(April 2007) When the Medicare drug benefit took effect last year, its architects said it would help elderly Americans cope with the soaring costs of prescription medications. This program has been successful in providing prescription drug coverage to many seniors who previously had no such health benefit. But research indicates that lapses in drug coverage, such as the benefit gaps that are part of the new program, could have unwelcome health and financial side effects by making people less likely to follow prescribed drug treatments.
The drug benefit, called Medicare Part D, was enacted in 2003 in response to concerns that many elderly could not afford to buy prescription medications. Spending on prescription drugs by government programs, private insurance plans, and individuals totaled $188.5 million in 2004, and had nearly quadrupled since 1990. Prescription drugs cost a median $352 for people with medical expenses that year, but for those ages 65 and older, the median cost was $1,285.
Why Some People Said They Did Not Enroll
Despite extensive publicity, just over 7 percent of those eligible for prescription drug coverage had not enrolled six months after the program took effect, according to a study funded by the National Institute on Aging. Some of those 2.7 million people had no insurance coverage for drugs and could have benefited immediately if they had enrolled. Others had no current need for coverage because they did not use prescription medications, but could benefit in the future if they enrolled now.
People who were eligible but did not sign up described the enrollment process as complicated, according to survey results. They said they did not have enough information about which medications were covered or whether they would benefit from enrolling. Although early problems in getting the word out about the program have been overcome, a substantial number of potential beneficiaries still may have trouble sorting through their options.
A relatively high share of those who did not sign up had a high school education or less, which could have made it more difficult for them to wade through the confusing array of options. For some Medicare beneficiaries, more limited cognitive abilities may have been part of the problem, according to an analysis of the Health and Retirement Study by John McArdle of the University of Southern California. McArdle suggests that decisions about drug plan enrollment may be harder for people with lower levels of mental alertness, memory, and verbal and numerical abilities, factors known to be important in understanding and interpreting information.
Many Plans Have Benefit Gaps That Could Undermine Health
One important feature of the prescription drug plans that cover Medicare recipients enrolled in Part D is a benefit gap called the “donut hole” (see figure). Here is how it works in the standard 2007 Medicare drug plan: Enrollees are charged a $265 deductible and then 25 percent co-payments for their first $2,400 in total prescription drug costs. But they must pay 100 percent of the next $3,051 of drug costs. This is the so-called “donut hole” in coverage, which amounts to about $3,850 in out-of-pocket costs. Enrollees are responsible for only a 5 percent copay for additional prescription drug purchases during the year. Although only a minority of Part D enrollees were in the standard plan in 2006, most were in plans with equivalent costs and coverage. These plans typically had no deductible and charged tiered copayments instead of coinsurance.
Standard Medicare Drug Benefit, 2007
Source: Kaiser Family Foundation.
Most Medicare prescription drug plans in 2006 had a coverage gap. Only 12 percent of enrollees had any drug coverage once the benefit gap kicked in. Nearly half of those enrolled—10.9 million people—were liable for their next $2,850 in drug costs once they reached the threshold where the gap in coverage took effect.
This benefit gap could have the impact of undermining good health and leading to higher costs if people delay getting care, according to research. A study of Medicare plans offering prescription drug coverage prior to the implementation of Medicare Part D showed unexpected negative effects on health. These managed-care plans offered prescription drug coverage with an annual cap on benefits. However, some employees had unlimited benefits through employer-provided supplements to the plan. Researchers found that enrollees with benefit caps had lower use of prescription medication than those without benefit caps. They had higher rates of emergency-room visits, higher hospitalization rates for essential procedures, and higher death rates.
In addition, Medicare beneficiaries with diabetes, hypertension, and other chronic conditions were less likely to follow doctor’s orders and more likely to fare poorly if they were in prescription drug programs with benefit caps. People in plans with benefit caps had substantially lower drug costs, but that was offset by higher emergency-room and hospitalization expenses. One study estimates that more than $1 billion a year could be saved by lowering copayments for patients who would benefit the most from cholesterol-lowering drugs.
This is a potentially important finding because chronic diseases account for a rising amount and major share of U.S. health care spending. One reason for the increased spending is the rise in obesity that contributes to chronic disease, including cardiovascular disease. Another is that physicians now treat cardiovascular disease more aggressively than they did in the past.
Economic arguments for higher out-of-pocket expenses predict that they encourage people to make better and more cost-effective decisions about their health care. But that could backfire if costs are so high that people have little left over for other basic needs or are discouraged from seeking care. Research suggests that efforts to save money on health care spending by limiting benefits have the potential to produce exactly the opposite result if the treatment of chronic conditions deteriorates, and results in costly hospital and emergency visits.
D’Vera Cohn is senior editor at the Population Reference Bureau. Marlene Lee is a senior policy analyst at the Population Reference Bureau. Funding for this article was provided by the National Institute on Aging.
Juliet Cubanski and Patricia Newmann, “Status Report on Medicare Part D Enrollment in 2006: Analysis of Plan-Specific Market Share and Coverage,” Health Affairs 26, no. 1 (2007): w1-12.
Dana Goldman et al., “Pharmacy Benefits and the Use of Drugs by the Chronically Ill,” Journal of the American Medical Association 291, no. 19 (2004): 2344-50.
Dana Goldman, Geoffrey Joyce, and Pinar Karaca-Mandic, “Varying Pharmacy Benefits With Clinical Status: The Case of Cholesterol-Lowering Therapy,” American Journal of Managed Care 12, no. 1 (2006): 21-28.
Florian Heiss, Daniel McFadden, and Joachim Winter, “Who Failed to Enroll in Medicare Part D, and Why? Early Results,” Health Affairs 25, no. 5 (2006): w344-54.
John Hsu et al., “Unintended Consequences of Caps on Medicare Drug Benefits,” New England Journal of Medicine 354, no. 22 (2006): 2349-59.
John McArdle, “Longitudinal Studies on the Dynamics of Cognition in the Health and Retirement Survey,” presentation at Population Reference Bureau (January 2006); and presentation at Mind the Gap! Consumer Perception and Choices of Medicare Prescription Drug Plans Conference, sponsored by the UC-Berkeley Center for Economics and Demography of Aging and the Stanford Longevity Center (December 2006).
Kathleen McGarry and Robert F. Schoeni, “Medicare Gaps and Widow Poverty,” Social Security Bulletin 66, no. 1 (2005): 58-74.
Kenneth Thorpe, “Cost Sharing, Caps on Benefits, and the Chronically Ill—Policy Mismatch,” New England Journal of Medicine 354, no. 22 (2006): 2385-86.
Kenneth Thorpe et al., “The Rising Prevalence of Treated Disease: Effects on Private Health Insurance Spending,” Health Affairs, Web Exclusive (June 27, 2005).
Chien-Wen Tseng et al., “Cost-Lowering Strategies Used by Medicare Beneficiaries Who Exceed Drug Benefit Caps and Have a Gap in Drug Coverage,” Journal of the American Medical Association 292, no. 8 (2004): 952-60.