Medicare Drug Benefit Could Leave out Large Numbers of Beneficiaries under Limited Federal Budget

New York City, August 1, 2002—A Medicare drug plan that is voluntary and will appeal to a wide range of beneficiaries while helping those most in need, cannot be achieved for $350 billion, a figure that is currently being debated in proposals before Congress, according to a new report from The Commonwealth Fund. However, a carefully designed benefit could protect low-income beneficiaries and place a cap on high costs.

The report by Marilyn Moon and Matthew Storeygard of the Urban Institute analyzes three different cost/payment structures for a Medicare drug benefit that fall under $350 billion. The analysts, in , find that each option would leave out an important group of beneficiaries. They conclude that a higher federal contribution of $450 billion would make it possible to design a much more attractive benefit package that would also appeal to beneficiaries and avoid the problem of adverse risk selection.

"Balancing the principles of broad-based coverage and assistance for those with greatest need will take careful planning with limited resources," said Karen Davis, president of The Commonwealth Fund. "It will require tradeoffs between competing goals, but making the program meet the needs of a wide range of beneficiaries will be key to its success."

Moon and Storeygard analyzed plans based on five important goals identified by policymakers, health leaders, and beneficiaries:

• Stay within a federal budget constraint
• Make at least a partial benefit available to all
• Protect those with very high expenditures
• Encourage large-scale participation on a voluntary basis
• Protect beneficiaries with low incomes

"Making good policy choices for a prescription drug benefit will be expensive, but without such an effort beneficiaries increasingly face unacceptable choices," said Marilyn Moon, senior fellow at the Urban Institute and lead author of the report.

Medicare beneficiaries spend nearly $2,000 per year on average for prescription drugs. The authors show how a $350 billion limit would make it difficult to meet all of these concerns. The authors analyze three types of benefit structures:

Level Benefit Is Inadequate for Most Beneficiaries
Moon and Storeygard calculate that a $350 billion federal contribution over 8 years (with a two-year start-up period) represents 23 percent of projected spending on prescription drugs by Medicare beneficiaries. A plan providing the same benefit for all, therefore, would result in beneficiaries shouldering over three-fourths of the cost of their medications. This approach meets almost none of the principles for coverage, and provides inadequate protection for those with high costs and/or low incomes.

First-Dollar Coverage Would Leave Out the Neediest
An "up-front" benefit in which the government pays for three-quarters of all drug spending for the first $812 dollars of spending for each individual, would also cost $350 billion. However, a maximum benefit of $609 annually would cover only a small share of spending for the neediest beneficiaries-those with high drug costs and those with chronic conditions, who are likely to spend $3,000 to $6,000 annually on drugs.

"Stop-Loss" Approach Helps Only a Small Share of Beneficiaries
A third approach is a "back-end" benefit in which the government pays all costs above a certain amount for those with the highest expenditures, offering only stop-loss protection. At a cost of $350 billion, coverage would begin after beneficiaries incur $3,463 in medication costs. While this would help those with high costs, according to the study, only about 20 percent of beneficiaries would receive any assistance.

The authors conclude that ultimately, unless federal spending is raised above $350 billion, none of the possible options would be attractive to most beneficiaries. But with additional funding of $100 billion, a benefit could be designed that addresses the highest priority needs of all beneficiaries. For example, the catastrophic limit could be lowered to include a larger share of the population and make the benefit much more desirable.

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