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MEDICARE DRUG REBATES WILL TOTAL $15 BIL. IN 1996-2000, HHS PROJECTS; DRUG BENEFIT’s ABILITY TO REDUCE COSTS OF ALTERNATIVE THERAPY UNKNOWN -- CBO STAFF

Executive Summary

HHS estimates that it will collect $15 bil. in manufacturer drug price rebates under the proposed Medicare outpatient prescription drug program during the five-year period 1996-2000. The rebate revenue will reduce net government expenditures on the program from $80.8 bil. to $66 bil. The costs of the benefit proposed under the Clinton Administration's comprehensive health care reform legislation (the Health Security Act), released Oct. 27 ("The Pink Sheet" Nov. 1, p. 3), include expenditures for "benefits, administration and pharmacists' costs." Those costs will total $8.2 bil. in fiscal 1996, $16.3 bil. in FY 1997, $17.5 bil. in 1998, $18.7 bil. in 1999 and $20.0 bil. in FY 2000. Rebates collected in each of the respective five years would generate payments to the federal government of $1.6 bil. $2.8 bil., $3.3 bil. $3.5 bil. and $3.8 bil., HHS estimates. The jump in expenditures between the first two years of the program -- almost doubling federal expenditures between fiscal 1996 and fiscal 1997 -- is is due to the government's Sept. 30 fiscal year. The start-up of the outpatient drug program is assumed to begin on Jan. 1, 1996. Consequently, first-year expenditures would be limited to nine months of benefit, January-September, 1996. Because of the proposed Medicare deductible, the government would be likely to pick up only about six months worth of expendtiures on drugs in that first fiscal year. In the next fiscal year, there would be about nine months of drug benefit expenditures, by HHS calculations. Earlier drafts of the plan included projections of Medicare outpatient pharmaceutical expenditures jumping from $10 bil. to $14 bil. in 1996-1997, then rising incrementally each year until benefits costs reached $17 bil. in 2000. The five-year total under the early draft was $72 bil. ("The Pink Sheet" Sept. 13, p. 3 and Sept. 27, p. 3). Yearly breakdowns of rebate revenues were not made available in the earlier drafts (rebates initially were proposed at 15% of retail prices; the Sept. 27 legislation sets them at 17%). The higher expenditure levels reflect an effort by the Administration to offer more conservative budgetary projections and may allow a greater margin of error if the government underestimates induced utilization rates. At a Nov. 1 seminar on universal drug coverage sponsored by the Institute for Alternative Futures, Veterans Affairs Department Pharmacy Service Clinical Pharmacy Chief Louise Rodriguez noted that drug benefit costs tend to be underestimated because improving patient access will increase utilization and, therefore, costs. Rodriguez was a key member of the drug working group of Hillary Clinton's health care task force. "Historically, what happens when you give people access to health care benefits is that utilization increases at an incredible rate," Rodriguez noted. As coverage works to "insulat[e] consumers from the price of a commodity, affordability [of the system] can go out of control." Office of Management & Budget Director Panetta testified to the complexity of utilization estimates at a Nov. 4 Senate Finance Committee hearing. Commenting on the Administration's estimate of subsidies to help pay for alliance premiums, Panetta said "this is an area, frankly, where we had very few models" with regard to the impact of health care reform on utilization patterns. Panetta maintained that the Administration has developed the "best models in the business" for estimating private-sector outcomes resulting from health care reform. However, he acknowledged that they "continue to need to be scrubbed." OMB reported to the Senate that its analysis of the assumptions for costs and savings projections will be released "fairly soon." Deputy Director Alice Rivlin told the Finance Committee that she thinks "when you see it, you will recognize we have made quite conservative assumptions." Regarding proposed pharmaceutical coverage for the entire population, Congressional Budget Office Drug Benefits Analyst Scott Harrison told the Alternative Futures symposium that government analysts cannot assume that the increased spending on a new drug benefit will be accompanied by a corresponding -- let alone greater -- decrease in other costs, such as hospitalization. Although Harrison affirmed that government analysts assume large utilization jumps "with 72 mil. more people coming in and getting a benefit," he said they "don't know...whether and how that fits with total benefit spending." Noting that pharmaceuticals account for no more than "7%-8% of health care dollars," he said, "we don't know yet whether that additional drug spending would offset or lower spending for surgery and other types of medical treatment." The CBO analyst also suggested that the question of whether broad health care reform constitutes an entitlement presents a legal problem, as well as a difficulty for cost projections. The various proposals by the Clinton Administration and members of Congress "look like entitlements," Harrison commented. Consequently, "I wonder what the lawyers would say when a managed care plan wants to limit through formularies what drugs a patient should get," he said.
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