How Prescription Drugs Are Pinching Your Pocketbook on 'AARP Live' at 10 p.m. ET Online or on RFD-TV

 

Medicare Beneficiaries and Prescription Drug Coverage: Gaps and Barriers

Introduction

The lack of a prescription drug benefit is often cited as a major shortcoming of Medicare, the federal health insurance program for older and disabled Americans. About one-third of noninstitutionalized beneficiaries have no prescription drug coverage. Many other beneficiaries who have drug coverage incur substantial out-of-pocket drug expenses as a result of cost-sharing and benefit caps associated with that coverage. This Issue Brief provides information on four aspects of prescription drug coverage among Medicare beneficiaries:

1.   Prescription drug coverage and supplemental insurance coverage

  • Most beneficiaries with drug coverage have private supplemental coverage, either through employer-sponsored plans or individually purchased private policies. About one-fifth of this group have coverage through Medicare HMOs. Another one-fifth have insurance through a public source, such as Medicaid.
  • Most of those without drug coverage have private supplemental insurance that covers other health care costs but not prescription drugs. About one-fifth have fee-for-service Medicare only and no supplemental coverage.

2.   Characteristics of beneficiaries with and without drug coverage

  • Beneficiaries without drug coverage are more likely to have lower incomes than are beneficiaries with drug coverage.
  • Those most likely to need such coverage -- beneficiaries reporting fair or poor health status -- are no more likely than their healthier counterparts to have drug coverage.

3.   Out-of-pocket spending on prescription drugs

  • Although beneficiaries with drug coverage spend substantially less out-of-pocket on drugs than those without such coverage ($320 per year vs. $590, on average), having supplemental drug coverage does not necessarily protect beneficiaries from high out-of-pocket costs. For example, those with drug coverage whose primary source of supplemental coverage is from individually purchased policies (e.g., Medigap) incur among the highest annual out-of-pocket drug costs ($570, on average).

4.   Barriers faced by beneficiaries in obtaining drug coverage

  • Beneficiaries with employer-sponsored coverage are the largest group of beneficiaries with drug coverage. However, fewer beneficiaries may have coverage in the future because retiree health coverage itself is declining.
  • Many beneficiaries do not have access to HMO benefits because Medicare+Choice plans are offered only in certain areas and the future of Medicare+Choice drug benefits is uncertain.
  • Beneficiaries who want to purchase individual supplemental coverage (such as Medigap) may not be able to afford it or be denied coverage due to health problems. For example, Medigap drug plans have a $250 deductible, high cost-sharing (50%), and benefit caps.
  • Many poor beneficiaries are not eligible for Medicaid.

Prescription Drug Coverage and Supplemental Insurance Coverage

About 65 percent of noninstitutionalized beneficiaries have some form of prescription drug coverage. Most of these individuals receive their drug coverage through their primary source of supplemental health insurance. Figure 1 shows the primary sources of supplemental coverage among the 25.6 million Medicare beneficiaries estimated to have drug coverage in 1999.

  • Almost 60 percent of those with drug coverage have private supplemental coverage, either through:
    • employer-sponsored plans (46 percent), or
    • individually purchased private policies (13 percent).
  • Of those who have drug coverage, 20 percent are enrolled in a Medicare+Choice HMO.
  • About 20 percent of beneficiaries with drug coverage receive their primary supplemental coverage from public sources--either state Medicaid programs (18 percent) or other public programs, such as Department of Veterans' Affairs, Department of Defense, and state pharmaceutical assistance programs (3 percent).

Figure 1
Primary Source of Supplemental Coverage Among
Medicare Beneficiaries With Prescription Drug Coverage, 1999
(Number of beneficiaries with some prescription drug coverage: 25.6 million)

Primary Source of Supplemental Coverage Among Medicare Beneficiaries With Prescription DrugCoverage, 1999

Note: Excludes beneficiaries who reside in institutions for the entire year. Other public refers to beneficiaries who receive coverage through Department of Veterans' Affairs, Department of Defense, and state pharmaceutical assistance programs.
SOURCE: AARP PPI analysis using Medicare Benefits Simulation Model

As shown in Figure 2, most beneficiaries who do not have drug coverage have supplemental insurance that covers other health care costs but does not include a prescription drug benefit. Of the estimated 13.5 million beneficiaries who lack drug coverage:

  • About one-fifth are in fee-for-service Medicare without any supplemental coverage.
  • Almost half receive supplemental coverage from individually purchased policies, and another 14 percent receive employer-sponsored coverage.
  • About 10 percent receive some Medicaid coverage. This population tends to be beneficiaries enrolled in the Qualified Medicare Beneficiary (QMB) or Specified Low-Income Medicare Beneficiary (SLMB) programs, under which state Medicaid programs provide some assistance with Medicare-related costs, but do not provide coverage for services not covered by Medicare, such as prescription drugs. 

Figure 2
Primary Source of Supplemental Coverage among
Medicare Beneficiaries Without Prescription Drug Coverage, 1999
(Number of beneficiaries without prescription drug coverage: 13.5 million)

Primary Source of Supplemental Coverage Among Medicare Beneficiaries Without Prescription DrugCoverage, 1999

Note: Excludes beneficiaries who reside in institutions for the entire year. 
SOURCE: AARP PPI analysis using Medicare Benefits Simulation Model

Characteristics of Beneficiaries With and Without Prescription Drug Coverage

The most defining demographic difference between beneficiaries with and without prescription drug coverage is level of income. Almost 45 percent of beneficiaries without drug coverage have incomes at or below 200 percent of the federal poverty level, compared with 33 percent of beneficiaries with drug coverage (Figure 3).

Beneficiaries without drug coverage are slightly more likely to be age 75 and over than are beneficiaries with drug coverage. Both groups are similar in terms of gender, limitations in activities of daily living (ADLs), and health status (fair/poor).

Figure 3
Characteristics of Medicare Beneficiaries With and 
Without Prescription Drug Coverage, 1999

Characteristics of Medicare Beneficiaries With and Without Prescription Drug Coverage, 1999

Source: AARP PPI analysis using Medicare Benefits Simulation Model

Out-of-Pocket Spending on Prescription Drugs 

Although beneficiaries with drug coverage spend substantially less out-of-pocket on prescription drugs than those without drug coverage ($320 per year vs. $590, on average), having supplemental drug coverage does not necessarily protect beneficiaries from high out-of-pocket costs. As indicated in Figure 4, average out-of-pocket prescription drug spending varies considerably by beneficiaries' primary source of supplemental coverage (e.g., individually purchased insurance vs. Medicaid).

  • Beneficiaries who have drug coverage and whose primary source of supplemental coverage is from individually purchased policies (e.g., Medigap) incur among the highest annual out-of-pocket drug costs, $570 on average. This spending level likely reflects the high cost-sharing (50%) and spending caps associated with Medigap drug benefits.
  • Medicaid protects some of the lowest income beneficiaries from prescription drug costs, but leaves those who receive only partial Medicaid assistance with high out-of-pocket expenses. For example, some beneficiaries who are classified as being in the QMB program and who have some prescription drug coverage are projected to spend an average of $205 on prescription drugs in 1999. Those enrolled in the SLMB program and part-year Medicaid enrollees who have some prescription drug coverage are projected to spend an average of $380.
  • Beneficiaries who have prescription drug coverage and are enrolled in employer-provided plans are projected to spend, on average, about $320 per year on prescription drugs; those enrolled in Medicare+Choice plans are projected to spend an average of $290. These amounts likely represent cost-sharing or spending in excess of coverage limits.

Figure 4

Projected Average Out-of-Pocket Spending on Prescription Drugs,

by Primary Source of Supplemental Insurance Coverage, 1999

Primary source of

Supplemental insurance coverage

Average out-of-pocket

prescription drug spending

With coverage

Without coverage

Millions of Beneficiaries

Average spending

Millions of Beneficiaries

Average spending

All noninstitutionalized beneficiaries

25.6

$320

13.5

$590

Employer-provided

11.7

$320

1.9

$580

Individually purchased

3.2

$570

6.4

$690

Medicare+Choice

5.2

$290

0.8

$315

Medicaid--full-year dual eligiblesa

2.0

$ 75

**

**

Medicaid--full-year QMBs

1.5b

$205

0.7

$455

Medicaid--full-year SLMBs and part-year Medicaid enrollees

1.1c

$380

0.7

$455

Fee-for-service Medicare onlyd

**

**

2.6

$520

Other

0.8

$330

0.4

$480

Note: Excludes beneficiaries who reside in institutions for the entire year. Beneficiaries are grouped by primary source of supplemental coverage, not necessarily by source of prescription drug coverage.

a Beneficiaries who receive full Medicaid benefits for the full year in addition to Medicare coverage. All state Medicaid programs provide prescription drug coverage to such dually eligible Medicaid enrollees. Some programs have cost-sharing requirements.
b Because of inconsistencies in the way that states report QMB enrollment to the Health Care Financing Administration (HCFA), some beneficiaries classified here as QMBs with prescription drug coverage may be receiving full Medicaid benefits (including prescription drug coverage). Other QMBs who have drug coverage obtain it from other supplemental sources (e.g., individually-purchased policies), but Medicaid is considered to be their primary source of supplemental coverage.
c Part-year dual eligibles in this category receive prescription drug benefits during the period in which they are enrolled in Medicaid. Other beneficiaries in this category (full-year SLMBs, part-year SLMBs, and part-year QMBs) may be receiving prescription drug coverage from other supplemental sources, but Medicaid is considered to be their primary source of supplemental coverage.
d Fee-for-service Medicare-only beneficiaries have no supplemental insurance policy, but some receive drug coverage from programs such as state pharmacy assistance programs.
**Number of observations too small for reliable projections.
Source: AARP PPI analysis using Medicare Benefits Simulation Model

Barriers to Obtaining Prescription Drug Coverage

Medicare beneficiaries who want to reduce their out-of-pocket prescription drug expenses by obtaining supplemental coverage often are not able to do so.

  • Beneficiaries with employer-sponsored supplemental insurance coverage, who are by far the largest group of beneficiaries with drug coverage, account for only 30 percent of the 39 million noninstitutionalized beneficiaries estimated to be enrolled in Medicare in 1999. Even fewer beneficiaries may have drug coverage in the future, since retiree health coverage itself is declining; the share of employers offering supplemental health coverage to Medicare-eligible retirees fell from 35 percent in 1995 to 30 percent in 1998.
  • About 13 percent of noninstitutionalized beneficiaries obtain coverage through a Medicare+Choice plan. However, the future of Medicare+Choice drug benefits is uncertain. Many plans--particularly those in areas in which fee-for-service spending is high--have been able to offer prescription drug coverage because the federal payments they receive for each enrollee have been relatively generous. However, plans' ability and willingness to continue offering drug benefits may decline as a result of rapidly rising drug benefit costs and uncertainty about federal payment levels to Medicare+Choice plans. Furthermore, many beneficiaries do not have access to HMO drug benefits because they do not live in areas where Medicare HMOs are offered, or because the Medicare HMO in their area does not offer a drug benefit.
  • For beneficiaries who do not have access to employer-sponsored drug coverage or Medicare HMO drug benefits, privately purchased policies such as Medigap may be the only option for obtaining prescription drug coverage. However, for many beneficiaries, buying a Medigap policy with drug benefits may not be feasible. Such policies can cost an additional $300 to $500 in premiums per year, or more, over the cost of supplemental plan C (which covers most Medicare-related out-of-pocket costs) when first purchased at age 65. Standardized Medigap policies (that is, policies issued after 1992) have an annual $250 deductible, 50 percent coinsurance, and an annual benefit cap of either $1,250 or $3,000. Beneficiaries with health problems may not be able to buy a plan with drug benefits because Medigap insurers are required to accept applicants regardless of health status only during the first six months of enrollment in Medicare.
  • While some lower income beneficiaries may be able to receive prescription drug benefits through state Medicaid programs, many are not eligible for Medicaid because their incomes are too high or their assets are not sufficiently low. In 1999, an estimated 45 percent of noninstitutionalized beneficiaries with incomes below the federal poverty level are projected to receive no Medicaid assistance, and only about 20 percent are projected to receive full Medicaid benefits for the entire year. Some of these beneficiaries may be able to obtain drug coverage if their state offers a low-income pharmacy assistance programs. Currently, fourteen states have such programs in place; together, they provide benefits to a total of about 700,000 individuals, most of whom are age 65 and older.

Conclusions

While almost two-thirds of Medicare beneficiaries have some prescription drug coverage, many of these beneficiaries, particularly those who obtain coverage from individually purchased supplemental plans, still incur substantial out-of-pocket drug costs. Those who can least afford to pay for their drugs--beneficiaries with lower incomes-are those least likely to have prescription drug coverage. Furthermore, those most likely to need such coverage--beneficiaries reporting fair or poor health status--are no more likely that their healthier counterparts to have drug coverage.

What are some of the obstacles to obtaining drug coverage? Employer-sponsored coverage--the biggest source of coverage--is available only to those whose employer offers it, and coverage is declining over time. Medicare+Choice plans are offered only in certain areas, and drug benefits may decline over time. Individually purchased supplemental coverage with drug coverage is costly, has high cost sharing, and may be denied to certain individuals. Medicaid drug coverage is available only to the very poor, and does not reach many low-income beneficiaries.

Many of those beneficiaries who do have coverage-particularly beneficiaries who obtain drug coverage from individually purchased supplemental plans-still incur substantial out-of-pocket drug costs. In addition, rising prescription drug costs are expected to result in higher premiums for prescription drug coverage, a reduction in the rate of retiree drug coverage, and higher cost-sharing for drug benefits. Each of these factors will further increase beneficiaries' out-of-pocket prescription drug spending. As long as Medicare does not have a prescription drug benefit, beneficiaries are increasingly likely to face financial barriers to obtaining appropriate medications.

Footnotes

  1. About 5 percent of Medicare beneficiaries are estimated to reside in institutions for the entire year (AARP analysis of Medicare Benefits Simulation Model).
  2. Beneficiaries can have multiple sources of supplemental insurance and multiple sources of prescription drug coverage. The Medicare Benefits Simulation Model, from which our estimates are derived, categorizes beneficiaries by their primary source of supplemental insurance; therefore, we are not able to categorize individual beneficiaries by their primary source of prescription drug coverage. According to data presented by Davis, et al. (1999), about 95 percent of Medicare beneficiaries who had prescription drug coverage in 1995 obtained that coverage from their primary source of supplemental insurance. See Margaret Davis, et al., "Prescription Drug Coverage, Utilization, and Spending Among Medicare Beneficiaries," Health Affairs (January/February 1999), pp. 213-243.
  3. QMB enrollees have incomes exceeding state Medicaid eligibility limits but are still below 100 percent of the federal poverty level. QMB enrollees receive Medicaid coverage for Medicare Part B premiums and Medicare cost-sharing, but not for prescription drugs or other services. SLMB enrollees, who have incomes between 100 and 120 percent of the federal poverty level, receive Medicaid coverage for Medicare Part B premiums. For a more detailed description of the QMB and SLMB programs, see Margo L. Rosenbach and JoAnn Lamphere, Bridging the Gaps Between Medicare and Medicaid: The Case of QMBs and SLMBs, AARP Public Policy Institute, Issue Brief #9902 (January 1999).
  4. In 1999, the projected federal poverty levels for persons under age 65 are $8,760 for individuals, and $11,334 for couples. For persons age 65 and over, the projected levels are $8,075 for individuals, and $10,185 for couples.
  5. Our projections of out-of-pocket prescription drug spending may be lower than those reported elsewhere (e.g., Gluck, 1999) because they do not reflect any adjustments for potential underreporting of prescription drug utilization. Our projections are derived from the AARP PPI analysis using Medicare Benefits Simulation Model, developed for AARP by The Lewin Group, Inc. The model uses data from the 1995 Medicare Current Beneficiary Survey (MCBS) Cost and Use res to derive its projections. Many experts believe that the MCBS, which relies on self-reported data on prescription drug use, understates actual prescription drug utilization because of under-reporting by beneficiaries. Gluck's methodology makes an implicit partial adjustment for under-reporting, and therefore results in higher estimates of beneficiary out-of-pocket spending on prescription drugs. See Michael E. Gluck, A Medicare Prescription Drug Benefit, Medicare Brief No. 1 (Washington, DC: National Academy of Social Insurance), April 1999.
  6. Estimates of out-of-pocket spending on prescription drugs do not include the premium cost for supplemental drug coverage.
  7. For example, beneficiaries who are enrolled in HMOs typically have cost-sharing requirements and may also have annual benefit caps; between 70 and 75 percent of HMO plans with drug benefits had caps either on brand name medications or on all prescriptions in 1998. Employer-sponsored plans may require cost-sharing and may restrict coverage for certain drugs. See The Lewin Group, Current Knowledge of Third Party Outpatient Drug Coverage for Medicare Beneficiaries, Report prepared for The Pharmaceutical Research and Manufacturers of America, November 9, 1998.
  8. This total enrollment figure includes individuals who are enrolled in Medicare at any point during the year, including part-year beneficiaries who become eligible at some point in 1999 or who die during the year. As a result, it exceeds HCFA's figure of about 39 million noninstitutionalized and institutionalized beneficiaries who are enrolled at any point in time.
  9. William M. Mercer, Mercer/Foster Higgins National Survey of Employer-Sponsored Health Plans 1998: Report of Survey Findings. (New York: William M. Mercer Companies LLC), p.38.
  10. Consumer Reports, "Medicare: New Choices, New Worries." September 1998.
  11. Coverage levels vary by state. Some states provide comprehensive coverage, while others provide coverage for a limited set of products or require substantial cost-sharing. See David Gross and Sharon Bee, State Pharmacy Assistance Programs, AARP Public Policy Institute Issue Paper #9905. (Washington, DC: AARP), April 1999.

Written by David Gross and Normandy Brangan, AARP Public Policy Institute
June 1999
©1999 AARP
May be copied only for noncommercial purposes and with attribution; permission required for all other purposes.
Public Policy Institute, AARP, 601 E Street, NW, Washington, DC 20049

Join the Discussion

0 | Add Yours

Please leave your comment below.

You must be logged in to leave a comment.

Next Article

Read This