Medicare Drug Bill Poised to Pass: What's Next?

Prescription drug use increases with age and prescription drug costs increase over time. These factors, combined with the lack of a prescription drug benefit for Medicare-eligible adults, make the acquisition of affordable medicines difficult for seniors. After five years of deadlock, Congress seems ready to pass a Medicare prescription drug benefit. Regardless of what the final package looks like, HCFO-funded research will help decision-makers understand its implications and help shape the implementation process.

Legislation currently moving its way through Congress attempts to address seniors' need for an insurance program to cover their prescription drug costs through the creation of a prescription drug benefit for Medicare. The legislation, titled Medicare Prescription Drug and Modernization Act of 2003 in the House (H.R. 1) and Prescription Drug and Medicare Improvement Act of 2003 in the Senate (S. 1) is currently being reconciled in conference committee. For a side-by-side comparison, visit the Kaiser Family Foundation.

Many similarities exist between the two proposed bills. For example, both are voluntary, both propose an additional Part D benefit, both offer a one-time enrollment option to prevent adverse selection, and both would offer discount cards to cover the two years needed for implementation before the benefit begins in 2006. Several important distinctions exist between the two bills, however, that have implications for access, costs, and quality. The Senate bill includes a fallback provision that the federal government will assume the risk of providing prescription drugs to seniors if stand-alone benefit plans are not available in a certain region. The House bill does not include this provision. Another notable difference is the cost-sharing provisions, the insurance limit, and the stop-loss threshold.

There are questions and issues that will need to be addressed regardless of the form of the final benefit. For example, how does a prescription drug benefit affect costs for other health care services? What are the implications for utilization rates with the addition of insurance for prescription drugs? How will specific populations, such as dual-eligibles, minorities, and low-income individuals, be affected by a new benefit? What are the impacts of management tools, such as formularies and tiered cost-sharing in expenditures or utilization of other health care services? Existing and ongoing HCFO-funded research provides answers to these questions and others.

HCFO-funded research relevant to the Medicare and prescription drug benefit design debate

Title: Prescription Benefit Comprehensiveness and Costs of Care in Elderly Persons with Chronic Illness: The Medicare Enrollee Drug Study (MEDS)
Institution: University of Washington
Time: November 2000 - April 2003
PI: Mark P. Doescher, M.D., MSPH

Is the cost of adding a prescription drug benefit to Medicare offset by a decrease in costs for other health care services? Researchers at the University of Washington are examining this question by looking at the effects of prescription drugs on more resource-intensive care. Using a sample of enrollees in a Medicare HMO administered by the Group Health Cooperative of Puget Sound, they are testing the following hypotheses: 1) as pharmaceutical benefit comprehensiveness increases, Medicare enrollees will engender higher outpatient pharmacy costs, but lower costs for other outpatient and inpatient services; and 2) the effects of increasing prescription drug benefits generosity will be amplified for low-income individuals. Their goal is to inform the current debate about Medicare prescription benefits on the possible cost off-setting that could be associated with improving pharmaceutical coverage for the elderly.

Title: Capped Prescription Benefits and Medicare Managed Care
Institution: University of Arizona Health Services Center
Time: August 1999 - July 2000
PI: Brenda Motheral, Ph.D.

What is the impact of capped prescription drug benefits on the drug-taking behavior of beneficiaries ages 65 or older enrolled in Medicare HMO plans? The elderly represent only 12 percent of the population, yet they incur 35 to 40 percent of all prescription costs. The dichotomy between the high utilization of prescription drugs by the elderly and the absence of a prescription benefit under traditional Medicare has motivated enrollment in Medicare risk plans that offer a prescription benefit. However, a high percentage of these HMOs that offer prescription drug benefits cap them in order to protect against financial risk. Hypothesizing that individuals reaching the limit on their cap may opt not to purchase or take the prescribed amounts of medications, leading to increased health costs for preventable conditions, the researchers evaluated changes in the amount of the cap on compliance with and utilization of prescribed medications among Medicare risk HMO enrollees. They also examined the effect of reaching the cap on disenrollment from the plan. The objective of this study was to provide public policymakers and plan administrators with better information about the impact of limiting prescription drug benefits as they seek to contain costs without negatively affecting the quality of care.

Title: Changes in Drug Payment and Management Strategies in Physician Organization
Institution: University of California, San Francisco
Time: September 1999 - December 2001
PI: Helene Levens Lipton, Ph.D.

How do changes in payment methods for drug costs affect drug use management, and what are the potential effects of these changes on quality and costs of care? Researchers at the University of California, San Francisco conducted a series of case studies examining changes in payment methods for prescription drugs. They: 1) described drug risk-sharing arrangements between HMOs and physician organizations; and 2) developed and refined hypotheses and generated preliminary findings about the relationships between physician organization risk bearing for drug costs, adoption of innovations in managing drug utilization, and the potential effects of these on quality and costs of care. The investigators analyzed whether HMOs retain control of some core pharmacy functions, including rebate contracting with drug manufacturers and formulary management, and if so, whether retention of such functions serves as an impediment to drug management innovation or as a barrier to changing physicians' prescribing practices. They also examined whether physician organization risk bearing for drug costs leads to a preoccupation with interventions designed primarily to decrease drug budgets. The objective of this study was to better inform private and public policymakers as they strive to set appropriate standards for and monitor the effects of various strategies to pay for and manage drug costs.

Title: The Impact of Pharmaceutical Formularies on Prescription Drug and Health Care Costs and Utilization
Institution: Harvard University
Time: May 2001 - April 2004
PI: Richard G. Frank, Ph.D.

What are the effects of a health plan instituting a three-tiered co-payment (TTCP) financing mechanism on prescription drug spending, total health care spending, and patients' compliance with treatment protocols and quality of care? The study, conducted by researchers at Harvard University in conjunction with Merck-Medco, involves an analysis of Merck-Medco administrative, medical and pharmaceutical claims, and encounter data. The researchers are investigating the effects of the three-tier co-payments on drug use and costs for both drugs and other health care services as well as the effects of the three-tier formulary on patterns of care for patients diagnosed with depression, congestive heart failure, and hypercholesterolemia. The objective of the study is to inform public and private policymakers - particularly those involved in designing proposals for adding a prescription drug benefit to Medicare - on the range of implications a three-tier copay strategy for prescription drug cost containment may have for patients, plans, and the market.

Title: Research on the Relationship Between Market Characteristics and the Number and Type of Medicare Enrollees in HMOs
Institution: University of Michigan
Time: February 1999 - July 2001
PI: Catherine McLaughlin, Ph.D.

What factors help explain why Medicare beneficiaries choose to enroll in different types of Medicare plans? A research team at the University of Michigan examined this question by assessing whether certain market conditions encouraged enrollment in different types of plans. Using the Community Tracking Study Household Survey data, InterStudy Survey data, a telephone survey of the 10 largest sellers of Medigap insurance policies nationwide, and a survey of three insurers selling Medigap policies in each of the 60 Community Tracking Study markets, they compared individuals who choose to enroll in Medicare HMOs to those who choose to enroll in Medicare fee-for-service plans. Market characteristics examined included prevalence and types of supplemental premiums offered, HMO reimbursement rates, and measures of HMO competition. One hypothesis tested was that Medicare HMOs market their products more aggressively in areas where Medicare pays a high average adjusted per capita costs (AAPCC) rate. Their objective was to better understand the role of market forces on Medicare, and subsequently on enrollees in Medicare HMOs.

Title: Exit, Voice and Frailty: Consumer Behavior Under Managed Competition
Institution: Yale University
Time: February 2000 - December 2002
PI: Mark Schlesinger, Ph.D.

What is the relationship between health care consumers' willingness and ability to exit health plan enrollment, and their "voice" or willingness to complain in order to improve their care and satisfaction? According to researchers at Yale University and Harris Allen Associates, managed competition models rely on exit as the primary safeguard for quality-consumers can exit if they are dissatisfied with care. Yet we know little about consumers' real ability to exit plans (Are there other plans available? What are the ramifications of exiting?). There is not much literature on voice and consumers' willingness to complain or make their feelings known to plans. This project analyzes data from the Employee Health Care Value Survey (EHCVS), a two-stage employee survey fielded by three large corporations in 1993 and 1995. The survey has a range of managed care models, a relatively large sample, and data on health status, sociodemographic factors, and satisfaction with plan measures. The objective of the study is to identify enrollee characteristics that facilitate (or are associated with) health plan exit (disenrollment) and voice (complaints) to help assess the true feasibility of the managed competition model.

Title: An Empirical Investigation of Employee Health Plan Choice and Switching Behavior Under Managed Competition
Institution: University of California, Irvine
Time: November 1996 - April 2001
PI: Thomas C. Buchmueller, Ph.D.

How do consumers choose among competing health plans in a managed competition setting? The researchers conducted five related empirical studies analyzing a data set compiled from the health benefits program of the University of California (UC). This data set consists of five years (1992 to 1996) of open enrollment choices for more than 100,000 UC employees and retirees. The researchers: 1) extended and refined their previous analysis of the effect of price on switching among health plans; 2) investigated the implications of overlapping provider panels for patterns of health plan switching; 3) examined the factors affecting the health plan choices and switching decisions of more than 30,000 retirees receiving health benefits from the UC; 4) examined the health plan switching decisions of individuals with serious health conditions; and 5) examined the relationship between various satisfaction measures and plan switching. The objective of this study was to better inform policymakers about how consumers make choices among competing health plans.

Title: Medicare Risk-Contracting: Impact on Access and Quality for Medicare HMO Enrollees and Vulnerable Populations
Institution: University of Southern California
Time: February 2001 - January 2004
PI: Glenn A. Melnick, Ph.D.

What are the effects of Medicare managed care on access and quality (compared to Medicare fee-for-service) for the general population of managed care beneficiaries and vulnerable populations, in particular? Based on previous studies finding that managed care works best for those who know how to work the system, the researchers at the University of Southern California hypothesize that vulnerable populations are more likely to plan than their non-vulnerable equivalents. They will test this hypothesis at both the patient and plan levels, examining the following questions: 1) Do vulnerable populations enrolled in Medicare managed care receive different levels or quality of care than their less vulnerable counterparts? and 2) Do health plan characteristics (e.g., type of ownership, organizational structure, or experience with Medicare risk contracting) influence the level of care vulnerable populations receive? The goal of this study is to provide policymakers with a deep and broad analysis of the experiences of Medicare managed care enrollees.

Title: Evaluation of Medicare's Local Medical Review Policies for New Medical Technologies
Institution: Harvard University
Time: May 2001 - December 2003
PI: Susan B. Foote, J.D.

How does variation in coverage decisions affect access to new technologies and equity for beneficiaries in the Medicare program? Are Medicare's Local Medical Review Policies (LMRPs) in need of reform? LMRPs are one of two ways that CMS evaluates new technologies and procedures in order to make coverage determinations. According to the researchers, a small number of technologies are reviewed through CMS's national process, where decisions are made uniformly across the country. However, the majority of such coverage decisions are made by local carriers and intermediaries under contract to CMS, with the LMRPs binding only in the local jurisdiction. The researchers are evaluating variations in LMRPs by analyzing: 1) the players - who participates in and influences decisions; 2) the process - how decision-making procedures differ; 3) the evidence - how evidence of value is solicited and measured; and 4) the outcomes - measuring and mapping timing and content patterns. The objective of the study is to provide policymakers considering the virtues of a more uniform national coverage policy, relative to a more flexible local policy, with better information about the extent of LMRP variation, the sources of variation, and the implications for flexible decision making, beneficiary access, and Medicare equity.

Title: Medicare and Disparities in Health
Institution: International Longevity Center-USA Ltd.
Time: January 2003 - December 2003
PI: Sandra L. Decker, Ph.D.

How does becoming eligible for Medicare affect utilization and health outcomes? Researchers at the International Longevity Center are estimating the effect of gaining Medicare coverage on health care utilization and outcomes. They suggest that examining the impact of this change in coverage for the near elderly (55 - 64) will shed light on the relationship between insurance coverage and use of services in health status more generally. The researchers include in their sample people who were insured and uninsured before becoming eligible for Medicare. The objective of the study is to provide policymakers with information about the effects of coverage, generally, and about expanding coverage to the near-elderly, specifically.

Title: Health Plan Selection for Medicare Eligible Enrollees in the Federal Employees Health Benefits Program
Institution: Emory University
Time: April 2002 - September 2003
PI: Curtis Florence, Ph.D.

How do variations in out-of-pocket premiums and benefits influence plan choice among Medicare-eligible enrollees in the Federal Employees Health Benefits (FEHBP) Program? Researchers at Emory University are examining the following questions: (1) How sensitive is the health plan choice of Medicare-eligible persons to variation in premiums? (2) How sensitive is the health plan choice of Medicare-eligible persons to variation in plan benefits? (3)Does the plan choice of Medicare-eligible enrollees reflect adverse selection for plans with greater benefits? (4) How strong is the preference for fee-for-service plans among Medicare-eligible enrollees? How much must fee-for-service premiums increase to induce them to pick managed care plans? (5) How would different subsidy schemes affect health plan enrollment for Medicare eligible enrollees? The researchers hope to generate policy-relevant findings concerning two approaches to Medicare reform: (1) a defined contribution subsidy and an "a la carte" plan that competes on the basis of price; or (2) a "bundled service" plan that competes on the basis of price and benefits. The objective of this study is to simulate the effect of various Medicare reform proposals by providing estimates of how enrollees react to changes in premiums and benefits offered and local health care costs. The researchers believe that the study will substantially contribute to an understanding of health plan choice for the Medicare population.

Title: Implementation and Impact of Health-Based Risk Adjustment
Institution: Park Nicollet Institute
Time: June 2000 - May 2003
PI: David Knutson

What is the impact of risk adjustment payment in the Twin Cities and other markets in which risk adjustment is well-established? The researchers at the Park Nicollet Institute particularly focus on its impact on the chronically ill. The three-year study is assessing the impact of risk adjustment on payers through annual interviews and the review of documentation on methods, phase-in, and extent of risk adjustment. The impact of risk adjustment is being assessed through annual interviews and analysis of eight markets for each of four products: Medicare risk; Medicaid risk; state employees, and private multiple-choice arrangements. Finally, the researchers are surveying individuals in Medicaid or Buyers Health Care Action Group (BHCAG) who were identified as chronically ill to assess the impact of risk adjustment on this vulnerable population. The objective is to inform state and private policymakers on the impact of risk adjustment on the mix of enrollees, costs, and satisfaction of payers and plans.

Title: Thomas C. Buchmueller, Ph.D.
Institution: University of California Irvine Graduate School of Management
Time: March 2002 - February 2003
PI: The Effect of Price on Health Plan Choices of Retirees

The researcher will analyze data from a large western employer to assess the price sensitivity and related health plan choices of Medicare-eligible retirees. Building on previous HCFO-funded research, the researcher will analyze the following: 1) What is the effect of out-of-pocket premiums on the health plan choices of Medicare-eligible retirees? 2) How price-sensitive are early retirees (under 65)? and 3) How responsive are retirees to financial incentives for declining coverage? The objective of this study is to educate decision-makers who develop Medicare reforms by providing credible estimates of the price sensitivity of Medicare beneficiaries. In addition, the researcher seeks to inform policymakers about how retirees respond to financial incentives and the impact this response might have on how insurance costs are allocated.