Some Doubts About Logic of Senate Plan for Drug Aid

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http://www.nytimes.com/2003/06/14/business/14DRUG.html?th

 

Some Doubts About Logic of Senate Plan for Drug AidBy DANIEL ALTMAN

 

 

You will not find the prescription drug benefit plan approved by the Senate

Finance Committee in any textbook on health insurance. The bill has the support

of senators from both parties, but its features leave some economists baffled.

 

" This just seems like a creature of political expediency or compromise, " said

Frank R. Lichtenberg, a professor of business at Columbia University who is an

expert on the economics of health care and prescription drugs. " It's not

plausible to me that there's really an economic logic to the political policy

that's being proposed. "

 

According to the rules of the Senate's plan, fewer than half of all Medicare

recipients would actually benefit from buying into the prescription drug program

in any given year. And the plan would not offer comprehensive benefits to its

members who are the most sick, either. Even people with $10,000 in prescription

drug costs in a year — a tiny percentage of the elderly population — would still

pay more than 40 percent of those costs themselves.

 

In addition, the Congressional Budget Office's estimate of the plan's costs,

$400 billion over 10 years, could be too low, experts said, because of the mix

of people likely to enroll and their demand for drugs. Whatever the government

spends, economists say, a lot of the money may end up inflating the profits of

drug makers rather than helping patients.

 

Douglas J. Holtz-Eakin, the director of the Congressional Budget Office,

acknowledged the importance of the concerns about how Medicare beneficiaries

will respond to the plan. But he stood by his staff's cost estimates.

 

" We've certainly thought a lot about these issues, " he said in a phone interview

yesterday. " I would testify to anyone that this is a really careful, good-faith

effort to try to anticipate the creation and microengineering of a market

structure. "

 

A member of the Finance Committee's staff called the plan a compromise between

offering immediate aid to the elderly and an insurance plan aimed at worst-case

outcomes. " The policy gives upfront benefits, but it also gives catastrophic

coverage on the back end, " said the staff member, who spoke on the condition he

not be identified, in accordance with the panel's rules.

 

Several influential Senate Democrats and Republicans have promised to vote for

the Finance Committee's bill, which was being completed yesterday. The House,

which has passed different versions of a prescription drug benefit, is expected

to vote on its plan later this month. The House proposal, which is more generous

to people with moderate drug needs and less so to those with the greatest use,

would also run afoul of some economists' recommendations.

 

The first set of potential problems in the Senate's plan comes from its payment

schedule. Elderly people who signed up would pay a premium estimated at $420 a

year. They would pay for their first $275 in drug purchases, too. Then Medicare

would cover half of their drug costs until the total hit $4,500. The insurance

would then temporarily vanish, leaving the patients to pay all of their

additional costs until their out-of-pocket outlay reached $3,700, not counting

the premiums. 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 Professor Lichtenberg 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.

 

Of course, drug prices have risen by about 20 percent since 1999. Even so,

eliminating coverage between $4,500 and roughly $5,800 in drug costs — a feature

not included in the House proposal — would still punish only the patients with

the most extreme need. Professor Lichtenberg said he saw no economic reason for

creating that gap, rather than maintaining the same levels of coverage no matter

how much people spent beyond the initial deductible.

 

Moreover, because the plan would offer no direct benefit to most elderly

Americans in a given year, and only modest benefits even for those with the

highest drug costs, many people might decline to enroll, economists said.

 

" If you had certainty about your future drug needs, you wouldn't do the deal, "

said Uwe E. Reinhardt, a professor of economics at Princeton University.

 

Of course, people can never be completely certain of their future medical costs,

but prescription drugs — especially for the elderly — are in some ways a special

category.

 

" There's a bunch of research studies suggesting that the under-65 are really

good at predicting, " said Richard G. Frank, a professor of health care policy at

Harvard. " I would guess that the over-65 are even better. Selection is going to

be a huge problem here. "

 

Professor Lichtenberg agreed. " A lot of the major drugs and big drivers of

expenditures are for chronic conditions, so people know they're going to be on

these drugs for a long time, " he said. " People know their expenditures are going

to be fairly predictable. "

 

If healthier people opted out of the plan, the average cost per member would

increase. In the Senate proposal, increases in annual costs would be

automatically reflected in premium increases the next year. As the plan became

more expensive, even fewer of those who expect to be healthy in the future might

enroll. With a progressively sicker pool of members, costs and premiums would

spiral upward while the membership pool would shrink.

 

Joseph R. Antos, a scholar in health care and retirement policy at the American

Enterprise Institute who spent almost three decades in government, said some

aspects of the Senate plan would help to shore up membership. He pointed out

that people who enroll in the years after they become eligible for Medicare have

to pay penalties. He also asserted that no one would want to be left without the

bargaining power of an insurance pool.

 

" These are the last people in America who are paying retail, " Mr. Antos said.

" When I turn 65, I'd hate to be the only one in the pharmacy line who's not in

some kind of a plan. "

 

He added, too, that reduced premiums offered to the poor would also make the

program attractive: " For the low-income person, it's a no-brainer. It's free, or

virtually free. "

 

But even if 77 percent of Medicare beneficiaries enroll, as the budget office

assumes, other factors could still cause costs to balloon. For people who buy

$275 to $4,500 of drugs each year, the plan would effectively reduce prices by

half. And that could lead to much more spending, some of it potentially

wasteful.

 

" People are very price-sensitive when they buy their prescription drugs, " said

Dana P. Goldman, director of health economics at the RAND Corporation, a

nonprofit research group. But the sensitivity varies with the kinds of drugs

being purchased, he said. The government's co-payments and deductibles might be

too high for drugs that treat chronic diseases, but too low to discourage

overuse of other drugs.

 

These two factors — changes in membership mix and price sensitivity — have

already had startling effects on health spending. Professor Reinhardt said that

regardless of health status, elderly people who have existing insurance rack up

about twice as much in drug spending as those without insurance.

 

All that extra use would be a boon to drug makers, Professor Reinhardt said.

" With this coverage, there will be a lot more volume, " he said. " But there is no

additional research needed to make these pills. So a huge amount of this money

is just pure gravy. "

 

Yet another factor, which neither the House nor Senate plan takes fully into

account, could result in the biggest cost increases: new drugs.

 

" There is a tremendous number of therapeutic advances that may be very expensive

that will be coming on the market, " Mr. Goldman said. " Five years ago, you never

would have expected that drug spending is where it is. The idea that this

prescription drug benefit is going to cost $400 billion over 10 years may in

some ways be ephemeral. "

 

Professor Reinhardt predicted the need for price controls, thanks to the lack of

generosity in the Senate plan. " My hunch is when stories come out of people with

$10,000 drug bills who still are aching, Congress will have to revisit the

issue, " he said. But making the program more comprehensive without raising

premiums could raise its cost to as much as $700 billion for one year. The

Senate estimate of $400 billion for 10 years, he said, was " sort of the camel's

nose under the tent. "

 

Mr. Goldman suggested a catastrophic insurance plan as a way to deal with the

challenges implicit in drug coverage. Such a plan would pay for almost no drugs

until members had spent a large amount themselves, but would cover almost all

costs incurred thereafter. Premiums could be very low.

 

" What you really want to do is insure against very high expenditures, " Mr.

Goldman said. " A catastrophic plan would be a cautious approach to sticking your

toe in the water. "

 

 

 

Copyright 2003 The New York Times Company

 

 

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