How Much Does Medicare Pay for Prescription Drugs under the House Medicare Reform Bill

How Much Does Medicare Pay for Prescription Drugs under the House Medicare Reform Bill? Implications of the Medicare Modernization and Prescription Drug Act of 2002, HR 4954:

Kenneth E. Thorpe

Emory University

July 1, 2002

Overview

H.R. 4954 recently approved by the House of Representatives would establish an outpatient prescription drug benefit in Medicare. This is a voluntary drug benefit offered by competing private drug plans, and would start in 2005. Key features of the bill include:

Plan sponsors would offer either standard coverage or actuarially equivalent coverage.

Standard coverage is defined as plans with a $250 annual deductible, 20% beneficiary cost sharing for expenses between $250 and $1,000; and 50% cost sharing for expenses between $1,000 and $2,000. Beneficiaries are responsible for all costs above $2,000 until they reach a catastrophic cap of $3,700. Medicare would pay all costs above this cap.

Medicare would provide subsidies to plans and beneficiaries. For plans, the program would subsidize the drug benefit through two payments—a reimbursement of 35% of plan’s spending for the standard benefit and an individual “reinsurance” payment for high-cost beneficiaries that total 30% of total spending. Beneficiaries with income below 150% would receive a full premium subsidy (up to the lower cost premium in the market), and would not pay cost sharing for the first $2,000 in spending.

The impact of this legislation on Medicare beneficiaries nationally, and in the state of Georgia, are presented below. The calculations are based largely on Medicare expenditure distributions developed by the Congressional Budget Office for the year 2005.

The CBO and the Centers for Medicare and Medicaid Services (CMS) assume that approximately 90-95 percent of Medicare beneficiaries enrolled in Part B of the program will participate in the new drug program. These tabulations assume a similar participation rate.

Table 1. Distribution of Average Drug Spending Per Beneficiary, and Spending By Medicare and by Beneficiaries under H.R. 4954, US and Georgia. Totals, 2005

Spending

No. of Beneficiaries

(Millions for US and 000 in GA)

US GA.

Beneficiary Spending Per Capita

Average spending in each category

Medicare Payments Per Capita

Total Payments Per Capita

$1-$250

$251-$1000

$1001-$2000

$2001-$4800

$4801 +

3.9 90

4.9 112

5.1 118

6.6 153

11.7 270

6.8 156

$235

$321

$653

$2,200

$3,700

$285

$852

$1,100

$5,300

$ 235

$ 606

$1,505

$3,300

$9,000

Totals

39.1 900

NOTES: Spending totals are averages for those with spending in each category. They do not represent the overall share of drug spending paid by Medicare or paid out-of-pocket. These totals are displayed in Table 2.

Out of pocket spending may be paid by Medicare beneficiaries or others (i.e. employers).

Approximately a third of Medicare beneficiaries would receive a federal subsidy to pay for their premiums and cost sharing

The tabulations in Table 1 examine typical Medicare beneficiaries within each of the spending categories (as will be shown in Table 2, the table does not indicate the share of total drug spending paid by Medicare) reveal that beneficiaries would pay approximately $1,270 per year out-of-pocket for their prescription drugs. In addition, they would pay, on average, annual premiums to purchase the coverage of $396—for a total of $1,666 per year out of pocket.

Table 2 shows the distribution of total drug expenditures in 2005 (assuming a full fiscal year), the share paid by Medicare and the share paid by beneficiaries.

Table 2. Distribution of Total Drug Spending, Medicare Spending and Beneficiary Spending, 2005 (Billions of Dollars)

Beneficiaries with spending equal to:

Total Medicare Spending

Total Beneficiary

Spending

Total

$1-$250

$251-$1000

$1001-$2000

$2001-$4800

$4801 +

Total

Premiums

OVERALL TOTAL, Benefits Plus Premiums

$3.9

$6.2

$35.4

$45.5

$(15.0)

$30.5

$1.0

6.2

$39.3

$54.5

$15.0

$69.5

$4.9

$12.4

$39.4

$35.4

$100

Estimated expenses among beneficiaries (approximately 90%) participating in drug program. Assumes some cost management savings of program. Thus, totals are lower than overall spending levels expected under current law.

Totals include only benefit payments, and do not include insurance load. Medicare totals do not reflect offsetting revenues from beneficiary premiums, or federal Medicaid savings. Total spending under current law expected to be $128 Billion. Totals assume full fiscal year of operation.

When including the premium paid, Medicare would pay approximately 30% of covered services and beneficiaries would pay 70% of Medicare drug expenses

(55% out-of-pocket (or through another insurance source) and the remainder in the form of monthly premiums.

Table 3 presents the distribution of drug expenses for Medicare beneficiaries in Georgia and the United States in 2005.

Percent of Medicare Beneficiaries

$631

$4096

$2596

$1049

$717

Comment and Implications

While the House Medicare prescription drug bill would make a substantial contribution toward the costs of drugs, significant gaps would remain. Overall, Medicare beneficiaries would still pay 70% of their drug spending out of pocket, and through monthly premiums. In particular, among the 30 percent of beneficiaries incurring drug expenditures between $2,000 and $4,800 per year, Medicare would only pay for a third of total drug spending (excluding the premium paid by beneficiaries). The nearly 12 million beneficiaries in this group would still pay for two-thirds of their drug expenses. When the annual cost of purchasing the Medicare benefit is included, these beneficiaries would pay for nearly 80 percent of their drug spending.

Much of the debate and rhetoric over the Medicare drug legislation has led many seniors to expect substantial financial relief from the high out-of-pocket expenses for their prescription drugs. For many, the reality of the House prescription drug bill may indeed constitute a major shock. Indeed, many Medicare beneficiaries who incur high drug expenses may expect that the House-passed bill will reduce substantially their out-of-pocket spending. Yet, as the analysis reveals, this is not likely to be the case. Indeed, nearly 50% of Medicare beneficiaries will still face annual out-of-pocket liabilities that average over $2,750 per year. Indeed, there appears to be a substantial gap between beneficiary expectations/perceptions regarding the drug benefit and actual legislation.

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