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MEDICARE Rx DRUG TRUST FUND COULD BE INSOLVENT WITHIN THREE YEARS

Executive Summary

MEDICARE Rx DRUG TRUST FUND COULD BE INSOLVENT WITHIN THREE YEARS, according to recent projections by the Health Care Financing Administration. In calculations prepared as part of the planning for the Reagan Administration's final budget proposal, HCFA actuaries are reportedly predicting a deficit for the Rx outpatient drug program of about $650 mil. by the end of calendar year 1991. The HCFA staff foresees income to the program of about $2.4 bil. in 1991 and outlays of over $3 bil. HCFA has submitted the dire predictions for the outpatient drug program to the Office of Management & Budget in 1990 budget documents. The agency is well aware of the shock value of the deficit projections when they reach general press reports on the budget. HCFA policy planners, in fact, are looking at the final Reagan Budget submission as one opportunity to begin pressing for pre-implementation Congressional changes to the Catastrophic Health Care Act and its drug coverage provisions. The HCFA drug cost estimates should draw careful consideration from the incoming Bush Administration health and budget officials. The Bush staff has been openly identifying the Medicare and Medicaid programs as targets for controlling entitlement program costs. Incoming OMB Director Richard Darman, for example, was widely reported at the time of his appointment as saying that Social Security would be the only sacrosanct entitlement program under the "flexible freeze" approach to deficit reduction. Among the constraints on existing Medicare programs that are anticipated are tighter limits on hospital capital expenditures and teaching subsidies. The timing is also probably good for a more aggressive attack by the incoming administration on physician payments. The drug program is portrayed by internal HCFA projections as a future budget buster. HCFA is particularly concerned that the legislated deductible rates through 1992 will permit substantially more utilization than Congress projected. The rates were put in the legislation to provide drug benefits to an estimated 16.8% of Medicare beneficiaries. HCFA now believes that up to 25% of Medicare beneficiaries could qualify for out-patient drug benefits under the deductible program. HCFA projects that instead of a 1990 deductible of $600, the program should have a $1,005 deductible to stay solvent. The agency may ask the Reagan Administration and/or the incoming Bush Administration to seek legislative changes to the drug program in the upcoming Congress. An attempt to make changes in the program before it takes effect has been hinted by top HCFA officials in recent public assessments of the new law ("The Pink Sheet", Sept. 19, p. 11). The AWP drug reimbursement formula in the act is getting a close look from HCFA. The agency would like to get a legislated change to what it views as the "generous" reimbursement formulas in the act. For example, for single source products, HCFA would like to see reimbursement at a percentage of the AWP (e.g. 95% of AWP) instead of full AWP or survey figures. The agency recognizes that asking for a discounted AWP reimbursement formula will draw "tremendous opposition from the drug industry."
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PS014693

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