July 1999

The Prescription Drug Program: Cornerstone of Clinton’s Medicare Reform

by Deanna S. Tarry

On June 29th, President Clinton proposed the biggest changes to the Medicare program since its inception over thirty years ago. Discussion of the president’s plan has centered on the potential prescription drug benefit for millions of seniors at a cost of $118 billion over the next 10 years. Leaders are quickly taking sides, and the benefit promises to be an issue of contention in the presidential and congressional elections of 2000.

According to the president, “In a nation bursting with prosperity, no senior should have to choose between buying food and buying medicine. My Medicare plan is credible, sensible, fiscally responsible. It will secure the health of Medicare while improving the health of our seniors. And we can achieve it.”

The Problem

The president instigated the benefit in response to the increasing burden on seniors throughout the nation due to the rising prices of prescription drugs. Nearly 12 million seniors and people with disabilities rely on Medicare to cover their medical needs but have no supplemental insurance to cover the cost of prescription drugs. Even seniors with Medigap policies often pay substantial out-of-pocket costs for medication. Politically, both sides agree that adding a prescription drug benefit to Medicare is essential to modernize the program and allow seniors to take advantage of medical advances rapidly becoming standards of care. 

Michael E. Gluck, director of health policy studies for the National Academy of Social Insurance, informed the Senate Finance Committee that in 1999 the cost of outpatient drugs per Medicare patient averages $942. About half of the current beneficiaries have out-of-pocket drug costs of over $200 per year, 29 percent pay over $500 per year, and 14 percent spend over $1,000 per year.

The Plan

Under Clinton’s proposal, the voluntary Medicare prescription drug benefit would do the following:

• Create a voluntary buy-in costing beneficiaries about $24 per month beginning in 2002, and $44 per month by 2008 when the program is fully phased in.
• Pay half of a beneficiary’s drug costs from the first prescription filled each year up to a total cost of $5,000, without requiring a deductible. (These benefits would not be fully phased in until 2008.)
• Ensure beneficiaries a 10 percent discount on prescription drugs even after the $5,000 limit is reached. 
• Ensure that beneficiaries with an income less than 135 percent of the poverty level—or less than $11,000 for individuals and $15,000 for couples—would not pay premiums. The proposal also provides premium assistance for people with an income between 135 and 150 percent of the poverty level.
• Provide incentives for employers that offer retiree health coverage with prescription drug benefits that are at least equivalent to the proposed Medicare prescription benefits.

According to White House estimates, approximately 31 million people would take advantage of the prescription drug benefit.

The Costs

The optional prescription drug benefit would cost $118 billion over 10 years, an amount which represents only 5 percent of total projected Medicare spending in 2009. According to the plan outline released by the White House, the Medicare proposal will generate enough savings (mainly through increased efficiency) to offset over 60 percent of this cost. The anticipated federal budget surplus will finance the remaining portion, which would total $45.5 billion.

Closer to Home

The prescription drug benefit has received a surge of attention in state legislatures throughout the country. Unlike so much of Medicare policy, which revolves around complicated discussions of reimbursement rates and managed competition, prescription drug coverage is a concept the public can easily understand. 

Democrats have done their part to raise interest in the issue. Over the last year, Democratic staff members on the House Government Reform Committee have conducted surveys in 55 congressional districts. The surveys compared prices for drugs paid by “favored” customers (insurance companies, government, and health maintenance organizations)—which the committee staff asserts are close to what big health maintenance organizations pay—with prices paid by the elderly without drug coverage buying retail. 

U.S. Rep. Debbie Stabenow (D-MI) released one such study on July 12th. It showed that in the 8th Congressional District uninsured seniors with chronic health problems are paying more than twice the amount charged to “favored” customers for five common medications used to treat heart problems, high blood pressure, cholesterol, depression, and ulcers. The price differential was even greater for other commonly prescribed drugs. For example, a dose of the drug synthroid—a commonly used hormone treatment—cost the “favored” customers only $1.75 but would cost the average senior in the 8th District over $28.00. 

The study also revealed that the price differential (between “favored” customer prices and regular retail prices) for prescription drugs is considerably higher than for other consumer goods, such as office supplies and paper products: The differential for the five prescription drugs studied was 113 percent, while the differential for other products averaged only 22 percent. Stabenow asserts that the study shows widespread price discrimination against the elderly, as uninsured and under-insured older Americans are charged top dollar compared with the industry’s “preferred” buyers, who negotiate better prices. 

Though the pharmaceutical industry acknowledges that the high cost of prescription drugs for uninsured seniors is a problem, they contend that these studies have serious methodological flaws. The industry maintains that surveys presented by Stabenow and other members of Congress are skewed in that they only look at a small number of the most expensive drugs and do not take into account the fact that pharmaceutical companies do not control either wholesale or retail price markups.

Targeting Low-Income Seniors

Republicans and some medical professionals have complained that Clinton’s prescription drug benefit is slightly off the mark. While few disagree that seniors deserve access to affordable prescription drugs and modern health care intervention, many believe the plan should be altered so that it applies only to low-income seniors. Opponents argue that 68 percent of Medicare beneficiaries already have some form of insurance to pay for prescription drugs. Mitchell A. Rinek, M.D., of Lansing believes that the best approach is to use means testing as a qualifying measure. Rinek notes that offering the benefit to those who do not need it will drive up the cost of the program and concludes that “We need a controlled program for those who need it.” 

Others have expressed concern over different aspects of the proposal, for example the fact that it does not provide seniors with benefits until 2002 and lacks catastrophic drug coverage.

The EPIC Program

Michigan has established a program, scheduled to begin in July 2000, to help the state’s low-income seniors with prescription drug costs. The Michigan legislature allocated $30 million from the tobacco settlement monies to create the Elder Prescription Insurance Coverage (EPIC) program. EPIC will give all seniors aged 65 and older with an income less than 200 percent of the poverty level access to prescription drug insurance. Though details of the plan are still being developed, seniors living at or below the poverty level—$8,240 for an individual and $11,060 for a couple—would be able to enroll in EPIC for free, while eligible seniors earning more would pay premiums based on a sliding scale. 

Michigan already has a prescription drug tax credit for seniors whose income does not exceed 150 percent of the federal poverty level. It allows them to claim a refundable credit equal to the amount by which their expenditures for prescription drugs exceed 5 percent of their household income. EPIC will increase the number of seniors receiving this credit by (1) allowing seniors living at a slightly increased household income to receive it and (2) removing the stipulation that seniors must spend 5 percent of their household income on prescription drugs before they qualify.