Considerations for Adding a Prescription Drug Benefit

T-HEHS-99-153: Published: Jun 23, 1999. Publicly Released: Jun 23, 1999.

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Pursuant to a congressional request, GAO discussed: (1) the factors contributing to the growth in prescription drug spending for both the general population and Medicare beneficiaries and efforts to control that growth; and (2) benefit design and implementation issues to be considered in deliberations about adding a new prescription drug benefit to the Medicare Program.

GAO noted that: (1) proposals to add prescription drug coverage to Medicare's benefits come during a period of rapid growth in national spending for pharmaceuticals and transformations in the prescription drug market; (2) increased coverage of drugs by health plans and insurers, advances in drug treatments, and aggressive marketing have spurred the growth in the use of pharmaceuticals, while the use of formularies, pharmacy benefit managers, and generic substitutions as cost control approaches have dramatically changed the nature of the market in which prescription drugs are purchased; (3) what remains unchanged since 1965, however, is the absence of coverage for outpatient prescription drugs by traditional Medicare; (4) a third of the Medicare population lacks the supplemental drug coverage provided to most beneficiaries through employer-sponsored plans, managed care organizations, Medicaid, or Medigap insurance; (5) moreover, high drug utilization among the Medicare population translates into a potentially daunting financial burden; (6) the implications of adding prescription drug coverage to Medicare's benefit package depend on the choices made regarding details such as its scope and financing; (7) its design and implementation will also shape the impact of this benefit on beneficiaries, Medicare spending, and the pharmaceutical market; (8) recent experience provides at least two approaches for implementing a drug benefit; (9) one would involve the Medicare program obtaining price discounts from manufacturers; (10) such an arrangement could be modeled after Medicaid's drug rebate program; (11) while the discounts in aggregrate would likely be substantial, this approach lacks the flexibility to achieve the greatest control over spending; (12) it cannot effectively influence or steer utilization because it does not include incentives that would encourage beneficiaries to make cost-conscious decisions; (13) the second approach would draw from private sector experience in negotiating price discounts from manufacturers in exchange for shifting market share; (14) some plans and insurers employ pharmacy benefit managers to manage their drug benefits, including claims processing, negotiating with manufacturers, establishing lists of drug products that are preferred because of price or efficacy, and developing beneficiary incentive approaches to control spending and use; and (15) applying these techniques to the Medicare program would be difficult due to its size, the need for transparency in its actions, and the imperative for equity for its beneficiaries.

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