Medicare Reform and Prescription Drugs: Ten Principles
Principle No. 8: By Using Medical Savings Accounts, Seniors Could Control Drug Costs as Well as or Better than under Managed Care.
Drug spending is a growing part of the cost of medial care, totaling more than $120 billion a year.33 In an effort to control these costs, third-party payers have experimented with a number of techniques.
"Patient control is preferable to restrictive drug formularies used by the Veterans Administration and to Medicaid-type rationing."
Drug Formularies. In general, a formulary is a list of generic and brand-name medications a health plan covers. For years, state Medicaid programs have used restrictive formularies to control drug costs. The Federal Employees Health Benefits Plan (FEHBP) and the Veterans Affairs health care system use them as well. [See the two sidebars.] Among the cost control mechanisms are:
- Restrictive formularies that narrow selection to one or two drugs for each type of therapy.
- Requirement for prior authorization before using drugs that are not on a formulary.
- Refusal to pay for branded drugs or establishment of a price ceiling on all but generic drugs in any therapeutic class.
Pharmacy Benefit Managers. Managed health care plans in general have attempted to hold down their drug cost increases by using pharmacy benefit managers (PBMs) to negotiate discounts with pharmacy chains and manufacturers, limit coverage to lower-price generic drugs and encourage the use of prescription drug therapies only if the benefits to the patient's health appear to justify the added cost. What difference do these techniques make?
Dr. Susan Horn conducted a study of pharmaceutical restrictions in six managed care plans.34 She found that restricting seniors' access to pharmaceu-ticals was associated with more emergency room admissions, hospital stays and doctor visits for such illnesses as depression, heart disease, ulcers and diabetes. The elderly were twice as likely to be harmed by formulary limits as were people under age 65. That is, faced with the same restrictions as someone under age 65, an elderly person in the same HMO was twice as likely to be hospitalized or see a doctor as a result of efforts to control drug costs.
"Patients with Medical Savings Accounts reduced spending on Ritalin by 20 percent compared to the costs under managed care."
Medical Savings Accounts and Prescription Drugs: Evidence from South Africa.35 The experience of Discovery Health in South Africa provides convincing evidence that Medical Savings Accounts - when designed and used in the right way - can control drug costs as well as managed care, but without the cost of managed care. In 2000, of the 202,595 Discovery members who were active for the whole year, 76,072 (37.5 percent) reached their deductible for outpatient spending. Before reaching the deductible, patients paid for drugs from their MSAs; after the deductible was reached, drug costs were paid by the insurer. Because patients were essentially spending their own money below the deductible, they had an incentive to spend wisely. But once they reached the deductible, they were essentially spending insurance company money and had no economic incentive to spend it wisely.
This plan design allowed investigators to ascertain the effects of MSAs on the cost of medication. One study found that:
- The average cost of a prescription rose 7.1 percent after members reached the deductible.
- The average number of prescriptions filled per month increased by 19.1 percent after members crossed the deductible threshold.
- Overall per-member-per-month costs rose 27.6 percent after members exceeded their deductibles!
Clearly, economic incentives matter in the market for prescription drugs.
MSAs versus Managed Care: Evidence from South Africa.36 Mental health drugs are one area in which patients are assumed to exercise considerable discretion. South Africa's experience with Medical Savings Accounts tends to bear out that assumption. One study found that:
- In one health plan, evidence indicated that parents exercised lot of discretion over the use of Ritalin (for children with attention deficit disorder); when spending from an MSA these parents reduced their spending on Ritalin by almost 20 percent compared to spending under a managed care arrangement, without any adverse health affects.[See Figure III.]
- Patients using their MSAs also were much more likely to purchase a generic equivalent that cost only 38 percent as much as Prozac (for depression); by contrast, use of the brand-name drug jumped 45 percent when patients were spending insurance company money.[See Figure IV.]
"Spending on drugs rose more than 27 percent when patients were spending insurance company money instead of their own MSA
money."
In both these examples, patients with MSAs controlled costs as well as or better than managed care - without the costs associated with managed care.
Some MSA critics contend that the introduction of deductibles might induce members to forgo necessary care in order to save money. To test this proposition, the same study examined the use of two drugs (Fosamax and Trisequens) used primarily for the prevention and treatment of osteoporosis in postmenopausal women. Patients used some of their MSA funds to buy these drugs in 1999, but switched to managed care the following year so the insurer bore the entire cost of the drugs. Here, the results are quite different from those of Ritalin. The amounts spent using MSAs are almost indistinguishable from those under the chronic benefit. Clearly, members were not forgoing necessary care.