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Executive Summary

The proposal to provide outpatient prescription drug coverage under Medicare will cost "about $5 bil. in 1990," analysts from Project Hope's Center for Health Affairs maintained in a report analyzing cost estimates used by Congress in considering catastrophic care legislation. The report -- funded by the Pharmaceutical Manufacturers Association and not necessarily indicative of the views of Project Hope -- notes that the cost of the proposed benefit has been projected by the Congressional Budget Office to reach $2 bil. by 1990 and by the Health Care Financing Administration (HCFA) to reach $6.8 bil. "Given the available data and knowledge about pharmaceutical utilization by the elderly, the best estimate of the proposed Medicare catastrophic drug benefit would most probably fall between the HCFA and CBO estimates," the report maintains. HCFA's cost estimate, the report states, is high largely because the agency assumes a 60% increase in drug use by enrollees in the program. That assumption "seems excessive," according to the Project Hope analysts. "To increase the accuracy" of HCFA's cost estimate, the projected increase in drug use should be reduced to 20%, the authors said. The reduction will decrease the agency's cost estimate "by about $1.6 bil." CBO's estimated increase is only 3%, based on the assumption that the proposal's $500 deductible will keep "induced demand small," the report states. "A moderate impact on the order of 10-20% seems more accurate." HCFA originally estimated a 20% drug use increase but upped its estimate "apparently" due to "some evidence . . . that a 50-150% increase in utilization would result when individuals who were not covered at all received full (first dollar) insurance coverage," the authors reported. "But because the Medicare drug provision contains a sizeable deductible and copayment, actual induced demand is likely to be much less." The report advises that HCFA's estimate should be reduced an additional 10% with an adjustment for "savings from reimbursement limitations, as CBO suggests." CBO estimated that the proposal's generic substitution incentives would result in a 10% savings. A Medicare drug bill has passed the House and is pending in the Senate. The chances are "better than 50-50" that the bill will be debated on the Senate floor late in the week of Sept. 14, according to a Senate staffer. Estimating the costs of current proposals is particularly difficult because "there are no recent or reliable data about prescription drug utilization or the way in which the Medicare population responds to changes in drug prices," the report states. Both CBO and HCFA estimates use information pieced together from existing data sources. The report notes that "CBO relied on the 1984 Consumer Expenditure Survey data base," and HCFA used "several data sets, relying heavily on the 1967-1977 Current Medicare Survey (CMS) data," and to a lesser degree on the National Medical Care Expenditures Survey of 1977, the National Medical Care Utilization & Expenditure Survey of 1980, and the National Ambulatory Medicare Surveys of 1980 and 1985. The report contends that "the HCFA estimate of average drug expenditures is better" because the CMS data "is generally believed to be reliable" and because HCFA uses more different data sources, which "appear to indicate a rising trend in drug use." The authors are Gail Wilensky, Peter Neumann, and Linda Blumberg.

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