Medication Costs and Reimbursements

Because of rising drug costs and the large number of Medicare beneficiaries without prescription drug coverage, there has been a growing debate in the United States concerning a national drug benefit for senior citizens. For such a benefit to become a reality, however, many decisions must be made. For example, who will be covered? Will the benefit be available to all Medicare beneficiaries or to only those below some specific income threshold? A 1999 study by the National Academy of Social Insurance (Gluck) indicated that providing a drug benefit for all Medicare recipients would increase the costs of the Medicare program by 7 to 13 percent over the next ten years. Other considerations include whether the plan would be voluntary, how the program would be administered, and which methods of cost containment should be used.

There have been four basic programs proposed with these factors in mind. These proposals vary in both scope and the level of federal involvement. Two of them involve changes in the current Medicare program.

Comprehensive Medicare reform. Since the late 1980s, analysts and policy makers have become increasingly concerned about the financial health of the Medicare program. Increasing health care costs and an aging population have led to dire predictions concerning the viability of this important government program. Many analysts have therefore called for a complete overhaul of the Medicare program. Such a reform would include an analysis of what types of coverage should be provided and how it should be financed. Important choices would have to be made concerning the level of benefits received by senior citizens, and cost-control methods would have to be adopted or expanded. It is possible that a prescription drug benefit could then be added to the program, but this would likely occur only in tandem with a reduction in other benefits or an increase in taxes and monthly premiums.

Addition of drug benefit to current Medicare. Instead of reforming the entire Medicare program, some analysts have suggested that the government simply add a new prescription drug benefit to the current program. This would be a voluntary program that would be financed through monthly premiums and general tax revenues (in much the same way that Part B of Medicare is financed). The federal government could make the benefit more affordable for low-income senior citizens by providing them with a subsidy.

Federal subsidies for private insurance. A third suggestion is for the federal government to provide subsidies to senior citizens so that they can purchase prescription drug coverage in the private market. This policy increases access and affordability of drugs to seniors with limited government involvement.

State programs. Last, the federal government could establish state grant programs targeted to provide drug coverage to low-income senior citizens. At the beginning of 2001, twenty-six states had some type of prescription drug program in place to assist senior citizens and disabled individuals. Many of these programs require senior citizens to pay part of the cost of the drugs, but the levels of these copayments vary widely from state to state.

Each of these proposed reforms has merit, yet they also generate concerns. It is possible that a prescription drug benefit could be added to the Medicare program, but this would likely occur only if other benefits are reduced or taxes and monthly premiums are increased. Accurately predicting future prescription drug costs will be difficult, and thus could lead to shortfalls in revenues for the program. This would result in more difficulty for the financially troubled Medicare program. If the prescription drug program through Medicare is voluntary and monthly premiums are sizable, there could be a great deal of adverse selection. Only Medicare beneficiaries requiring numerous prescriptions each year would join the program. This would make predicting the costs of the program much more complex. A federal subsidy to help senior citizens purchase drug coverage through private markets lowers government involvement, but will it be possible for the private market to provide prescription drug coverage that is affordable? Last, state government leaders may be reluctant to participate in a federal grant program if they are concerned that the federal government will eventually shift the cost of the program to the states as costs rise.