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MEDICARE DRUG BENEFIT ANNUAL COST OF $ 4.8 BIL. IS $ 600 MIL. ABOVE CBO ESTIMATE -- NMES; SEN. PRYOR QUESTIONS HHS' INDUCED-DEMAND ASSUMPTIONS

Executive Summary

Medicare's prescription drug benefit would cost $ 4.8 bil. per year in 1987 dollars, based on a per-patient deductible set at $ 500, according to data from the National Medical Expenditure Survey. The total is $ 600 mil. more than estimates by the Congressional Budget Office. An HHS report on the NMES study predicts that expenditures will be significantly higher than predicted by CBO. "The CBO estimate of the total annual expenditures exceeding the $ 500 deductible in 1987 are lower than estimates based on NMES data," the Administration report states. "The CBO estimate of $ 4.163 bil. is 13.8% lower than the estimate of $ 4.832 bil. based on NMES data." The HHS report on the NMES data is entitled "Expenses Incurred by Medicare Beneficiaries for Prescription Drugs." Under the Catastrophic Coverage Act of 1988, the department was required to use the NMES data to inform Congress of prescription drug costs incurred by Medicare enrollees. The differences between the NMES data and CBO estimates will fuel the ongoing debate over catastrophic care premiums. The controversy came to a head on April 20 when, citing CBO figures that showed excess revenues of $ 4.9 bil. over the first five years of coverage, Sen. Bentsen (D-Tex.) proposed a 16% reduction in revenues from catastrophic coverage supplemental premiums ("The Pink Sheet" April 24, p. 3). Noting the movement in Congress to reduce catastrophic coverage premiums, HHS budget chief Kevin Moley told Vice President Quayle and House Speaker Wright in a May 8 letter accompanying the report: "The fact that the latest available data confirm the Administration's estimates of the drug program argues against taking any action to reduce either the flat or supplemental premium rates provided in the statute." Formerly a transition aide to HHS Secretary Sullivan, Moley is HHS assistant secretary for management and budget. The NMES data seem to support the arguments of the Administration and key congressmen, such as Rep. Rostenkowski (D-Ill.), who also opposes reductions in catastrophic care premiums. If, as the NMES data suggests, drug benefit expenditures are approximately $ 600 mil. higher per year than CBO estimates, total costs would be $ 3 bil. greater over the program's first five years, accounting for most of the surplus predicted by the CBO and Bentsen. The HHS study also says that "the NMES data would suggest that the $ 600 deductible may have been set somewhat low, given the intent to limit benefits to 16.8% of the noninstitutionalized Medicare population." Accounting for an average annual inflation rate for prescription drugs of 7.8% from 1987 to 1989, "the $ 600 deductible can be deflated to an equivalent value of $ 450 in 1987 prices," the NMES report said. According to NMES data, 19.6% of noninstitutionalized Medicare beneficiaries had expenditures in excess of $ 450 in 1987. Using $ 500 as the deductible level in 1987, the NMES study noted the CBO estimate that "13.4% of beneficiaries would have expenses above the deductible." The NMES study puts its "comparable estimate" at 17.1%. Under the catastrophic coverage legislation, the drug benefit deductible will be indexed after 1991 to ensure that 16.8% of enrollees during the proceeding year will meet the deductible, which is set for $ 600 in 1991. "The CBO estimate of the average annual expenditure for prescription drugs for noninstitutionalized Medicare beneficiaries adjusted to reflect 1987 is $ 233," the report states. "This estimate is 11.1% less than the estimate of $ 262 based on the NMES data." In addition, the study notes that the average number of prescriptions per Medicare enrollee more than doubled from 12.1 in 1980 to 14.7 in 1987, an increase of 21.5%. Furthermore, the average cost of a prescription rose from $ 8.05 to $ 16.89 during the same period, or 9.9% per year. Overall prescription costs increased at an average rate of 14.2% per year, from $ 98 in 1980 to $ 248 in 1987. In a May 9 letter to HHS Secretary Sullivan, Senate Aging Committee Chairman Pryor (D-Ark.) suggested that the department's analysis of the data should not have assumed a 60% increase in pharmaceutical use based on induced demand. The report "fails to provide any data from prescription drug insurance programs in support of HCFA's key assumption of a 60% increase in utilization as a result of the new drug benefit." Pryor asked that he be shown "the empirical basis, including any and all supporting data, for the department's estimate of 60% 'induced demand' for prescription drugs." The body of the report notes that "HCFA actuaries assume" that induced demand will increase aggregate drug use by the Medicare population in 1991 "by about 10%." As the coinsurance rate falls from 50% to 40% in 1992, "aggregate consumption is projected to be about 12% higher than it would have been without the program." Induced demand is expected to increase drug use by only 11% in 1993, when the drop in the coinsurance rate to 20% is offset by a projected increase in the deductible from $ 652 to $ 850. However, in an appendix on induced demand, the report states that Health Care Financing Administration actuaries assume that precription drug use will increase by 60% for patients "going from no insurance to full insurance." Induced demand in the Medicare program can be expected to be limited in that beneficiaries must first meet an out-of-pocket deductible and, even after the deductible is reached, visit a physician to obtain prescriptions. However, the report states, "private insurance could significantly increase drug spending by covering coinsurance and deductibles. To the extent that this occurs, the total demand induced would be greater than that induced by" Medicare alone. In an appendix containing the actual report by the National Center for Health Services Research (NCHSR), which conducted the survey, NMES data from 1977 indicate that "there were no significant differences in average prescription use or expenditures between insured persons who had prescription drug coverage and those who did not." NCHSR added that Medco data suggest that even when atypically high-use elderly patients receive first-dollar coverage, induced demand is at most 30%. Sen. Pryor also requested "both current and pre-NMES HHS projections for each year from 1990 through 1993, depicting annual mean prescription drug expenditures per beneficiary, percentage of beneficiaries estimated by HCFA to exceed the drug program deductible, and total annual expenditures above the deductible." Pryor explained that he was "puzzled" that the department's analysis did not include a comparison of HCFA's earlier and current 1990-1993 cost projections. The senator suggested that HCFA's previous and new projections should be analyzed along with CBO's previous and revised projections. "Lacking such a comparison," Pryor stated, "it is difficult to evaluate assertions such as [assistant] secretary Moley's statement in the letter of transmittal that the 'latest available data confirm the administration's estimates of the drug program [costs].'" HCFA is predicting an incurred deficit of $ 946 mil. for the Medicare drug program through 1993, the program's first four years of operation. Agency data indicate that a $ 1.5 bil. surplus at the end of calendar 1990 -- when the program involves only limited benefits while supplemental premiums are collected -- will turn into an incurred deficit of $ 634 mil. by the end of calendar 1991, as the drug benefit expands. HCFA predicts that the program's cash position will dip into the red in 1992, when an $ 883 mil. cash surplus turns into a $ 36 mil. deficit. By 1993, HCFA predicts the program will have a negative $ 769 mil. cash deficit. "Using data that have become available during the last six months, actuaries in the Health Care Financing Administration have refined their estimates of the benefit costs of the Catastrophic Drug Insurance (CDI) program," the HHS report states. "The new estimates continue to show that the program is seriously underfunded, [and while] the precise status of the trust fund is still being determined, the benefit estimates clearly indicate that the CDI trust fund is not solvent." Sources for the HHS report include the "National Medical Expenditure Survey," which is attached as an appendix. Among the elements of HCFA's drug benefit model are: an outpatient per capita prescription rate of 20.7 prescriptions annually; an average cost per prescription of $ 17.99; and an induced demand for prescription drugs at 10% in 1991, 12% in 1992 and 11% in 1993. Use of a fiscal year (ending Sept. 30) perspective, the agency noted, "tends to obscure the problems faced by the trust fund." HHS explained that because nearly half of a calendar year's benefits are not incurred until after the year closes, fiscal year benefit payments in the early years of the program appear small. "Premiums received, on the other hand, are affected much less than are benefits, so that the financial difficulties of the program do not appear until fiscal year 1993." Looking at cash receipts and expenditures on a fiscal year basis, HCFA shows an aggregate cash surplus of $ 775 mil. through the first four fiscal years of the program. The report also notes that "nearly 30% of all prescriptions filled in community pharmacies for aged customers was covered by Medicaid or some form of third-party insurance." Other details from the report include the observation that "the average cost per prescription more than doubled between 1980 and 1987." The average per prescription cost increased at an average rate of 11.2% per year during the period. Cardiovascular medicines (29.1%) and central nervous system medicines (19.3) "together accounted for almost half the prescriptions obtained by the noninstitutionalized Medicare population in 1987," the report states. HHS' cost projections for the Medicare catastrophic care program have been high since the program was proposed. Initially, it was understood that the Administration wanted to limit the legislation in size. Washington observers believe HHS is sticking with its high cost estimates to dissuade Congress from lowering the premiums at the demand of enrollees. It is doubtful that Sen. Bentsen favors premium reductions, but Capitol Hill mavens agree that his plans for hearings to review the legislated premium amounts is politically shrewd. By appearing open to reductions, Congress is deflecting senior citizens' wrath over the new premiums to the Administration and its insistence on holding the line. At a May 9 conference of the National Council on Patient Information & Education, HHS Inspector General Richard Kusserow pointed out: HHS "actuaries have gone back and re-estimated the drug benefit program, and they still say it's going to be bankrupt within a year. There's not nearly enough money to be able to pay for that program, and that's going to be a major controversy and a major issue that Congress is going to face."
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