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June 11, 2001
 

Honorable Max Baucus
Committee on Finance
Chairman
United States Senate
Washington, DC 20510

Dear Mr. Chairman:

The Congressional Budget Office (CBO) has prepared the attached updated estimates of the effect on direct spending of four proposals made during the 106th Congress to establish an outpatient prescription drug benefit in Medicare. Those proposals are:

The updated estimates reflect CBO's current baseline for spending on outpatient prescription drugs by or for the Medicare population and revisions in CBO's estimating methods. Those revisions are based on updated data and intensive review of our methods to ensure the reasonableness and consistency of the estimates.

The original proposals all would have established a prescription drug benefit in 2003 or earlier. The updated estimates assume that the benefit would begin in 2004.

The original proposals specified dollar amounts for deductibles, benefit caps, and stop-loss thresholds for the first year of the benefit, and occasionally for subsequent years. The updated estimates assume the specified amounts apply beginning in 2004.

Table 1 summarizes the effect of each proposal on direct spending during the 2002-2011 period. Tables 2 through 5 provide year-by-year estimates and supplemental information for each of the estimates.

If you or your staff have any questions about these estimates, or if you need additional information, we would be happy to be of assistance. The CBO staff contact is Julia Christensen.

I hope this information is helpful to you.

Sincerely,

Dan L. Crippen
Director
 

Attachments
 
cc: Honorable Charles E. Grassley
Ranking Member, Senate Committee on Finance
 
  Honorable Kent Conrad
Chairman, Senate Committee on the Budget
 
  Honorable Pete V. Domenici
Ranking Member, Senate Committee on the Budget
 
  Honorable John B. Breaux
 
  Honorable Bill Frist
 
Identical letters sent to Honorable W. J. "Billy" Tauzin and Honorable William "Bill" M. Thomas

 

 
Table 1.
Estimated Effect on Direct Spending of Proposals Introduced During the 106th Congress to Establish a Prescription Drug Benefit in Medicare, Fiscal Years 2004-2011
  Clinton Robb Breaux-
Frist		 H.R. 4680
Federal Spending on Prescription Drugs for Medicare Enrollees        
  Medicare 417 295 124 97
  Spending by Other Federal Programs on Prescription Drugs for Medicare Enrollees -113 -111 -64 -68
  Low-Income Subsidy 100 111 104 109
    Subtotal 405 294 164 138
 
Other Direct Spending 21 24 12 16
 
      Total 425 318 176 154
SOURCE: Congressional Budget Office.
 
TABLE 2.
CBO's Estimate of the Effect on Direct Spending of Establishing a Prescription Drug Benefit in Medicare: President Clinton's Proposal in the 2000 Mid-Session Review, Assuming Implementation in 2004 (Outlays in billions of dollars, by fiscal year)
            2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2002-
2006		 2002-
2011
Federal Spending on Prescription Drugs for Medicare Enrollees  
  Medicare  
    Benefits 0 0 28.2 44.3 54.1 63.3 75.0 86.4 100.4 116.4 126.6 568.0
    Premiums 0 0 -8.9 -12.3 -15.9 -17.7 -21.6 -23.8 -28.0 -31.6 -37.0 -159.7
    Subsidy to ESI plans 0 0 0.5 0.7 0.9 1.0 1.2 1.3 1.6 1.8 2.1 9.0
      Subtotal 0 0 19.8 32.7 39.2 46.5 54.6 64.0 74.0 86.5 91.7 417.3
 
  Spending by Other Federal Programs on Drugs for Medicare Enrollees  
    Medicaid 0 0 -4.3 -9.3 -10.4 -11.6 -13.0 -14.6 -16.3 -18.3 -24.0 -97.8
    FEHB (for annuitants, on-budget) 0 0 -0.3 -0.4 -0.4 -0.5 -0.5 -0.5 -0.6 -0.6 -1.1 -3.7
    Tricare 0 0 -0.6 -0.9 -1.1 -1.3 -1.5 -1.7 -2.0 -2.3 -2.5 -11.3
      Subtotal 0 0 -5.2 -10.5 -11.9 -13.4 -15.0 -16.9 -18.9 -21.2 -27.5 -112.9
 
  Low-Income Subsidy 0 0 4.3 9.1 10.8 12.2 13.6 15.0 16.7 18.6 24.1 100.2
 
        Subtotal, Federal Spending on Drugs for Medicare Enrollees 0 0 18.9 31.2 38.1 45.4 53.2 62.2 71.8 83.9 88.2 404.7
 
Other Direct Spending  
  Other Medicaid and Medicare effects 0 a 0.6 1.4 2.2 2.4 2.6 2.8 3.0 3.2 4.3 18.3
  Effect of higher drug prices on federal programs (on-budget) 0 0 a 0.1 0.1 0.2 0.3 0.4 0.5 0.7 0.2 2.2
  Effect of higher drug prices on FEHB (for postal workers and annuitants, off-budget) 0 0 a a a a a a a a 0 0
      Subtotal 0 a 0.7 1.5 2.3 2.6 2.9 3.1 3.5 3.9 4.5 20.5
 
          Total 0 a 19.6 32.7 40.4 48.0 56.1 65.3 75.3 87.8 92.8 425.2
 
Memorandum: Change in Spending by States 0 a -0.1 -0.6 -0.3 -0.4 -0.6 -0.8 -1.1 -1.4 -1.0 -5.2
Characteristics of the Proposed Benefit
Voluntary prescription drug benefit under new Part D; one-time only enrollment option; 50 percent subsidy of premium below the benefit cap, 100 percent subsidy of premium above the stop-loss amount.
Administered by single Pharmacy Benefit Manager (PBM) per region that does not assume insurance risk.
Premiums and cost-sharing subsidies for low-income people, including amounts above the benefit cap and below the stop-loss amount.
 
Monthly Premium for Prescription Drug Benefit     $27.50 $28.40 $38.40 $39.90 $49.50 $51.40 $61.10 $65.50    
 
Deductible     $0 $0 $0 $0 $0 $0 $0 $0    
Coinsurance Rate (Percent)     50 50 50 50 50 50 50 50    
 
Benefit Cap     $1,000 $1,000 $1,500 $1,500 $2,000 $2,000 $2,500 $2,638    
Total Spending on Drugs at the Benefit Cap     $2,000 $2,000 $3,000 $3,000 $4,000 $4,000 $5,000 $5,276    
 
Stop-loss Amount     $4,000 $4,220 $4,452 $4,697 $4,955 $5,228 $5,515 $5,819    
Total Spending on Drugs at the Stop-loss Amount     $5,000 $5,220 $5,952 $6,197 $6,955 $7,228 $8,015 $8,457    
 
Participation Rate (as percentage of Part B enrollment)     92% 92% 92% 92% 92% 92% 92% 92%    
Price Effect (in the 10th year) 12.4%  
Medicare Cost-Management Factor 10.0%  
SOURCE: Congressional Budget Office.
Notes: a = less than $50 million; ESI = employer-sponsored insurance; FEHB = Federal Employees Health Benefits program.
 
TABLE 3.
CBO's Estimate of the Effect on Direct Spending of Establishing a Prescription Drug Benefit in Medicare: Senator Robb's Proposal in Amendment 3598 to H.R. 4577, Assuming Implementation in 2004 (Outlays in billions of dollars, by fiscal year)
            2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2002-
2006		 2002-
2011
Federal Spending on Prescription Drugs for Medicare Enrollees  
  Medicare  
    Benefits 0 0 31.6 50.3 57.6 65.1 73.9 84.0 95.0 108.5 139.5 565.9
    Premiums 0 0 -17.0 -25.5 -29.2 -33.0 -37.4 -42.5 -48.0 -54.9 -71.8 -287.6
    Subsidy to ESI plans 0 0 1.0 1.4 1.7 1.9 2.1 2.4 2.7 3.1 4.1 16.2
      Subtotal 0 0 15.5 26.2 30.1 34.0 38.6 43.9 49.7 56.7 71.7 294.6
 
  Spending by Other Federal Programs on Drugs for Medicare Enrollees  
    Medicaid 0 0 -4.3 -9.3 -10.4 -11.6 -13.0 -14.6 -16.3 -18.3 -23.9 -97.8
    FEHB (for annuitants, on-budget) 0 0 -0.2 -0.3 -0.3 -0.3 -0.4 -0.4 -0.4 -0.4 -0.7 -2.6
    Tricare 0 0 -0.6 -1.0 -1.1 -1.3 -1.4 -1.7 -1.9 -2.1 -2.7 -11.1
      Subtotal 0 0 -5.1 -10.5 -11.8 -13.2 -14.8 -16.6 -18.6 -20.9 -27.4 -111.5
 
  Low-Income Subsidy 0 0 4.5 9.3 11.3 13.2 15.0 17.0 19.2 21.8 25.2 111.2
 
        Subtotal, Federal Spending on Drugs for Medicare Enrollees 0 0 14.9 25.0 29.6 33.9 38.7 44.2 50.3 57.7 69.5 294.3
 
Other Direct Spending  
  Other Medicaid and Medicare effects 0 a 0.7 1.7 2.5 2.9 3.0 3.2 3.5 3.7 5.0 21.3
  Effect of higher drug prices on federal programs (on-budget) 0 0 a 0.1 0.1 0.2 0.3 0.4 0.6 0.8 0.3 2.6
  Effect of higher drug prices on FEHB (for postal workers and annuitants, off-budget) 0 0 a a a a a a a a 0 0
      Subtotal 0 a 0.8 1.7 2.7 3.1 3.4 3.7 4.1 4.5 5.2 23.9
 
          Total 0 a 15.7 26.7 32.3 37.0 42.1 47.9 54.3 62.2 74.8 318.2
 
Memorandum: Change in Spending by States 0 a 0.4 0.4 1.1 1.4 1.7 1.9 2.2 2.6 1.9 11.7
Characteristics of the Proposed Benefit
Voluntary prescription drug benefit under new Part D; one-time only enrollment option; 50 percent subsidy of premium.
Administered by competing Pharmacy Benefit Managers (PBMs) that do not assume insurance risk.
Coinsurance rates below the stop-loss amount vary from 50 percent to 25 percent.
Premiums and cost-sharing subsidies for low-income people.
 
Monthly Premium for Prescription Drug Benefit     $52.80 $60.70 $68.10 $75.20 $83.80 $93.20 $103.30 $114.70    
 
Deductible     $250 $250 $277 $306 $338 $371 $406 $443    
Coinsurance Rate (Percent)     25-50 25-50 25-50 25-50 25-50 25-50 25-50 25-50    
 
Benefit Cap     None None None None None None None None    
Total Spending on Drugs at the Benefit Cap     n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.    
 
Stop-loss Amount     $4,000 $4,000 $4,428 $4,902 $5,402 $5,931 $6,495 $7,092    
Total Spending on Drugs at the Stop-loss Amount     $8,750 $8,750 $9,686 $10,723 $11,816 $12,974 $14,207 $15,514    
 
Participation Rate (as percentage of Part B enrollment)     92% 92% 92% 92% 92% 92% 92% 92%    
Price Effect (in the 10th year) 17.9%  
Medicare Cost-Management Factor 17.5%  
SOURCE: Congressional Budget Office.
Notes: a = less than $50 million; ESI = employer-sponsored insurance; n.a. = not applicable; FEHB = Federal Employees Health Benefits program.
 
TABLE 4.
CBO's Estimate of the Effect on Direct Spending of Establishing a Prescription Drug Benefit in Medicare: S. 2807, as Introduced by Senators Breaux and Frist, and Modified in Discussions with Staff; Assuming Implementation in 2004 (Outlays in billions of dollars, by fiscal year)
            2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2002-
2006		 2002-
2011
Federal Spending on Prescription Drugs for Medicare Enrollees  
  Medicare  
    Benefits 0 0 21.5 32.8 36.5 40.1 44.4 49.4 54.8 61.4 90.9 341.0
    Premiums 0 0 -14.5 -20.9 -23.2 -25.4 -28.1 -31.3 -34.7 -38.8 -58.6 -216.8
      Subtotal 0 0 7.0 12.0 13.3 14.7 16.3 18.2 20.2 22.6 32.3 124.3
 
  Spending by Other Federal Programs on Drugs for Medicare Enrollees  
    Medicaid 0 0 -2.5 -5.4 -6.0 -6.7 -7.6 -8.5 -9.5 -10.8 -13.8 -56.9
    FEHB (for annuitants, on-budget) 0 0 -0.1 -0.1 -0.1 -0.1 -0.1 -0.2 -0.2 -0.2 -0.3 -1.1
    Tricare 0 0 -0.4 -0.6 -0.6 -0.7 -0.8 -0.9 -1.0 -1.1 -1.6 -6.1
      Subtotal 0 0 -3.0 -6.0 -6.7 -7.6 -8.5 -9.6 -10.7 -12.1 -15.7 -64.2
 
  Low-Income Subsidy 0 0 4.6 9.2 11.0 12.6 14.1 15.7 17.5 19.6 24.8 104.2
 
        Subtotal, Federal Spending on Drugs for Medicare Enrollees 0 0 8.7 15.1 17.6 19.7 21.8 24.3 27.0 30.1 41.4 164.3
 
Other Direct Spending  
  Other Medicaid and Medicare effects 0 a 0.4 0.5 1.0 1.4 1.8 2.0 2.1 2.2 1.9 11.4
  Effect of higher drug prices on federal programs (on-budget) 0 0 a a a a a a a a a 0.1
  Effect of higher drug prices on FEHB (for postal workers and annuitants, off-budget) 0 0 a a a a a a a a 0 0
      Subtotal 0 a 0.4 0.5 1.0 1.4 1.8 2.0 2.1 2.2 1.9 11.5
 
          Total 0 a 9.1 15.6 18.6 21.2 23.7 26.3 29.1 32.3 43.3 175.9
 
Memorandum: Change in Spending by States 0 a -0.7 -1.4 -1.1 -1.5 -2.2 -2.7 -3.2 -3.7 -3.1 -16.4
Characteristics of the Proposed Benefit
Voluntary prescription drug benefit under new Part D; one-time only enrollment option; 25 percent subsidy of basic benefit.
Administered by competing Pharmacy Benefit Managers (PBMs) with full risk, offset by 80 percent federal reinsurance on high-cost enrollees.
Premiums and cost-sharing subsidies for low-income people, but no subsidy for amounts above the benefit cap and below the stop-loss amount.
 
Monthly Premium for Prescription Drug Benefit     $46.40 $50.70 $55.60 $59.50 $64.90 $70.70 $76.80 $83.50    
 
Deductible     $250 $277 $306 $338 $371 $406 $443 $484    
Coinsurance Rate (Percent)     50 50 50 50 50 50 50 50    
 
Benefit Cap     $1,050 $1,162 $1,287 $1,418 $1,557 $1,705 $1,862 $2,033    
Total Spending on Drugs at the Benefit Cap     $2,350 $2,601 $2,880 $3,174 $3,485 $3,816 $4,167 $4,550    
 
Stop-loss Amount     $6,000 $6,642 $7,353 $8,103 $8,897 $9,742 $10,638 $11,617    
Total Spending on Drugs at the Stop-loss Amount     $7,050 $7,804 $8,639 $9,521 $10,454 $11,447 $12,500 $13,650    
 
Participation Rate (as percentage of Part B enrollment)     89% 89% 89% 89% 89% 89% 89% 89%    
Price Effect (in the 10th year) 0.7%  
Medicare Cost-Management Factor (Risk / Fallback) 30.0% / 12.5%  
SOURCE: Congressional Budget Office.
Notes: a = less than $50 million; FEHB = Federal Employees Health Benefits program.
 
TABLE 5.
CBO's Estimate of the Effect on Direct Spending of Establishing a Prescription Drug Benefit in Medicare: H.R. 4680, the Medicare Rx 2000 Act, as passed by the House; Assuming Implementation in 2004 (corrected August 10, 2001) (Outlays in billions of dollars, by fiscal year)
            2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2002-
2006		 2002-
2011
Federal Spending on Prescription Drugs for Medicare Enrollees  
  Medicare  
    Benefits 0 0 20.2 30.7 34.1 37.2 41.1 45.7 50.6 56.5 85.0 316.0
    Premiums 0 0 -15.0 -21.6 -23.8 -25.7 -28.3 -31.4 -34.7 -38.7 -60.4 -219.1
      Subtotal 0 0 5.2 9.2 10.3 11.5 12.8 14.3 15.9 17.8 24.6 96.8
 
  Spending by Other Federal Programs on Drugs for Medicare Enrollees  
    Medicaid 0 0 -2.7 -5.8 -6.4 -7.2 -8.1 -9.1 -10.1 -11.3 -15.0 -60.8
    FEHB (for annuitants, on-budget) 0 0 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.3 -0.9
    Tricare 0 0 -0.4 -0.6 -0.6 -0.7 -0.8 -0.9 -1.0 -1.1 -1.6 -6.1
      Subtotal 0 0 -3.2 -6.5 -7.2 -8.1 -9.0 -10.1 -11.3 -12.6 -16.8 -67.8
 
  Low-Income Subsidy 0 0 5.1 9.9 11.7 13.2 14.6 16.3 18.2 20.3 26.6 109.2
 
        Subtotal, Federal Spending on Drugs for Medicare Enrollees 0 0 7.1 12.6 14.7 16.6 18.4 20.5 22.8 25.5 34.4 138.2
 
Other Direct Spending  
  Other Medicaid and Medicare effects 0 a 0.2 0.3 0.9 1.7 2.5 3.1 3.3 3.6 1.5 15.6
  Effect of higher drug prices on federal programs (on-budget) 0 0 a a a a a a a a a 0.1
  Effect of higher drug prices on FEHB (for postal workers and annuitants, off-budget) 0 0 a a a a a a a a 0 0
      Subtotal 0 a 0.2 0.3 0.9 1.7 2.5 3.1 3.3 3.6 1.5 15.7
 
          Total 0 a 7.3 12.8 15.7 18.3 20.9 23.6 26.1 29.1 35.9 153.9
 
Memorandum: Change in Spending by States 0.0 0.0 -0.9 -1.8 -2.0 -3.0 -4.1 -5.1 -5.7 -6.5 -4.7 -29.1
Characteristics of the Proposed Benefit
Voluntary prescription drug benefit under new Part D; one-time only enrollment option.
Administered by competing Pharmacy Benefit Managers (PBMs) with full risk,offset by 35 percent reinsurance subsidy on high-cost enrollees.
Premiums and cost-sharing subsidies for low-income people, but no subsidy for amounts above the benefit cap and below the stop-loss amount.
 
Monthly Premium for Prescription Drug Benefit     $54.60 $59.40 $64.80 $68.20 $74.10 $80.50 $87.30 $94.60    
 
Deductible     $250 $277 $306 $338 $371 $406 $443 $484    
Coinsurance Rate (Percent)     50 50 50 50 50 50 50 50    
 
Benefit Cap     $1,050 $1,162 $1,287 $1,418 $1,557 $1,705 $1,862 $2,033    
Total Spending on Drugs at the Benefit Cap     $2,350 $2,601 $2,880 $3,174 $3,485 $3,816 $4,167 $4,550    
 
Stop-loss Amount     $6,000 $6,642 $7,353 $8,103 $8,897 $9,742 $10,638 $11,617    
Total Spending on Drugs at the Stop-loss Amount     $7,050 $7,804 $8,639 $9,521 $10,454 $11,447 $12,500 $13,650    
 
Participation Rate (as percent of Part B enrollment)     79% 79% 78% 78% 78% 78% 78% 78%    
Price Effect (in the 10th year) 0.5%  
Medicare Cost-Management Factor (Risk / Fallback) 30.0% / 12.5%  
SOURCE: Congressional Budget Office.
Notes: a = less than $50 million; FEHB = Federal Employees Health Benefits program.