NCPA - National Center for Policy Analysis

Problems Of Snowe-Wyden Drug Insurance Subsidies

March 17, 2000

About 65 percent of Medicare beneficiaries have some kind of prescription drug coverage -- from a former employer, private supplemental (Medigap) insurance or Medicaid. But about 35 percent -- 12 million seniors -- have no coverage. To deal with this problem, Sens. Olympia Snowe (R-Maine) and Ron Wyden (D-Ore.) have proposed a new federal program, the Seniors Prescription Insurance Coverage Equity (SPICE) Act.

  • The Snowe-Wyden bill provides subsidies to Medicare beneficiaries who purchase "stand-alone" private prescription drug coverage.
  • Every SPICE drug plan would have to meet standards governing deductibles, copayments and premium levels.
  • Every senior's premium would be subsidized on a sliding scale, ranging from 100 percent for those with incomes below 150 percent of the federal poverty line down to 25 percent for those with incomes more than 175 percent of the federal poverty line.

The subsidies would be paid with revenues from new tobacco taxes and by using part of the anticipated budget surplus. However, health economists warn that the cost of the SPICE program could increase rapidly.

This could happen because employers would have a financial incentive to stop covering their retirees' prescriptions. Also, SPICE would encourage seniors with comprehensive coverage to buy cheaper plans and purchase subsidized stand-alone policies -- raising the cost of subsidies.

Furthermore, those most likely to buy coverage would be seniors who already have high drug costs. Such adverse selection would increase the costs of SPICE, leading to still higher premiums or to price controls and formulary restrictions.

Drug coverage in a stand-alone policy would also drive total health care costs up. For example, a $10,000 drug treatment may be more effective than a $100,000 heart bypass operation. But whereas a health insurer covering a patient's prescription drugs along with other care would benefit from the switch to the drug treatment, an insurer whose policy covered only drugs would see it as a $10,000 loss.

Source: Robert Goldberg (senior fellow, NCPA), "SPICE: Not the Right Prescription," Brief Analysis No. 316, March 16, 2000, National Center for Policy Analysis, 12655 N. Central Expwy., Suite 720, Dallas, Texas 75251, (972) 386-6272.

For text


Browse more articles on Health Issues