Adding a flexible drug benefit to Medicare could bring down costs.When Medicare was begun in 1965, U.S. annual spending for prescription drugs was less than $4 billion. No one even thought to include a drug benefit as part of Medicare. This year, spending on pharmaceuticals will exceed $400 billion. Drug therapy has become one of most important ways to manage chronic illness, and many health plans have turned to pharmacy benefit managers to administer their benefits.
Congress, now in the throes of considering changes in Medicare coverage, should add a prescription drug benefit to Medicare and assist state Medicaid programs overwhelmed by rising pharmacy costs. In doing so it should look to the experiences of the benefit managers.
Pharmacy managers have transformed the mix of drugs prescribed to treat illness under private insurance plans and the way they are dispensed. Early on, they took a hard line and refused to pay for certain drugs. Not surprisingly, this led to considerable dissatisfaction among patients and doctors. They also tried increasing the co-payments, the amount a patient pays when filling a prescription.
More recently, pharmacy managers have switched to incentive-based plans wherein most drugs are covered but enrollees pay "tiered" co-payments ranging from low ones for generic drugs to pricier ones for brand-name medications. The active ingredient in the heartburn drug Zantac, for example, can be purchased as the generic ranitidine for about half the price.
Our three-year study of 75 large employers shows that changing drug benefits can result in a dramatic drop in total drug spending by insurers and employees. Increasing a single drug co-payment from $5 to $10 cut overall drug spending by 22% among workers. Adding an additional tier to an existing plan (for example, charging $20 for brand drugs rather than $10 for all drugs) reduced overall spending by 19%.
Some of these plan savings will eventually show up in lower health insurance premiums, though we don't know how much of the savings will trickle down to consumers. But when it comes to controlling rising drug costs over long periods, these changes are marginal at best. Unless plans continue to raise co-payments and add tiers, costs will keep rising because of more use of existing medications and the introduction of new, expensive drugs.
Ultimately, controlling drug spending will require new approaches to the drug approval process and in how benefits are designed. For example, the Food and Drug Administration approves drugs if they are shown to help patients more than existing medical practice does. Congress should require that economic impact -- whether the drug is worth the extra price and whether it will promote competition within a class of drugs -- also is considered. This is an opportune moment for such an experiment given that new FDA Commissioner Mark McClellan is an economist as well as a physician.
Of course, Congress also will need to consider the health consequences of any legislation involving drug benefits. Most middle-income people with chronic illnesses such as diabetes and asthma continue to take their medications when co-payments rise. But other populations that are more sensitive to co-payments, such as the elderly poor, would require more generous benefits.
Congress should clear the way for state Medicaid programs to experiment. For example, why not allow a Medicaid plan to offer medicines for chronic diseases free but charge high co-payments on less essential medications?
Also, a catastrophic drug plan -- one that would not cover routine prescriptions but would kick in once expenses exceeded a certain amount, such as in the case of a life-threatening accident or illness -- would be valuable to those without existing prescription drug coverage. Why not start with such a plan and see how much it costs?
Thirty-seven years ago, Congress chose not to include a drug benefit in Medicare. Medicine has come a long way since then. It's time for Congress to move with the times and provide more flexibility.
Dana P. Goldman is director of health economics and Geoffrey F. Joyce is an economist at RAND in Santa Monica.
This commentary originally appeared in Los Angeles Times on December 11, 2002. Commentary gives RAND researchers a platform to convey insights based on their professional expertise and often on their peer-reviewed research and analysis.