NCPA - National Center for Policy Analysis

Prescription Drug Benefits And Medicare Reform

October 11, 2002

Health policy experts say that the design of a prescription drug benefit for seniors requires careful consideration, and that without reform of the Medicare program itself, the cost of drug benefits would compound the health care system's financial problems.

They say that the right kind of Medicare reform could greatly reduce seniors' exposure to catastrophic prescription drug costs, improve overall health care quality and control taxpayer costs. In a new NCPA study, they propose principles to guide that reform.

Among the points they make:

  • Medicare needs fundamental reform because it pays too many small bills the elderly could easily afford while exposing them to thousands of dollars in potential out-of-pocket expenses, including drug costs.
  • The failure to cover prescription drugs creates incentives to substitute more costly therapies.
  • A unified health plan that administers both drug and other medical benefits would be more efficient.
  • Seniors are better at controlling their own drug spending than managed care restrictions on the types of prescriptions that are covered or Medicaid-type rationing; Medical Savings Accounts are a way seniors could exercise such control.
  • Seniors should have access to the same health plans as non-seniors -- competing plans that offer a choice of coverage.

Adding a drug benefit to Medicare as currently structured would add to the financial burden on future generations. Under current law, 48 percent of federal income tax revenues will be needed to meet the annual deficits in Social Security and Medicare by the year 2050 -- in addition to the 15.3 percent payroll tax. Under the House Republican prescription drug proposal, a total of 55 percent of income tax revenues will be needed to pay seniors' benefits by the time today's teenagers retire, while under the House Democrats' proposal, more than two-thirds of income tax revenues will be needed. [See Figure II.]

Source: John C. Goodman, Robert Goldberg and Greg Scandlen, "Medicare Reform and Prescription Drugs: Ten Principles," NCPA Policy Report No. 256, October 2002, National Center for Policy Analysis.

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