Why Medicare Must Do More At The Drugstoreby
Dramatic breakthroughs in prescription drugs have fundamentally altered the treatment of virtually every major illness over the last few decades. Thirty years ago, patients who survived a heart attack might be sent home with advice to take it easy; today they are sent home with prescriptions for medications that improve the quality and length of life. Four out of five senior citizens are prescribed at least one drug treatment every day, and one in five take five prescribed drugs daily. These trends will only strengthen as new gene research produces advances in pharmaceuticals.
But such progress carries a hefty price tag. According to the National Bipartisan Commission on the future of Medicare, of which I am a member, some 12% of the population is elderly but these people account for more than one-third of all spending on prescription drugs. Per capita spending on drugs by the elderly is more than three times that of other adults and nearly 10 times that of children. On average an elderly American spends more than $600 a year on drugs, with 1 in 10 spending more than $2,000 a year. At a time of little inflation, drug spending by the elderly is projected to grow at more than 8% per year.
When the Medicare program was enacted more than 30 years ago, drug coverage was not included. Drugs were not as important in medical treatment as they are now, and drug coverage was not the norm in private health insurance plans, as it is today. Consequently, as both the effectiveness and the cost of drug therapies have increased, elderly Americans, the majority of whom have annual incomes of $25,000 or less, have been forced to find sources other than Medicare to cover their prescription drug bills. The resulting coverage is riddled with inequities, inefficiencies, and unnecessary administrative costs.
A FAILURE. About 20% of the elderly, those living below the poverty line, can obtain drug coverage by enrolling in Medicaid. About one-third receive some drug coverage through supplemental insurance policies provided through their former employers and subsidized by federal tax breaks for employer-sponsored health insurance plans.
But the private insurance market is not working well for the elderly. From 1993 to 1997, the percentage of large companies offering retiree health benefits dropped from about 40% to about 30%. About 10% of the elderly buy individual private insurance policies that provide a capped drug benefit. But premiums often exceed $1,000 per year for a policy with limited nondrug benefits and an annual cap of $1,250 on drug spending. Some elderly people obtain drug coverage by enrolling in Medicare HMO plans, but they are not available in many locations, and their drug benefits are spartan (many have a benefit cap of $200 per quarter). Today, about 35% of the elderly--and nearly half of the elderly who are living in rural areas--have no drug insurance whatsoever.
Why hasn't the private insurance market developed affordable policies to solve the drug coverage problem for the elderly? The major reason is what economists call the "adverse selection" problem in insurance. Most drug spending reflects chronic conditions. As a result, private plans that offer generous drug benefits tend to attract high-risk, high-cost enrollees. Healthy individuals with a low risk of chronic illness prefer more inexpensive plans that limit drug benefits. As a result, insurance plans that include adequate drug benefits quickly become extremely expensive.
CUTTING A DEAL. Supplemental private insurance coverage through employers avoids this selection problem because all the employees covered by a business, high risk and low risk, elderly and non-elderly, participate together, allowing the very sharing of risk that insurance is meant to provide.
Employers can also bargain for lower prices with drug producers. Without such bargaining power, the average elderly American who doesn't have drug insurance pays twice as much for drugs as larger insurers or HMOs. And without drug insurance, a growing number of Americans are forced to choose more expensive, less effective forms of inpatient care that are covered by Medicare over less expensive, more effective forms of outpatient care that are not.
Medicare was designed in 1965 with the goal of providing each elderly American, regardless of income, with health insurance as good as that available to the non-elderly. This goal is increasingly elusive as drug therapies become more central to the prevention and treatment of illness. It is time to stop debating whether or not Medicare should include drug coverage and start assuring that drug benefits are provided competitively, efficiently, and fairly to all Medicare beneficiaries.