Summary

Concerns are growing about gaps in the Medicare program, most notably the lack of outpatient prescription drug coverage, which may leave the most vulnerable program beneficiaries with high out-of-pocket costs that they can ill afford. Nearly one-third of Medicare beneficiaries lacked prescription drug coverage in 1996. At the same time, however, the long-term cost pressures confronting the Medicare program are considerable. A consensus appears to be emerging that substantive financing and programmatic reforms are needed to put Medicare on a sound footing in the future. These reforms are vital to reducing the program's growth, which threatens to consume ever-larger shares of the nation's budgetary and economic resources. Continuing economic prosperity and projected federal surpluses provide an opportunity to address the structural imbalances in Medicare, Social Security, and other entitlement programs. Congress faces the difficult decision of how best to guarantee the Medicare program's sustainability while being mindful of the plight of many seniors who cannot afford the latest pharmaceutical breakthroughs. Congress and the President may ultimately decide to include some form of prescription drug coverage as part of Medicare reform. Care must be taken, however, to ensure that any expansion of the program is accompanied by other programmatic reforms that will sustain Medicare's long-term financial integrity. This testimony discusses (1) the factors contributing to the growth in prescription drug spending and efforts to control that growth and (2) the design and implementation issues associated with proposals to improve seniors' access to affordable prescription drugs.

GAO noted that: (1) the Medicare benefit package provides virtually no coverage; (2) in 1996, almost one third of beneficiaries had employer-sponsored health coverage, as retirees, that included drug benefits; (3) more than 10 percent of beneficiaries received coverage through Medicaid or other public programs; (4) to protect themselves against drug costs, the remainder of Medicare beneficiaries can choose to enroll in a Medicare Choice plan with drug coverage or purchase a Medigap policy; (5) however, the availability, breadth, and price of such coverage is changing as the costs of expanded prescription drug use drives employers, insurers, and managed care plans to adopt new approaches to control the expenditures for this benefit; (6) over the past 5 years, prescription drug expenditures have grown substantially, both in total and as a share of all health care outlays; (7) prescription drug spending grew an average of 12.4 percent per year from 1993 to 1998, compared with a 5 percent annual growth rate for health care expenditures overall; (8) total drug expenditures have been driven up by the following factors: (a) both greater utilization of drugs and the substitution of higher-priced new drugs for lower-priced existing drugs; (b) private insurance coverage for drugs; (c) biotechnology advances and a growing knowledge of the human immune system; and (d) advertising of drugs; (9) all of these factors suggest the need for effective cost control mechanisms; (10) a common technique to manage pharmacy care and control costs is to use a formulary, which can affect how frequently a drug is prescribed and purchased and, therefore, can affect its market share; (11) another way in which the market has been transformed is through the use of pharmacy benefit managers by health plans and insurers to administer and manage prescription drug benefits; (12) expanding access to more affordable prescription drugs could involve either subsidizing prescription drug coverage or allowing beneficiaries access to discounted pharmaceutical prices; (13) the design of a drug coverage option, as well as its implementation, will determine the effect of the option on beneficiaries, Medicare or federal spending, and the pharmaceutical market; (14) a new benefit would need to be crafted to balance competing concerns about the sustainability of Medicare, federal obligations, and the hardship faced by some beneficiaries; and (15) the effect of granting some beneficiaries access to discounted prices will hinge on details such as the price of the drugs after the discount, how discounts are determined and secured, and which beneficiaries are eligible.