June 2004

Private Discounts, Public Subsidies: How the Medicare Prescription Drug Discount Card Really Works

Joseph Antos
AEI

The Medicare prescription drug discount card has received much early scrutiny. Most of the analysis has consisted of simple price comparisons for a few drugs across Medicare and various private outlets. This approach overlooks much of the value in this program. The right analysis adopts the perspective of a typical senior and considers the costs he stands to incur out of pocket. In this study, my co-author Ximena Pinell and I looked at three patients with health profiles common to an older population. We determined medications typically prescribed for each patient and considered both brand and generic products, as an average senior would generally do.

Evaluating the program from the viewpoint of a typical senior is a far better indicator of the program's value to beneficiaries. We cannot, however, gauge the exact savings to all seniors. They take different drugs and prefer to purchase through different channels (mail vs. retail) or at different pharmacies. While early analysis of the program has not uncovered significant geographical disparities, subtle variations may indeed exist.

The discount card program is an assistance program. It is not the full Part D drug benefit, and it is not insurance. The Medicare discount cards earn seniors savings on their drug bills from three sources, though not all apply to every senior. All seniors that enroll in a card pay discounted prices negotiated between card sponsors and pharmaceutical manufacturers. These are posted on Medicare's pricefinder website. Low-income seniors below 135 percent of poverty and without drug coverage can also receive a $600 subsidy in 2004 and again in 2005 toward the purchase of their prescription drugs. Many of these needy seniors also qualify for special manufacturer discounts that make drugs available for an extremely modest sum, like $15 per month.

For a low-income patient living in Brooklyn with diabetes, high blood pressure, high cholesterol, and in need of an occasional Viagra pill, the best retail deal through Medicare is $495 for the seven months from June to December. This assumes he takes advantages of every easily accessible discount made available to him through his Medicare card. In contrast, this hypothetical patient would pay over $2,000 if he did not enroll in a Medicare card or participate in any other discount program. The $600 subsidy accounts for just under 40 percent of the overall savings, the baseline discounts make up another 36 percent, and the special manufacturer discounts account for one quarter. Though most studies have overlooked the value of manufacturers' special targeted discounts, they can be sizable--over $400 for this hypothetical patient in seven months.

A savvier shopper, one that buys at discounted pharmacies and takes advantage of any available senior discounts, can still save substantially by enrolling in a Medicare discount card. Over seven months, a low-income senior can stand to save between one-half and three-quarters of his prescription drug costs.

Even higher income beneficiaries who are not eligible for the subsidy or special price breaks can save hundreds of dollars through the standard Medicare card discounts alone. For people with prescription drug coverage, Medicare's prices generally cannot beat a low copayment, but for ten million Medicare beneficiaries without drug coverage, the card may offer large savings.

The importance of selecting the best Medicare card from among the dozens available depends on each beneficiary's own circumstances. Higher-income seniors and those with drug coverage are eligible for only the baseline discounts. Those beneficiaries have a wide range of nearly equivalent choices. On June 1, at the card's launch, one or two dozen cards were within 5 percent of the overall best deal.

In contrast, the decision could be very important--though difficult to make--for low-income seniors that qualify for the subsidy and special discounts. Some special manufacturer discounts may be available through only one or few cards. For example, on June 1, Pfizer was contracting with only the U Share Card to offer its very generous low-income discount. This fact was not easy to discern from Medicare's website. Our own analysis of special discounts required a close reading of many pharmaceutical firms' press releases and several conversations with both card sponsors and pharmaceutical manufacturers. For an average senior scanning the Medicare website, the U Share Card may not have been the obvious best choice. However, we found that a senior might forego hundreds of dollars in additional savings available through the U Share Card if he enrolls in a different card ranked "lowest-cost" on the Medicare website.

Another approach to evaluating the Medicare prescription drug discount card considers the top ten prescription drugs used by the elderly. Compared to private outlets, Medicare's standard prices are generally better. However, if we consider the special discounts pharmaceutical manufacturers make available to low-income seniors, Medicare's advantage grows considerably, as high as 90 percent off private outlets. Even compared to Canada and the Department of Veteran's Affairs, Medicare's prices are substantially lower for the most needy beneficiaries. Critical reviews that overlook these special discounts discourage seniors from considering and enrolling in the program. They do a great disservice to seniors, especially the neediest among them who stand to save an enormous amount on their drug bills through this program.

The Center for Medicare and Medicaid Services (CMS) has accomplished an incredible feat in launching this complicated program and pricefinder website in only the six months since the Medicare Modernization Act was passed. Despite their great efforts, the program's website is not designed ideally for customers. A guide that offers summary judgments of the various card options, modeled after Consumer Reports, would be more useful to seniors and help them to better take advantage of this new program.

Grace-Marie Turner
Galen Institute

The Medicare discount card program has been regularly panned since its launch earlier this month. A critic recently asserted that CMS should have taken more time to resolve glitches in the program and in its pricefinder website. This was not possible. The political impetus last year for a temporary drug benefit was too strong to allow seniors to go without assistance any longer. In fact, CMS should be commended for rolling out this program and extending immediate discounts to all beneficiaries in just six months.
 
The discount card program establishes a major precedent by introducing privately negotiated prices into a public program. The three layers of savings for the neediest beneficiaries--the subsidy, baseline discounts, and special discounts--supercharge this program.

The findings of this study are widely validated by other analyses of the program. The Business Round Table estimated an enormous value to seniors, $131 million in the State of Virginia alone. A recent CMS study that integrated the three components of savings found discounts in Medicare between 32 and 86 percent off average retail prices. Similarly, the Lewin Group earlier found savings between 29 and 92 percent.

Despite many positive evaluations of the program, the critics persist. Some claim that the program offers an array of card options too confusing for seniors to navigate, but such a decision is not beyond their capacity. Seniors choose everyday among hundreds of makes and models of cars, for instance. It is irresponsible to discredit the program based solely on its complexity.

Other critics state that card sponsors are likely to drop the drugs they cover or not cover major drugs from the outset. Because this is a discount program, cards cannot cover all drugs by design. They negotiate discounts with manufacturers based on their ability to move market share to those drugs. Therefore, they cannot cover all drugs and offer the deep discounts that they do. They are, however, required to cover at least one drug in each of 209 therapeutic classes. Any price changes will be closely monitored by CMS. Moreover, card sponsors face no incentive to arbitrarily drop drugs from their formularies. Most want to attract and keep beneficiaries for the remainder of the discount card program, and many of them will seek to offer the full benefit in 2006.

Another point of contention for many is that the government is prohibited from negotiating drug prices in the program. While some see immediate cost savings in government pricing, the Congressional Budget Office estimated only negligible savings from striking that provision. Furthermore, such a scheme would forfeit the price transparency the program has boldly introduced.

This program functions with a defined contribution from the government to low-income seniors, so program costs can be known. Because seniors spend from their own accounts, they face incentives to spend wisely. Such a structure may be able to contain Medicare's soaring costs. Perhaps the government should consider extending it in 2006.

Howard Bedlin
National Council on the Aging

The Access to Benefits Coalition (ABC) formed several weeks ago includes seventy-eight diverse organizations committed to the needs of low-income seniors. Members include senior groups, minority groups, disease groups, women's groups, and others.

ABC is headed by the National Council on the Aging (NCOA). While NCOA supported the Medicare Modernization Act for extending drug benefits to needy seniors, ABC is not a political organization. Its member groups both supported and opposed the Medicare law, but they have come together with the charge to enroll more seniors who are eligible for the $600 subsidy in the Medicare card program.

CMS estimated that 7 million Medicare beneficiaries qualified for the $600 subsidy but that only 4.7 million would actually receive it. ABC's goal is to enroll 5 million subsidy-eligible seniors in the card program.

The Access to Benefits Coalition plans to coordinate with CMS and other agencies to give grants to senior outreach organizations. Private donors have contributed $2 million, CMS has allocated $2.4 million, and the Administration on Aging has given $1.3 million toward the grants.

In addition, ABC is recruiting volunteers to meet directly with seniors to encourage and facilitate their enrollment in the program. It also recently launched a website to assist outreach groups in this effort, www.accesstobenefits.org. The site provides fifty-one state guides, functions as an enrollment center for pharmaceutical company patient assistance programs and state pharmacy assistance programs, and recommends best practices on low-income outreach.

While the 7 million subsidy-eligible Medicare beneficiaries are not likely to be particularly web savvy, ABC is also building a consumer website. NCOA maintains a site that integrates all available pharmaceutical benefits, www.benefitscheckuprx.org. Within one month, this website will be updated to reflect the manufacturer wraparound programs available through Medicare cards. The objective is for seniors to input their drug set and the site to return the combination of programs that maximizes savings.

Recent assessments of the Medicare card program's early performance have overlooked some of the program's most innovative and important aspects. The price transparency introduced by Medicare's pricefinder website is a true breakthrough for both the program and the wider health care market. Manufacturer wraparound programs also deserve more attention and credit than most analysis has given them. Low-income seniors should understand that the savings available in the program could be much greater than the $600 subsidy when wraparound programs are considered. Finally, there are currently six cards that charge no enrollment fee. There is no risk in participating in these programs, but they offer potentially large savings.

ABC supports a policy of automatic enrollment of Medicare Savings beneficiaries and other previously identified groups that would qualify for the subsidy. This could be facilitated by an interagency task force to streamline enrollment in public programs like the prescription drug subsidy, food stamps, and low-income housing.

To remove some of the mystery surrounding the discount cards and encourage seniors to enroll, ABC is considering highlighting certain cards that could work best for patients, like ones with wraparound programs or with open formularies.

The Medicare Modernization Act increased funds to state health insurance counseling programs that support seniors facing important health care decisions. Investment in these valuable resources is both extremely worthwhile and overdue.

Seniors are likely dissuaded from enrolling in a Medicare card program by the provision that locks them into that program for several months before they can reevaluate their best option. When the full Part D benefit is rolled out in 2006, we will face new enrollment challenges. Asset tests, in particular, could complicate the shift of seniors from Medicaid to Medicare, and from the Medicare discount card program to Part D. The Medicare card program has no asset tests, while Medicaid and Medicare Part D do, though the criteria in each of those programs is different. Permitting electronic enrollment could facilitate the process.

Julie Goon
Centers for Medicare and Medicaid Services

In evaluating the Medicare discount card program, we should recall that it was designed primarily to help seniors with the greatest need. We should also consider that it is an eighteen-month stopgap program to assist seniors with their drug costs until the full benefit begins in 2006. With this program, CMS has also launched the first site to make pharmaceutical prices transparent and introduced private partnerships into a major public program. The confusion surrounding the cards, however, is not a first. We experienced similar hesitation and uncertainty among seniors when Medicare was created in 1965.

In just six months, CMS finalized regulations and launched the prescription drug discount card program. There are 3.6 million seniors enrolled in card programs today. Of 41 million Medicare beneficiaries, CMS's actuaries anticipated enrollment of only 7.3 million. By that metric, we are halfway to our goal in the program's first month. There are 4.6 million beneficiaries eligible for the $600 subsidy, a population that represents our greatest enrollment challenge.

A major obstacle that seniors face in considering the program is identifying the wraparounds that participate with the various cards. Pfizer, for example, is now seeking to partner with all card sponsors to offer its low-income program, but this information is not readily available to the public.

Despite CMS's efforts, is this program good enough? We continue to make refinements to improve access to the program. CMS's call center staff has been increased to 3,000 representatives, and wait times have fallen considerably. The program website also continues to be developed. It now has a universal enrollment form for all cards, but seniors cannot enroll electronically because a signature is required to apply for the subsidy.

The website will soon feature a consolidated drug dictionary, where drug names and dosages are available side by side. It will also provide alternatives in the same therapeutic class. In response to criticisms that the site is too complex and offers too many card choices, the pricefinder tool will offer the five best choices, along with the option to see more. However, it will be difficult to limit the output to five choices when many more plans have the same price for a drug set. Thirty-four nationally available plans are marketing to and enrolling seniors, so the maximum number of choices a senior could face is thirty-four national cards and a handful of regional plans. CMS is also working to clarify the wraparound programs that participate with each card.

CMS is working with card sponsors to monitor price changes and prevent fraud. We are also identifying cards with open drug formularies. Our most important efforts involve consumer outreach, for which we are collaborating with various public and private groups, including the Department of Agriculture, state health insurance programs, and the Access to Benefits Coalition.

Low-income beneficiaries without drug coverage should absolutely enroll in a Medicare card program, but even seniors with insurance for prescription drugs should consider it. Some may be daunted by claims that there are too many choices to navigate, but that is, in fact, part of a greater trend. Over the last thirty years, for example, the number of types of running shoes has soared from five to 285. Seniors make good decisions when they face these choices, and they can also with Medicare discount cards.

AEI research assistant Ximena Pinell prepared this summary.