A Preliminary Analysis of Medicare Outpatient Prescription Drug Proposals Proposed By Vice-President Gore and Governor Bush

 

Kenneth E. Thorpe

Professor of Health Policy

Emory University

kthorpe@sph.emory.edu

404-727-3373

September, 2000

 

 

Overview

 

Vice-President Gore and Governor Bush have both advanced new proposals for extending outpatient prescription drug coverage to Medicare beneficiaries. These proposals differ substantially in several important dimensions with important implications for Medicare and its beneficiaries. This analysis examines both proposals on several key fronts, including:

 

·        The number of Medicare beneficiaries eligible for coverage under the proposals

·        The number of uninsured and insured beneficiaries likely to enroll in each plan

·        The extent of catastrophic protection available to Medicare beneficiaries

·        The impact on out-of-pocket spending among uninsured beneficiaries

·        Premiums and cost sharing associated with each proposal

 

 

 

Data concerning the level and distribution of Medicare drug expenditures are based on data derived from the Congressional Budget Office (CBO). These data, and the assumptions underlying them are available at their web-site, www.cbo.gov. Assumptions concerning program participation, particularly among the uninsured, are tied to recent CBO estimates as well. See in particular the methodological discussions found in their letter to Senator Lautenberg as well as their detailed cost estimate of H.R. 4680, the Medicare Rx 2000 Act.

 

Background Data and Information

 

Rates of program participation and the financial impacts of the Bush and Gore Medicare drug proposals are derived from information collected by the CBO. The following tables present some of the underlying data used in the analysis.

 

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·        Analysis and opinions represent those of the author only and do not reflect those of Emory University.  Neither the Gore nor Bush campaigns have reviewed the assumptions or analysis presented below.

 

 

 

Table 1 Estimated Distribution of Medicare Beneficiaries with and without Outpatient Prescription Drug Coverage, 2002 (Millions of Beneficiaries)

 

 

Income as % Poverty	Insured            Uninsured	Total
0-100% 101-135% 136-150% 151-175% 176-200% 201% +   Total   Spending Per Capita   Total Spending	5.4                       3.4 2.6                       2.4 0.9                       0.9 1.6                       1.2 1.7                       1.3 12.8                     6.0   25.1                                      15.2   $1,889   $76.9 Billion	8.8 5.0 1.8 2.8 3.0 18.8   40.3

SOURCE: Medicare Current Beneficiary Survey, 1995 aged to 2002.

 

By 2002, approximately 38 percent--15.2 million-- of  Medicare beneficiaries are  projected to lack outpatient prescription drug coverage. This total is similar to the numbers projected by the CBO for 2003  (they estimate 40% will be uninsured). Half of all Medicare beneficiaries without outpatient drug coverage live in families with incomes above 175% of poverty.

 

By 2002, Medicare beneficiaries will spend approximately $1,900 per enrollee (both out-of-pocket, and through various forms of insurance) accounting for nearly $77 Billion in total outpatient spending on prescription drugs.

 

 

Proposal Advanced By Governor Bush

 

While several details of Governor Bush's outpatient drug proposal were released on September 5, 2000, other key details remain unknown.  The following specific aspects of the proposal have been articulated:

 

 

 

Figure 1. Proposed Structure of Bush Plan for Outpatient Prescription Drugs

 

Structure and Administration         2001-2004                               2005-2010

Outpatient prescription drugs, as well as additional benefits not covered under traditional Medicare  will be offered by private health plans contracting with the Medicare program     Would provide $48 Billion in federal grants to states over the first four years, allowing the states to provide prescription drugs for low-income Medicare beneficiaries.  Medicare would cover the full costs associated with the plan for those with income at or below 135% of poverty. Partial subsidies would be available for those with incomes to 175% of poverty.   States would have flexibility in designing the prescription drug benefit. However, the states would choose among three benefit designs; the Blue Cross standard option, Medicaid, or their state employee's health plan. Alternatively, the state could design their own with approval from the Department of Health and Human Services.   No specific details, though the plan would provide $110 Billion for prescription drugs over the six-year period.

Benefits                   Beneficiary Premium Contributions

The plan would cover any out-of-pocket costs associated with outpatient drug spending exceeding $6,000 per year for FY 2001-2004. Starting in FY 2005, the $6,000 out-of-pocket cap would be applied to all Medicare covered benefits.   Health plans would enjoy flexibility in offering a prescription drug benefit (other than the $6,000 out-of-pocket cap)   Would vary by income according to the following schedule:  Beneficiary pays:   0%  if income is at or below 135% of poverty up to 75% on a sliding scale between 135-175% 75% of premium if income above 175% of poverty

 

The following sections examine the impact of the Bush drug proposal in two phases: the initial phase from 2001 through 2004 and 2005-2010.

 

Phase 1. 2001-2004 of the Bush Plan

States would receive $12 Billion per year to establish pharmaceutical coverage (based on the one the benchmark plans outlined in the proposal) for seniors with incomes at or below 175% of poverty. Such subsidy programs are currently operating in 16 states, with programs pending in another 6.  The state programs vary widely, both in terms of services covered and eligible population. The largest program, Pennsylvania's Pharmaceutical Assistance for the Elderly  (PACE) currently enrolls approximately 240,000 seniors--accounting for nearly 30 percent of enrollment nationally. [1] Over 830,000 seniors are receiving coverage in these states collectively. States could use federal funding to augment their current programs or establish new ones. Table 1 presents estimates of the number of Medicare beneficiaries newly eligible for benefits under phase 1 of the Bush plan.

 

Table 1. Counts of New Medicare Eligibles and Likely Participants In Phase I of the Bush Outpatient Drug Proposal

Medicare beneficiaries in states with existing pharmaceutical plans, and potentially eligible for additional benefits under current law   Number of Uninsured in Participating States   Number of Current Recipients	9.1 million         3.9 million     830,000
Medicare beneficiaries in states without an existing pharmaceutical plan and newly eligible**   Number of Uninsured in states without a state-based drug program   Number of Expected New  and Previously Uninsured Enrollees   Total Number with Catastrophic Drug Protection (all states)*	5.8 million      2.5 million     525,000 to 625,000   25,000

* for drug expenditures exceeding $6,000 per year.

** Under 175% of poverty and not eligible for Medicaid

Assuming that only the previously uninsured have enrolled in the existing state programs, approximately 20 percent of eligible beneficiaries are enrolled. However, the participation rates vary substantially across the states.  Approximately 25 percent of those eligible for coverage (uninsured meeting the income eligibility guidelines) participate in the Pennsylvania program. Thus, the expected number of beneficiaries receiving coverage in phase 1 of the Bush plan will depend critically on two key issues; first, the number of states participating in the program and second the number of enrollees in the new states.

 

Table 1 presents a range of estimates reflecting the underlying uncertainty in both state and individual participation rates. For simplicity, I assume that all states that currently do not offer a state-based program will take the federal dollars available and establish a state-based program. Second, I assume a range of program participation. The lower estimate is based on the average experience of existing state-based pharmaceutical assistance programs-- approximately a 20 percent participation rate. The higher estimate is based on program participation--25 percent-- in the largest program in Pennsylvania (PACE). I estimate that between 525,000 and 625,000 Medicare beneficiaries without drug coverage will receive a new drug benefit in Phase 1 of the Bush proposal. In addition, the 830,000 beneficiaries with coverage under existing programs could also receive more comprehensive drug benefits compared to their existing state-based program.

 

In the first four years, beneficiaries would be protected from out-of-pocket spending that exceeds $6,000 per year. Using the expenditure distributions noted above, I estimate that approximately 1 percent of uninsured beneficiaries would incur spending above this level in 2002. Thus, approximately 25,000 beneficiaries would receive protection against high drug spending (1 percent of 830,000 in states that currently offer and up to 625,000 new beneficiaries plus other currently insured beneficiaries). It is not clear, however, how the catastrophic plan would be administered and the out-of-pocket payment cap coordinated between the states and the federal government.

 

Phase II of the Bush Plan, 2005-2010

 

 

Phase 2 would adopt a broader set of Medicare reforms, including a choice of private health plans that would include prescription drugs.  The reforms include:

 

·        A $6,000 limit on all Medicare beneficiary spending, including outpatient prescription drugs as well as out-of-pocket spending on existing Medicare covered services

 

·        A choice of plans that do and do not include outpatient prescription drugs

 

·        Annual plan choice

 

·        Seniors with income below 135% of poverty would not contribute toward the cost of the drug package. Seniors with incomes between 135% and 175% of poverty would contribute toward the premium on a sliding scale. By 175% of poverty, seniors would contribute 75% of the cost of the drug package.

 

·        The plan does not specify a benchmark drug plan, other than noting the $6,000 cap on out-of-pocket spending.

 

 

 

Though Governor Bush does not establish specific plan design features for his benefit package, his campaign has estimated the costs associated with it.  These underlying calculations could be used to estimate the benefit design associated with his proposal. Table 2 presents the costs associated with the Bush proposal, to the estimated costs of the Republican plan for outpatient prescription drugs (H.R 4680) recently published by the CBO. A comparison of these two provides a useful indication of the generosity of a drug package that could be financed through the $158 Billion federal costs estimated by the Bush campaign.

 

Table 2. Estimated Federal Budget Costs Associated with Outpatient Prescription Drug Proposal Advanced by Governor Bush and H.R. 4680 (Billions of Dollars)

 

 

Years	Bush Plan	H.R. 4680
2001-2004	$ 48	$23.9
2005-2010   Total 2001-2010	$110   $158	$135.1   $159

 

 

H.R. 4680 as well as the Bush plan are expected to cost the same amount--around $158 Billion over ten years. If the states actually spend all $48 Billion proposed by the Governor in the first four years, the Bush plan would have $25 less than H.R. 4680 budgeted between the years 2005 and 2010. If true, either the benefit package envisioned by the Governor would have to be less generous than the benchmark plan outlined in H.R. 4680, fewer beneficiaries could be served, or both. Alternatively, if the benchmark plan specified in H.R. 4680 were adopted, the cost of the Bush plan could potentially be $25 Billion more than estimated.

 

However, as both H.R. 4680 and the Bush plan propose to spend the same amount over the ten-year budget period, it is reasonable to assume that the outpatient drug benefit package underlying the Bush numbers is actuarially similar to the package in H.R. 4680. For comparison purposes, I will use the benchmark plan in H.R. 4680 to illustrate how such a plan could impact Medicare beneficiaries. It is important to note, however, that this may or may be the actual benchmark adopted if and when the plan is implemented.  This plan had a $250 deductible, with 50% coinsurance on the next $2100 in spending--up to an aggregate Medicare out-of-pocket spending cap of $6,000.

 

Table 3 presents an estimate of the number of  Medicare beneficiaries with and without prescription drug coverage that would likely participate in the Bush drug plan.

 

 

Table 3. Number of Medicare Beneficiaries Participating in Phase II of the Bush Drug Proposal, Fully Implemented, 2008 (Millions of Persons)

 

Medicare Enrollment   Part A only Part A and B   Beneficiaries without drug coverage	Numbers in Millions   44.4 41.2   17.8
Uninsured (no drug benefit) newly eligible   Uninsured likely to participate[2]   Remaining beneficiaries without drug coverage   Number of uninsured with catastrophic protection[3]   Total Number of Medicare Beneficiaries Enrolling   Number of Medicare beneficiaries with catastrophic cap	17.8      5.8   12.0     0.2     33.0     2.7

 

 

When fully implemented, the Bush prescription drug proposal would likely enroll 5.8 million beneficiaries without drug coverage (a third of the uninsured), and 74 percent (33 million) of all Medicare beneficiaries. The number of beneficiaries likely to spending $6,000 out of pocket on Medicare covered services is 2.7 million, with approximately 200,000 previously uninsured receiving catastrophic protection.

 

 

 

Proposal Advanced By Vice-President Gore

 

The outpatient prescription drug proposal advanced by the Vice-President differs substantially from the Bush proposal. In particular, the Vice-President's plan would:

 

·        Be run as part of the Medicare program, and administered locally by pharmaceutical benefit managers

 

·        Start universally in 2002 by allowing Medicare beneficiaries to voluntarily enroll in the program

 

·        Would initially cover half of all drug expenditures for the first $2,000 in spending and half of all expenditures to $5,000 by 2008.

 

·        Beneficiaries would have a $4,000 annual limit on out-of-pocket expenditures staring in 2002.

 

·        The federal government would pay all premiums and cost sharing for beneficiaries with family income below 135% of poverty, and would provide support (on a sliding scale) for premiums for beneficiaries to 150% of poverty. Beneficiaries with income above 150% of poverty would contribute half the premium.

 

 

The analysis of the Vice-President's proposal is derived from a series of recent analyses of similar proposals advanced by the Clinton Administration.  Table 4 presents an estimate of the number of newly insured and catastrophic drug expenses in the first year of the program, as well as when it is fully implemented by 2008.

 

 

 

 

 

Table 4.  Number of Medicare Beneficiaries Participating In Vice-President Gore's Medicare Outpatient Prescription Drug Proposal, 2002 and 2008 (Millions of Beneficiaries)

 

 

2002     Uninsured Beneficiaries Eligible for Plan   Number of Uninsured Participants   Total Medicare Participants in Plan   Number of Uninsured with Catastrophic Drug Protection**   Total Number of Medicare Beneficiaries with Catastrophic Drug Protection	Millions of Beneficiaries     15.2   15.2   35.5   1.0     2.8
2008   Uninsured Beneficiaries Eligible for Plan     Number of Uninsured Participants   Total Medicare Participants in Plan   Number of Uninsured with Catastrophic Drug Protection   Total Number of Medicare Beneficiaries with Catastrophic Drug Protection[4]	17.8     17.8   39   2.1     5.1

·        Uninsured projected in the absence of the proposal

·        Number with out-of-pocket spending that would be limited by the indexed $4000 cap.

 

Based on the CBO analysis of the Administration's plan, they project that virtually all the uninsured and 88 percent of all Medicare beneficiaries would participate in the plan. Of the 15.2 million uninsured now receiving coverage, approximately 25 percent would spend more than $2,000 per year (an estimated 29% of all new enrollees would exceed the cap in 2002). Approximately 1 million uninsured would benefit from the catastrophic spending cap, and 2.8 million Medicare beneficiaries overall would benefit from the cap.[5]

 

Table 5 presents a side-by-side comparison of the Bush and Gore outpatient prescription drug proposals in the initial years of the plans (2002) and when both plans are fully implemented (2008).

 

Table 5. Summary Comparison of Gore and Bush Medicare Outpatient Prescription Drug Proposals, 2002 and 2008 (Millions of Beneficiaries)

Year	Gore	Bush
2002   Number of Uninsured Receiving Coverage   Number of Uninsured with Catastrophic Drug Protection   Number of Total Beneficiaries with Catastrophic Drug Protection     2008   Number of Uninsured Receiving Coverage   Number of Uninsured with Catastrophic Drug Protection   Number of Total Beneficiaries with Catastrophic Drug Protection**	15.2      1.0        2.8               17.8      2.1        5.1	0.5 to 0.6     *       *               5.8     0.2       2.7

 

·        An estimated 25,000 would receive catastrophic drug protection under the Bush plan

** Catastrophic protection in the Bush plan by 2008 applied to all Medicare spending

The summary presented in Table 5 highlights the differences in the number of plan participants, and extent of catastrophic protection available to beneficiaries in 2002 and 2008. Governor Bush's plan would be most effective in extending drug coverage to those in states that currently do not offer pharmaceutical coverage, though dollars could be used in states to augment and improve existing drug plans. Assuming that all states participate, and that enrollment mirrors the experience in the largest state--Pennsylvania--the plan could enroll approximately 625,000 uninsured. In contrast, the Vice-President's proposal would likely enroll all 15.2 million uninsured during 2002.

 

As the catastrophic cap in the Bush plan is set at $6,000 per year, far fewer would receive protection against high expenses compared to the Gore plan (with a $4,000 cap). Approximately 2.8 million Medicare beneficiaries would be protected from expenses over $5,000 per year in the Gore plan (during 2002) compared to only 25,000 in the Bush plan.

 

Overall, the Gore plan would enroll more Medicare beneficiaries, more uninsured, and provide a greater level of financial protection against high drug costs compared to the Bush plan. Beneficiaries with incomes above 175% of poverty would pay 75% of plan premiums in the Bush plan compared to 50% of premiums in the Gore plan.  As a result of higher enrollment, a greater extent of catastrophic protection, and lower percent of premium contributed by beneficiaries, the Gore plan would cost more (approximately $100 Billion over ten years).

 

What would Medicare Beneficiaries Pay for Coverage Under the Gore and Bush Proposals?

 

The following section examines the annual premiums paid by Medicare beneficiaries by family income (see Table 6).  As noted above, Governor Bush does not specifically outline a benefit package. However, the spending estimates associated with his plan are completely consistent with a benefit package with an actuarial value equivalent to the package outlined in H.R. 4680.  This plan had a $250 deductible, and paid 50% of costs for the next $2100 in expenditures, with a $6,000 limit on out-of-pocket spending. The actual benefit package associated with the final Bush plan may differ, however.  The table compares the Gore and Bush plan in 2005, the initial year the Bush plan would operate in conjunction with Medicare.

 

 

 

 

Table 6. Estimated Annual Outpatient Prescription Drug Premiums Paid By Medicare Beneficiaries Under the Bush and Gore Plans, By Income and Percent of Poverty, 2005

 

 

Income as Percent of Poverty	Bush*	Gore
0-135%   136-150%   151-175%   176% +	$0   sliding scale   sliding scale   $635	$0   sliding scale   $385   $385

 

*Premiums based on CBO estimates of the President's drug plan (CBO testimony, May 11, 2000 and estimates of H.R. 4680). Bush premiums have been adjusted from the CBO totals to include a 25% federal subsidy for those above 175 percent of poverty.

 

 

The lowest income seniors, those under 135 percent of poverty, would not contribute toward the cost of drug coverage under either proposal. However, Medicare beneficiaries above 135 percent of poverty would pay substantially more for drug benefits compared to the Gore proposal. For instance, Medicare beneficiaries in families with income exceeding 175 percent of poverty would pay $250 more per year--or 65% higher premiums--under the Bush plan compared to the Gore plan. The higher premiums relate to several factors, higher administrative costs associated with the drug plan, as well as a lower federal subsidy (only 25 percent compared to 50% under the Gore plan).

 

In addition to higher premiums, Medicare beneficiaries would pay a higher share of drug costs out-of-pocket. The largest difference under the plans is for seniors with the highest drug costs (see Table 7). This is largely traced to the substantial difference in catastrophic protection provided under the two proposals.

 

 

 

 

Table 7. Estimated Medicare Beneficiary out-of-pocket spending under the Bush and Gore Outpatient Prescription Drug Plans When Both are Fully Implemented

 

Total Spending	Out-of-pocket spending in Bush Plan	Out-of-pocket spending in Gore Plan
$1000   $2000   $5000   $8000	$ 625   $1125   $3950   $6000	$500   $1000   $2500   $4000

 

 

Though the specifics of the Bush plan may differ from those modeled above, the impact on out-of-pocket spending is well established--a $6000 rather than a $4000 cap as proposed in the Gore plan.

 

Medicare beneficiaries with over $5,000 per year in prescription drug costs would pay substantially more out-of-pocket under the Bush proposal, nearly $4,000 out-of-pocket compared to $2500 under the Gore proposal.  Beneficiaries with total spending of $8,000 per year would pay 50% more out-of-pocket--some $2,000 more per year--compared to the Gore plan.