly performing federal agencies.20 If Congress does not reform Medicare and instead retains the central planning and price regulation that govern both Medicaid and Medicare, similar cost controls are likely to be imposed on any new Medicare prescription drug plan. Under these circumstances, America's senior citizens in a government-managed drug benefit will pay a very high price in service quality.
Patients without a choice of health plans are often dissatisfied with the quality of their coverage.21
Federal employees and retirees have a very different situation under the Federal Employees Health Benefits Program, which covers them and their families--approximately 8.3 million Americans. All health plans in the FEHBP have drug coverage, and in recent years most of these plans have paid 80 percent or more of prescription drug costs. Most important, if federal workers or retirees do not like their health plan's drug coverage or its restrictions on coverage, they can choose another plan.
The ability of federal workers or retirees to "vote with their feet" and leave overly restrictive health plans is a key feature of the FEHBP. Not surprisingly, this power of personal choice also affects the character of pharmacy benefit managers (PBMs) who are common to these health plans and who often contract with health plans and administer drug benefits for health plans, including the negotiation of drug prices with pharmacies and drug manufacturers. They also process drug claims and employ formularies or preferred drug lists. According to the U.S. General Accounting Office (GAO), FEHBP health plans generally use PBMs, like those in private employer-based health insurance.22 The GAO also reports that PBMs in the FEHBP have "generally nonrestrictive drug formularies across a broad range of drugs and therapeutic categories."23
In controlling costs, the GAO found that PBMs in the competitive environment of the FEHBP were successful in passing on significant savings.24 In retail pharmacies, federal employees and retirees were able to secure an average discounted price for 14 selected "widely used brand name drugs" at about 18 percent below the average for "cash paying customers" without drug coverage. For four selected generic drugs, the GAO found that the PBM negotiated retail pharmacy prices that were 47 percent below the prices paid by cash-paying customers.25
In the FEHBP, health plans that employ PBMs also use them to provide options for mail-order prescription drugs to federal employees and retirees. On average, the GAO found that prices of the 14 brand-name drugs were 27 percent lower for mail-order prescription drugs than prices at retail pharmacies, and the four generic drugs were 53 percent lower.26
A Medicare reform proposal based on the FEHBP would give current and future senior citizens a superior program for prescription drug coverage without the kind of restrictions that are found in Medicaid today and will surely be imposed in Medicare tomorrow.
Medicaid, which provides medical benefits for the poor and the indigent, is imposing significant restrictions on patient access to prescription drugs. This is not surprising. In Medicare and Medicaid, there is no interaction between the demand for medical services and the supply of those goods and services. Free-market functions that control costs in every other sector of the economy are absent. Rather, cost control in Medicare and Medicaid is largely a function of political decision-making and budgetary allocations.
Government officials cannot control the demand for medical goods and services in these government programs; they can only control the supply. They routinely control cost by limiting supply, usually through some form of price regulation. In Medicaid, boards made up of government officials, pharmacists, and uninvolved doctors also limit the supply of drugs available to Medicaid patients, sometimes with clerks or interns making initial decisions when prior authorization is required.27
For senior citizens, the Medicaid experience is a lesson. If Congress adopts a drug benefit through traditional Medicare without reforming that program to respond to consumer demand and patient choice, senior citizens can expect Medicare officials to impose similar restrictions on prescription drugs.
Medicaid limits and delays a doctor's choice of prescriptions for the patient, the number of prescriptions allowed per month, and the number of pills allowed per prescription. Access to the newest, most effective drugs is also limited.
Medicaid has these restrictions because of financial pressures and budget constraints. The financial pressures facing Medicare have hardly begun, but they will become even more formidable. Seniors should realize that efforts to control costs in Medicare will likely tie the hands of physicians by limiting treatment options, as they have in Medicaid.
There is a better way. Instead of a system based on government central planning and price fixing, Congress should encourage market competition and give full sway to patient choice. The best available model for a new Medicare program is the Federal Employees Health Benefits Program, the consumer-driven health program that covers federal workers and their families. Unlike many private employer-based plans, the FEHBP allows a broad choice of health plans, allowing individuals and families to choose the coverage they want, including prescription drug coverage. At the very least, the next generation of retirees should be able to choose the kind of prescription drug coverage that best suits their needs in a new and strengthened Medicare program.
In Florida's Medicaid program, officials restrict Paxil (for anxiety disorder and depression). Paxil in 10 mg form is not permitted; it must be prescribed in 20 mg tablet form, and the patient is to use one-half of a tablet. Likewise, patient claims for OxyContin (for chronic pain and terminal cancer) is limited to four doses per day except for the OxyContin 160 mg strength, which is limited to two doses.28
If a drug is not on the Florida Medicaid program's Preferred Drug List (PDL) and the provider cannot quickly obtain authorization, a 72-hour supply may be dispensed by the pharmacist until the request can be reviewed.
(1) anemia associated with renal failure if patient is not on dialysis (six-month authorization); (2) anemia associated with HIV Infection (six-month authorization) specifically Anemia related to zidovudine therapy in HIV-infected patients; or (3) the anemia is associated with chemotherapy (six-month authorization).29
North Carolina Medicaid officials require prior authorization of Neupogen therapy, which helps maintain high white blood cell counts during chemotherapy to help fight infection. Neupogen therapy is authorized only for those cases that meet one of two criteria: (1) "To decrease the incidence of infection due to severe neutropenia (low white blood cell count) caused by myelosuppressive anti-cancer therapy; (2) To decrease the incidence of infection due to severe neutropenia in AIDS patients on zidovudine therapy." 30
North Carolina Medicaid officials require prior authorization for OxyContin when the patient has failed therapy with generic products (oxycodone or a similar narcotic analgesics) and has had a diagnosis of chronic pain syndrome of four-week duration.31 North Carolina also limits the number of pills that can be prescribed per day to four.32
Maine's plan to provide discounted prescription drugs to citizens that do not qualify for Medicaid and do not have prescription drug coverage could further limit access to drugs for the state's Medicaid population. The plan "requires drug makers to give it the same rebates that companies already give for Medicaid drugs--about 20% off retail prices."33 If a company "refuses to play ball" and agree to the discounts, it "will find its products shut out of the significant state-bought portion of the Maine drug market."34
In May 2003, the Supreme Court of the United States lifted a temporary injunction blocking implementation of Maine's plan, under which, according to The New York Times, "manufacturers that did not cooperate faced having their products subject to a 'prior authorization' procedure."35 The Times added, "Doctors and patients tend to seek alternatives to drugs for which pre-authorization is required."36
In order to prescribe a brand-name drug, the prescriber must both provide documentation that a generic drug was tried and document the length of the trial. If there was no trial, the prescriber must provide a "medical justification" for using a brand-name drug. For example, "documentation is required showing that all four lipid-lowering classes have been tried before Xenical is required."37
Michigan has one of the nation's most restrictive formularies. Drug manufacturers have agreed to offer supplemental rebates to the state in order to have drugs placed on the state's formulary.
Data gathered through a prescription access hot line38 found that 66 percent of callers reported medication delay, denial, or switching with negative consequences. The types of negative consequences reported included:
subsequent hospitalization; required new medication not working as effectively as previous drug; forced switching to a product causing allergic or other negative reaction; reduced ability to perform Activities of Daily Living; going several days, or even weeks, without any medication at all; forced switching to a product form (such as tablet, chewable or liquid) which the consumer could not tolerate; and loss of continuity upon discharge from a hospital (i.e., hospital physicians/patients are not under prior authorization, but have to deal with it immediately upon discharge).39
In the same report, a health care provider from Washtenaw County, Michigan, said, "It's just the biggest mess you can imagine. It's really horrible customer service. The patients are waiting longer and longer for their medications." Another Washtenaw County health care provider said, "I am running into trouble with the randomness of this [program]. It's too capricious. I'm getting acceptance one day and the next a denial for the same medicine. It is taking up too much time, and requiring patients to be switched too often."40
1. For an overview of the impact of these prescription drug restrictions, see Susan Horn, Ph.D., Frederick Goodwin, M.D., and Robert Goldberg, Ph.D., "What Seniors Should Know About Government Restrictions on Prescription Drugs," Heritage Foundation Backgrounder No. 1611, November 4, 2002.
2. For a description of the FEHBP, see Robert E. Moffit, "What the GAO Says About the Best Model for Medicare Reform," Heritage Foundation Backgrounder No. 1625, February 24, 2003.
3. Douglas Holtz-Eakin, Director, Congressional Budget Office, "Prescription Drug Coverage and Medicare's Fiscal Challenges," testimony before the Committee on Ways and Means, U.S. House of Representatives, April 9, 2003, p. 3.
4. David Walker, Comptroller General of the United States, Medicare: Financial Challenges and Considerations for Reform, testimony before the Joint Economic Committee, GAO-03-577T, April 10, 2003, p. 9.
6. Thomas R. Saving, "Perspectives on the 2003 Social Security and Medicare Trustees Reports," Private Enterprise Research Center at Texas A&M University and National Center for Policy Analysis, March 2003.
9. Vernon Smith, Kathy Gifford, Rekha Ramesh, and Victoria Wachino, Medicaid Spending Growth: A 50-State Update for Fiscal Year 2003, Kaiser Commission on Medicaid and the Uninsured, January 2003, p. 10, at www.kff.org/content/2003/4082/4082.pdf.
10. National Pharmaceutical Council, Pharmaceutical Benefits Under State Medical Assistance Programs, 2001, 2002, pp. 4-31, at www.npcnow.com/issues_productlist/PDF/medicaid2001/NPC2001Benefits.zip.
11. On average, bringing a drug to market costs $897 million. See Tufts Center for the Study of Drug Development, "Total Cost to Develop a New Prescription Drug, Including Cost of Post-Approval Research, is $897," news release, May 13, 2003, at csdd.tufts.edu/NewsEvents/RecentNews.asp?newsid=29.
12. Boston Consulting Group, "Ensuring Cost Effective Access to Innovative Pharmaceuticals: Do Market Interventions Work?" April 1999, p. 25, Figure 14, at www.bcg.com/publications/files/Ensuring_Cost_Effective_Rpt_Apr99.pdf.
13. Rene Schwalberg et al., Medicaid Outpatient Prescription Drug Benefits: Findings from a National Survey and Selected Case Study Highlights, Kaiser Commission on Medicaid and the Uninsured, October 2001, Table 2, p. 7.
18. Opponents of prior authorization of prescription drugs include the National Association of Mental Health Planning and Advisory Councils, the American Academy of Family Physicians, the Medical Association of Georgia, the National Medical Association, and the National Prostate Cancer Coalition.
20. Robert E. Moffit, "Congress Should Think Twice About Allowing the Medicare Bureaucracy to Manage a Drug Benefit," Heritage Foundation Backgrounder No. 1583, September 9, 2002.
21. See Derek Hunter, "Just the Facts: Health Care Choice and Patient Satisfaction," Heritage Foundation Web Memo No. 259, April 17, 2003.
22. David M. Walker, Comptroller General of the United States, Medicare: Observations on Program Sustainability and Strategies to Control Spending on Any Proposed Drug Benefit, testimony before the Committee on Ways and Means, U.S. House of Representatives, GAO-03-650T, April 9, 2003, p. 20.
29. North Carolina Medicaid Web site, at www.ncmedicaidpbm.com.
37. Missouri Medicaid, "Drug Prior Authorization Process," revised March 24, 2003, at www.dss.state.mo.us/dms/dated/drugpa.pdf.
38. The hot line was set up by the Michigan Association for Children with Emotional Disorders and the Mental Health Association in Michigan in association with Michigan Partners for Patient Advocacy and the National Alliance for the Mentally Ill of Michigan.