Policy Debate: Should Medicare Provide Prescription Drug Coverage?
Issues and Background
Pharmaceutical therapies have become increasingly important in
the treatment of virtually every major illness. In many cases,
new drugs substitute for or allow patients to avoid more
expensive therapies such as hospitalization and surgery. In other
cases, drugs facilitate treatment or provide treatment where
none existed before, thus improving the quality and length of life
for the patient. While nearly all private health insurance plans
include some type of outpatient prescription drug coverage,
Medicare does not. Put simply, prescription drugs in Medicare
are smart medicine.
~Esther "Tess" Canja, May 27, 1999
If Medicare offered prescription drug coverage with taxpayer subsidies,
then the incentive seniors would have to purchase Medigap or Medicare HMO
coverage would diminish. Moreover, employers could become less inclined to offer
private health plans to their elderly employees. (If drugs already were covered by
someone else, why would employers spend the extra money?) This new subsidized
benefit would crowd out the more efficient private market from the drug market. In
addition, the price controls embodied in this approach would stifle incentives for
innovative pharmaceutical companies to develop new medicines--an enterprise that
is so crucial in combating today's debilitating diseases and improving the quality of
life for senior citizens.
~James Frogue, Heritage Foundation Backgrounder, June 16, 1999.
Recent advances in medical care have resulted in the development of many new pharmaceutical
therapies for a variety of health conditions. Many of these newly introduced drug therapies, though,
are relatively expensive due to the high costs associated with developing and testing these drugs.
Elderly individuals are more likely to experience chronic medical conditions that may be treated by
these drugs. They are also likely to rely upon Medicare to cover their medical expenses. Until recently,
Medicare did not provide prescription drug coverage. Instead, retired individuals either
had no prescription drug coverage, or purchase relatively expensive "Medigap" insurance coverage
to cover the medical expenses not covered by Medicare.
In response to concerns about the rising cost of prescription drug coverage for the nation's elderly,
Medicare prescription drug coverage became available in January 2006. Proponents
of this coverage argue that this provides more equitable access to medical care. Opponents argue
that this expanded coverage results in a substantial increase in the cost of the Medicare program
at a time when the ratio of workers to Medicare recipients will be at a record low level.
(The online debate on the future of social security addresses
the impact of this demographic trend on the social security system.) The wide variety of
prescription drug coverage offered to Medicare recipients has caused many critics to complain
about the complexity of the plan.
One of the concerns with any type of insurance program is the existence of a moral hazard
problem. Individuals with prescription drug insurance coverage will use more medication than
individuals without prescription drug coverage. In some cases, they may rely on relatively
expensive prescription drugs to control health problems that could be as effectively controlled
by changes in diet or exercise. Individuals who face the full cost of their medical coverage have
more incentive to consider other effective alternatives to expensive prescription medications.
Physicians often prescribe more expensive antibiotics and other medications for those who have
prescription drug coverage even if these treatments are only slightly more effective than lower
cost medications since they know that the additional cost is not borne by the individual patient.
Proponents of Medicare prescription drug coverage argue that prescription drug therapy often offers
relatively low-cost alternatives to expensive surgical treatments. If Medicare covers the cost of
surgery, but does not cover the cost of prescription drug coverage, individuals may elect more
expensive treatment options since they result in lower out-of-pocket expenses.
Another concern associated with Medicare prescription drug coverage is that the high rate of cost
inflation in this industry may result in pressure for price controls for prescription drugs. There
is concern that such controls, if enacted, would result in shortages and a reduction
in the level of research and development in the pharmaceutical industry.
Medicare coverage of prescription drugs is not an entirely new phenomenon. Congress passed
the Medicare Catastrophic Coverage Act in 1988. This Act included coverage for prescription drugs (as well
as other expansions in Medicare benefits). In 1989, this Act was repealed, primarily in response
to concerns over its costs.
Critics of Medicare prescription drug coverage argue that many senior citizens already
had carried some form of private insurance plan that provides prescription drug coverage. Supporters
of Medicare prescription drug coverage counter this by arguing that a reliance on
voluntary participation in Medigap insurance programs results in more
costly prescription drug coverage as a result of the adverse selection problem. This problem
occurs because the retired individuals most likely to
purchase prescription drug coverage are those who, on average, have the highest levels of
utilization of prescription drugs. This results in private insurance plans that are more
expensive than the costs that society would face in providing this insurance coverage to all
senior citizens.
Primary Resources and Data
- Medicare
http://www.medicare.gov/
The official U.S. Government Medicare web site provides detailed information on the Medicare program.
Among other information, this website provides information on the new prescription
drug plan.
- About.com, "Senior Health"
http://seniorhealth.about.com/health/seniorhealth/cs/medicare/
About.com provides a collection of information and links to resources related to Medicare and
medical needs of the elderly.
- American Association of Retired Persons (AARP)
http://www.aarp.org/
The AARP web site contains information concerning a variety of issues affecting the elderly.
The AARP has been actively and effectively lobbying in support of expanded Medicare prescription
drug coverage.
- FamiliesUSA, "MedicareCentral"
http://www.familiesusa.org/site/PageServer?pagename=Medicare_Central_Index
The FamiliesUSA website contains an extensive collection of articles, studies, and press releases dealing
with Medicare issues. This organization supports the introduction of a medicare prescription drug
program.
- FamiliesUSA, "Cost Overdose: Growth in Drug Spending for The Elderly -- 1992-2010"
http://www.familiesusa.org/assets/pdfs/drugod852b.pdf
This July 2000 study contains a detailed analysis of recent and projected future changes in
the cost of prescription drugs for the elderly. It is noted that the cost of prescription drugs has
risen faster than all other components of health care costs. This study also observes that senior
citizens, who comprise only 13% of the population, account for 42% of the dollar value of
prescription drug sales. The Adobe Acrobat viewer plugin is required to view this document.
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- John R. Graham and Beverly A. Robson, "Prescription Drug Prices in Canada and the United States -- Part 1: A Comparative Survey"
http://www.fraserinstitute.ca/admin/books/files/PrDrgPr1(42).pdf,
John R. Graham, "Prescription Drug Prices in Canada and the United States -- Part 2: Why the Difference?
http://www.fraserinstitute.ca/admin/books/files/PrDrgPr2(43).pdf, and
John R. Graham and Tanya Tabler, "Prescription Drug Prices in Canada and the United States -- Part 3: Retail Price Distribution
http://www.fraserinstitute.ca/admin/books/files/RetaiPrices3.pdf
These studies, by John R. Graham, Beverly A. Robson, and Tanya Tabler examine the differences between Canadian and U.S.
prescription drug prices. They also analyze the reasons behind these differences. It is found that
differences in income and in tort law account for substantial portions of the difference.
U.S. companies charge higher prices, in part, because of higher costs associated with lawsuits.
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- Henry J. Kaiser Family Foundation, "Medicare: The Basics - Key Data"
http://www.kaiseredu.org/topics_reflib.asp?id=132&rID=1&parentid=66
This website, provided by the Henry J. Kaiser Family Foundation contains links to many of studies
sources of statistics and data related to the Medicare system.
- Bruce Stuart, Dennis Shea, and Becky Briesacher, "Prescription Drug Costs for Medicare Beneficiaries:
Coverage and Health Status Matter"
http://www.cmwf.org/usr_doc/Stuart_prescriptiondrug.pdf
This January 2000 online article by Bruce Stuart, Dennis Shea, and Becky Briesacher examines statistics on prescription drug
coverage among Medicare beneficiaries. They note that in 1996, data suggests that:
- 52.7% of noninstitutionalized Medicare beneficiaries had prescription drug coverage throughout the year,
- 28.4% had no prescription drug coverage, and
- nearly 19% had prescription coverage for only part of the year.
They find, not surprisingly, that those with prescription drug coverage used more medications
that those without such coverage. A somewhat more surprising result is that the total cost to the patient of
prescriptions is higher among those with prescription drug coverage.
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- Congressional Budget Office, "Updated Estimates of Spending for the Medicare Prescription Drug Program"
http://www.cbo.gov/showdoc.cfm?index=6139&sequence=0
This March 4, 2005 CBO letter contains estimates of the projected cost of the Medicare prescription drug
program. It is estimated that the net Medicare spending for this plan will be $593 billion for the
years 2006-2015.
Different Perspectives in the Debate
- John E. Calfee, "Pharmaceutical Price Controls Are a Prescription for Disaster"
http://www.aei.org/publications/pubID.10635,filter./pub_detail.asp
In this July 22, 1999 article, John E. Calfee examines the effect of prescription drug costs
on the elderly. He notes that the increase in
the cost of prescription drugs is primarily the result of the increased use of existing drugs and
the introduction of many new (and more expensive) drugs. Calfee voices concern that a medicare
drug benefit plan would result in the introduction of price controls that would stifle innovation.
- James Frogue, "How to Provide Prescription Drug Coverage Under Medicare"
http://www.heritage.org/Research/HealthCare/BG1293.cfm
In this June 16, 1999 Heritage Foundation Backgrounder, James Frogue examines alternative methods of
providing prescription drug coverage to Medicare recipients. He argues that providing
Medicare coverage of prescription drugs would be too expensive and suggests a more limited system
of providing prescription drug coverage to those elderly individuals who need assistance.
Frogue cites Bureau of Labor Statistics data that indicate that a typical elderly individual
spent only $637 annually on both prescription and non-prescription drugs.
- James Frogue, "Why Price Controls on Prescription Drugs Would Harm Seniors"
http://www.heritage.org/Research/HealthCare/EM595.cfm
James Frogue argues against price controls on prescription drugs in this May 4, 1999
Heritage Foundation study. He argues that Congress should develop a sound Medicare prescription
drug program that does not include price controls.
- Lawrence W. Reed, "Counting the Cost of Prescription Drug Price Controls"
http://www.mackinac.org/2901
Lawrence W. Reed, in this May 31, 2000 online article, argues that the U.S. is a leader in the
development of innovative pharmaceutical products because it does not face widespread price controls
on prescription drugs. He argues that Medicare prescription drug coverage would ultimately result in
price controls on the cost of prescription drugs. Reed argues that such price controls would reduce
the incentive for firms to engage in research and development of new pharmaceutical products. He
cites a study that indicates that "every dollar spent on medical drugs translates into a decline
of four dollars in spending on care in hospitals."
- Anna Cook, "Why Different Purchasers Pay Different Prices for Prescription Drugs"
http://aspe.hhs.gov/health/reports/Drug-papers/CookPricingMemo-final.htm
In this August 2000 online study, Anna Cook notes that there is substantial price dispersion across
customers in the market for prescription drugs. She notes that large purchasers receive substantial
discounts. Cook notes that this results in the largest costs being borne by uninsured individuals.
- Esther "Tess" Canja, "Statement Before the Senate Finance Committee on the Future of Medicine"
http://www.senate.gov/~finance/5-27canj.htm
Esther "Tess" Canja, AARP President-Elect, discusses some of the problems facing Medicare in this
May 27, 1999 testimony. One of the major problems is the retirement of the baby-boom generation at a time
when lifespans have become longer as a result of improved medical coverage. Canja argues that prescription drugs
have become an increasingly important component of modern health care. She argues that prescription
drug coverage should be a part of the basic Medicare package. Canja argues that the adverse selection
problem raises the cost and significantly limits the benefits associated with private Medigap programs
that provide subscription drug coverage.
- Patricia Barry, "Chasing Drugs: Many Readers Take Drastic Steps to Get Prescription Medicine"
http://www.aarp.org/bulletin/prescription/Articles/a2003-09-29-chasing_drugs.html
In this October 2003 online article, Patricia Barry discusses the responses submitted by AARP members to an AARP Bulletin "Sound Off"
questionnaire concerning prescription drug use and expenditures. She notes that 40% of the respondents reported that they
had either reduced or skipped doses of presecribed medications due to high costs.
- Patricia Barry, "More Americans Go North for Drugs"
http://www.aarp.org/bulletin/yourhealth/Articles/a2003-06-25-moreamericans.html
Patricia Barry examines the growing volume of prescription drug purchases from Canada by retirees in this online April 2003
AARP Bulletin article. She states that approximately 1 million U.S. citizens have been purchasing drugs from Canada.
Barry suggests that the internet has played a major role in the volume of cross-border drug purchases. While such purchases
are illegal, there has been little attempts to enforce restrictions on the importation of drugs from Canada.
- Patricia Barry, "Why Drugs Cost Less Up North"
http://www.aarp.org/bulletin/prescription/Articles/a2003-08-12-whydrugs.html
In this June 2003 online article, Patricia Barry examines the reasons for lower prescription drug prices in Canada. She observes that
most of the prescription drugs that are imported from Canada to the U.S. were originally produced in the U.S. Barry suggests that
a major reason for the difference in prices is the effect of government policies. She describes the regulatory process that
helps keep drug prices lower in Canada. Under the Canadian system, firms are faced with guidelines designed to prevent
excessively high prices. Barry argues that this environment encourages firms to charge low prices, with government
intervention on pricing decisions being used only in very rare cases. She suggests that the uniform pricing system used for
drugs in Canada is superior to the system of price discrimination in the U.S. in which non-insured individuals pay higher prices
than those who have prescription drug insurance coverage.
- William C. Weller, "Estimated Impact on Medigap Premiums of Potential Changes Suggested as Part of Medicare Reform"
http://hiwire.hiaa.org/research/content.cfm?ContentID=740
This May 1999 study, conducted by William C. Weller of the Health Insurance Association of America, investigates the effects of
several proposals to reform Medicare. He notes that the cost of prescription drug coverage is rising faster than other medical care
costs. Weller voices concern that several proposals for reforming Medicare would result in either
substantially higher Medigap insurance costs or the elimination of the Medigap plans offered by some
insurers.
- Thomas R. Saving, "Answering the Myths about Social Security"
http://www.ncpa.org/pub/ba/ba509/
Thomas R. Saving provides information about the financial status of the Social Security and Medicare
programs in this March 22, 2005 online policy brief. He argues that the funding crisis for these programs
should be dealt with immediately to prevent the cost of dealing with the shortfalls from being more
severe in the future. He recommends a shift to private retirement accounts.
- Sue A. Blevins, "How a Medicare Prescription Drug Program Will Affect Taxpayers and Seniors: A Historical Perspective"
http://www.pacificresearch.org/pub/act/2000/action59.html
Sue A. Blevins argues that the actual cost of Medicare programs have historically exceeded their projected costs. She
argues that the Medicare program has actually raised Medicare costs for the elderly. She suggests that
a safety net for low-income elderly individuals is preferable to a mandated Medicare prescription drug plan.
- America's Senior Care Pharmacists (ASCP), "ASCP's Prescription for Quality Care: Preventing Medication-Related Programs Among Older Americans"
http://archive.ascp.com/public/ga/quality//
In this online article, ASCP argues that many senior citizens have conditions that remain untreated because of the high cost
of prescription drug care coverage. They also note that inappropriate drug therapy and interaction
effects are common problems in the elderly population. ASCP argues that a well designed Medicare
prescription drug plan would provide substantial benefits.
- Robert Kuttner, "The Right is Wrong on Prescription Drugs"
http://www.prospect.org/columns/kuttner/bk990620.html
Robert Kuttner argues that a Medicare prescription drug coverage program is desirable in this
online article. He notes that the proportion of elderly individuals with prescription drug
coverage is declining while the cost of prescription drugs is rising rapidly. Kuttner indicates
that approximately half of all prescriptions are unfilled because elderly individuals cannot
afford the medications that are prescribed for them.
- Alan B. Krueger, "Economic Scene: The model doesn't quite fit Medicare drug insurance"
http://www.irs.princeton.edu/krueger/prescription.htm
In this October 12, 2000 New York Times article, Alan B. Krueger critically examined the Medicare prescription drug plans proposed by the
Bush and Gore campaigns during the 2000 Presidential elections. He argued that existing Medigap
plans are effectively equivalent to prepaid prescription drug plans (due to their caps on
expenditures). Krueger argues that the Bush plan of subsidized insurance was not sufficiently
generous to encourage many people to join. While the Gore plan would reduce adverse selection
problems by encouraging more people to join, Krueger argues that it would result in high costs.
- Merrill Matthews, "Drug Company Profits Aren't a Problem, They're the Solution"
http://www.heartland.org/Article.cfm?artId=640
In this July 7, 2001 online article, Merrill Matthews argues that concern over drug
company profits is misdirected. He notes that large profits in the industry provide incentives
for research and development expenditures that can result in substantial health benefits.
- Doug Bandow, "Manufacturing a Pharmaceutical Crisis"
http://www.cato.org/dailys/10-02-00.html
Doug Bandow argues, in this October 2, 2000 article, that there is no pharmaceutical crisis. He
suggests that price controls in other countries have resulted in a substantial reduction in innovation and
in the quality of medical care.
- Harvard Medical School Office of Public Affairs, "Who Will Manage the Proposed Medicare Prescription Drug Benefit?"
http://www.hms.harvard.edu/news/releases/0300huskamp.html
This May 6, 2000 press release summarizes a study by Harvard researchers who argue that a
Medicare drug plan should be overseen by multiple pharmacy benefit managers. They suggest that
such a plan should encourage competition to keep costs relatively low.
- Jadadeesh Gokhale, "An Evaluation of Medicare's Prescription Drug Policy"
http://www.cato.org/testimony/ct-jg092005.html
Jadadeesh Gokhale raises several objections to the Medicare prescription drug program in this September 22, 2005
Congressional testimony. He argues that this program:
- is unnecessary since most retirees already had prescription drug coverage,
- replaces a functioning private market system with a system that he believes will
benefit low-income retirees at the expense of higher income retirees,
- will result in a higher rate of inflation for prescription drugs, leading to higher
prices and reduced insurance coverage for those who are younger and working,
- dramatically increases the rising shortfall in the Medicare program, and
- reduce the incentive for younger individuals to save.
- Joseph Antos and Jagadeesh Gokhale, "Medicare Prescription Drugs: Medical Necessity Meets Fiscal Insanity"
http://www.cato.org/pubs/briefs/bp91.pdf
Joseph Antos and Jagadeesh Gokhale argue against the Medicare prescription drug program in this February 9, 2005
Cato Institute Briefing Paper. They note that the projected funding shortfall for Medicare is
six times as large as the more widely known projected shortfall for Social Security. They suggest that
workers born before 1965 will benefit from this plan, but younger workers (and future generations) will
suffer net losses as a result of this plan. Antos and Gokhale suggest replacing this plan with a set
of market-based reforms.
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- George Reisman, "Kill The Prescription Drug Benefit"
http://www.mises.org/fullstory.aspx?Id=1752
George Reisman argues against the Medicare prescription drug program, in this March 1, 2005 online article.
He notes that the projected cost over the first 10 years is now $300 billion more than its original estimate.
Reisman suggests that the tax cost of this program is too high and that it will result in pressure
to regulate prescription drug prices. He argues that such interference with the market mechanism will
have adverse long-term effects on the pharmaceutical industry.
- AARP, "Medicare Prescription Drug Coverage"
http://www.aarp.org/research/medicare/drugs/
The AARP Medicare Prescription Drug Coverage website provides links to studies examining the effectiveness
of the prescription drug benefit program. It also provides links to an extensive collection of speeches, studies and reports that
support the case for prescription druge coverage for Medicare recipients.
- Robert E. Moffitt and Brian M. Riedl, "Medicare's Deepening Financial Crisis: The High Price of Fiscal Irresponsibility"
http://www.heritage.org/Research/HealthCare/bg1740.cfm
Robert E. Moffitt and Brian M. Riedl raise concerns over the rising cost of the Medicare program in this
March 25, 2004 Heritage Foundation article. They summarize a study that reports that the Medicare
program will account for 24% of all federal income tax revenue in 2019 and over half of all federal income
tax revenue by 2042. They argue that the prescription drug coverage plan will crowd out the private
insurance prescription drug coverage plans that most retirees now have.
- Dean Baker, "The Savings from an Efficient Medicare Prescription Drug Plan"
http://www.cepr.net/publications/efficient_medicare_2006_01.pdf
In this January 2006 Center for Economic and Policy Research online article, Dean Baker argues that the current Medicare Prescription Drug Plan should be replaced by one in which
the government negotiates with pharmaceutical companies to lower the cost of medications. He notes that the
prices of prescription drugs are lower in foreign countries in which the government negotiates lower prices.
The U.S. Veteran's Administration also buys prescription drugs at negotiated prices that are substantially lower
than those paid under the Medicare prescription drug plan.
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