Comparing Prescription Drug Proposals: Bush v. Gore

Studies | Health

No. 239
Thursday, November 30, 2000
by Robert Goldberg

Executive Summary

Compared to the health care coverage available to people below age 65, Medicare for seniors is very inadequate, exposing them to thousands of dollars in out-of-pocket costs. To avoid these financial risks, most seniors have private, Medigap coverage - to plug the holes in Medicare. Yet even with two health insurance plans, most seniors typically do not have the same prescription drug coverage as most non-seniors.

The two major presidential candidates, Vice President Al Gore and Texas Governor George W. Bush, are offering competing proposals to deal with this problem:

  • Vice President Gore proposes the addition of a third insurance program for seniors - one with a separate premium covering prescription drugs.
  • Governor Bush proposes to allow the elderly to enroll in the same kind of comprehensive health plans available to the non-elderly.

Under the Gore proposal, seniors would have three plans and three premiums. Under the Bush proposal, seniors would enroll in one plan with one premium. What difference do these approaches make?

Achieving Efficient Health Care Delivery. Failure to cover drugs in the current system creates perverse incentives that waste resources and endanger patient health. Whereas drug therapies are rapidly substituting for more expensive and less effective hospital and doctor therapies in the rest of the health care system, many seniors and their doctors have an incentive to avoid drug therapies simply because patients must pay out-of-pocket. Both proposals move to remedy this problem, but the Bush proposal goes further. Decision makers would be able to choose from among all medical therapies on a level playing field because all benefits would be covered by a single health plan.

Lowering the Cost of Health Insurance. Health economists have documented that when the elderly have two separate health plans (Medicare and Medigap) there is a great deal of waste. In fact a study by Milliman & Robertson for the NCPA found that if average Medicare spending is combined with the average Medigap premium, the combined sum would be sufficient to pay the cost of comprehensive health insurance (the same plans non-seniors are enrolled in), including coverage for prescription drugs. Thus the Bush proposal could theoretically solve the gaps-in-coverage problem without any extra spending - either by government or by the elderly, in most cases. By contrast, adding a third plan with a third set of administrators (as Gore proposes) adds to the current inefficiencies and would require more spending - both by the government and the elderly.

Creating Freedom of Choice. The trend in the workplace is to give employees more choices. The reason: People are different and one-size-fits-all doesn't work. The Bush approach adopts a similar philosophy, giving the elderly the full range of health insurance choices now available to the non-elderly. Gore, on the other hand, has rejected this idea. Under his approach, there would be one drug plan and it would be administered by the federal government (Medicare).

Protecting Against Catastrophic Expenses. Under the Bush approach, we would expect to see the same kinds of plan designs currently popular with employers and their employees. In all cases, there would be protection against large-dollar expenses. Out-of-pocket costs to the patient would be limited to small-dollar expenses. Under Gore's proposal, however, government would pay half the cost of drugs from the first dollar for a middle-income patient. After $2,000 of costs, the patient would pay the next $3,000 and the government would pay all costs above $5,000. Gore's advisors frankly admit that this strange design is a result of political pressures inherent in a government-run health plan.

Coping with Adverse Selection. Both proposals would allow seniors to choose to opt into the new arrangement or continue in their current status. And any time people exercise such choices, there is the danger that only the sick will join (adverse selection) making average program costs much higher than originally anticipated. With Bush this is less of a problem because seniors would choose among comprehensive health plans. With Gore, it is a big problem because when drug coverage is sold as a separate benefit, the risk is that only those with high drug costs will be willing to pay the additional premium.

Controlling Drug Costs. If the experience of the past is any guide, both these proposals will cost more than their proponents originally projected. What are the likely methods of dealing with these rising costs?

  • Gore would explicitly rely on pharmacy benefit managers (PBMs), which function like an HMO for drugs. But PBMs are also likely under the competing health plan options in the Bush proposal.
  • Even without PBMs, both plans would probably also rely on drug formularies - where only certain drugs are covered under the plan and other drugs are either not available or would require greater out-of-pocket payments from patients.
  • A third technique is to use the bargaining power of an insurer representing a large share of the market; and these techniques are often combined with restrictive drug formularies.
  • A fourth technique, common elsewhere around the world, is direct government control of drug prices.

Dangerous Side Effects from Cost Controls. The danger in all of these techniques is that seniors will not have access to the newest and latest drugs. Even without reform, increased availability of new drugs is having a remarkable impact on the elderly. They partly explain why:

  • The proportion of Americans age 65 or older with a chronic disability declined from 24 percent in 1982 to 21 percent in 1994.
  • Occupancy in nursing homes declined by 14 percent among persons ages 65 to 74, 21 percent among persons ages 75 to 84 and 13 percent among those ages 85 and older.

Aggressive attempts to control drug costs could nip this progress in the bud. According to one study of pharmaceutical restrictions in managed care plans:

  • Reduced access to drugs led to more emergency room admissions, hospital stays and doctor visits for such illnesses as depression, heart disease, ulcers and diabetes.
  • Further, the elderly were twice as likely to be harmed by formulary limits as people under the age of 65.

Conclusion. No matter which proposal is adopted, there is a danger that political pressures will induce politicians to attempt to curtail drug costs in ways that are harmful to senior citizens. But because the proposal relies more on competition in the private sector and integrated health care delivery, the Bush plan is much less susceptible to such outcomes.

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