NCPA - National Center for Policy Analysis

Medicare Drug Plan Could Cost Much More

June 17, 2003

Costs for the prescription drug benefit plan approved by the Senate Finance Committee could balloon far beyond the $400 billion over 10 years estimated by the Congressional Budget Office, according to health economists. That is because of the mix of people likely to enroll and their demand for drugs.

Under the Senate's plan:

  • Elderly people who signed up would pay a premium estimated at $420 a year.
  • They would pay for their first $275 in drug purchases; then Medicare would cover half of their drug costs until the total hit $4,500.
  • Patients would pay all additional costs until their out-of-pocket outlay reached $3,700, not counting the premiums, and after that the insurance would cover 90 percent of drug costs.

Only people with more than about $1,100 in drug costs in a year would be better off, in retrospect, for having enrolled in the plan. According to data compiled by Frank R. Lichtenberg, a Columbia University health economist, from the government's Medical Expenditure Panel Survey:

  • About two-thirds of the elderly used less than $1,100 worth of drugs in 1999.
  • The 10 percent of the elderly who used the most drugs averaged $3,720 in total costs; at that level, the out-of-pocket cost under the Senate plan would be $2,418.

Moreover, because the plan would offer no direct benefit to most seniors in a given year, healthy people might not enroll, increasing the average cost per enrollee. Premiums would rise, and as they did so, still fewer healthy people would join.

Furthermore, for people who buy $275 to $4,500 of drugs each year, the plan would effectively reduce prices by half -- increasing their demand for drugs.

Source: Daniel Altman, "Some Doubts About Logic of Senate Plan for Drug Aid," New York Times, June 14, 2003.


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