Medication Costs and Reimbursements

Approximately one-third of all Medicare beneficiaries have no prescription drug coverage. This lack of coverage disproportionately affects Medicare beneficiaries near the poverty level, those in rural areas, and those age eighty-five and older. While some may receive assistance through state pharmacy programs, out-of-pocket expenditures for beneficiaries without coverage for prescriptions are significantly higher than for those with coverage. For example, Poisals' and Chulis's study found that in 1996, annual out-of-pocket expenditures averaged $463 for Medicare beneficiaries without prescription drug coverage, compared with $253 for those with coverage. These out-of-pocket differences existed even though beneficiaries without coverage filled five fewer prescriptions per year, on average, than those with prescription drug coverage.

Medicare beneficiaries with prescription drug coverage receive such coverage from a variety of sources. Poisal and Chulis report that the majority of Medicare beneficiaries receive supplemental drug coverage from private sources, either from an employer (31 percent) or from a purchased Medigap policy (10 percent). The remaining beneficiaries with drug coverage receive such coverage from Medicaid (11 percent) or through a Medicare HMO (8 percent).

Employer-provided coverage. Like many health insurance benefits from employment, drug benefits from former employers tend to be fairly generous. However, due to changes in accounting standards and rising health care costs, the proportion of firms offering health insurance coverage to retirees has been declining. Even firms that continue to provide such insurance have been reducing or eliminating prescription drug coverage. A 2000 study by Hewitt Associates indicated that 36 percent of large employers planned to reduce prescription drug coverage for retirees age sixty-five and over during the next three to five years.

Medigap policies. Individual Medicare beneficiaries purchase Medigap policies to cover some or all of the deductibles and copayments for Part A or Part B services, as well as some uncovered services, such as prescription drugs. Of the ten standard Medigap policies available, only three include prescription drug coverage. These policies have fairly large copayments and deductibles, and also include an annual limit on drug expenditures. For example, one standard policy has a $250 deductible and provides 50 percent coverage up to a limit of $1,250 per year. Another standard policy has the same deductible and coinsurance, but a coverage limit of $3,000 per year.

Medigap policies with drug coverage are generally much more expensive, and have experienced larger increases in monthly premiums than those that do not include drug coverage. A 2001 study by Weiss Ratings found that average premiums for Medigap plans covering prescription drugs increased by 37.2 percent from 1998 to 2000, while premiums for Medigap policies that have no drug coverage rose by only 15.5 percent during the same period.

Medicaid. Medicaid provides access to prescription drugs for the poorest Medicare beneficiaries. Medicare beneficiaries who, because of low income, qualify for Supplemental Security Income, or who are deemed to be medically needy because of their extensive medical costs, can qualify for full Medicaid benefits. These individuals pay neither the Medicare Part B premium nor any of Medicare's deductibles and copayments. In addition, they are eligible for all benefits provided by their state Medicaid program, including coverage for prescription drugs. Half of Medicare beneficiaries with incomes below the poverty threshold are covered by Medicaid.

Medicare HMOs. In 2000, 17 percent of Medicare beneficiaries were enrolled in Medicare HMOs. Of these beneficiaries, 80 percent are enrolled in HMO plans that include a prescription drug benefit (Health Care Financing Administration, 2000). There is, however, considerable variation in the scope and generosity of benefits across plans, and Medicare HMOs are not available in all geographic areas. Many plans use cost-containment measures in their prescription drug coverage, such as copayments and low spending limits (often as low as $1,000 annually). Studies show that Medicare beneficiaries often drop out of their HMO plans once they have exhausted their drug benefits. This has led to new restrictions on the ability of beneficiaries to switch plans during the year.