Medicare pays for prescription drugs only if they are administered in institutional settings (e.g., hospital or nursing home) or belong to several special drug categories such as immunosuppressives, erythropoiten, oral anti-cancer drugs, hemophilia clotting factors, and some vaccines. The vast majority of outpatient prescription drugs are not reimbursable under the standard package of Medicare benefits. Supplemental insurance thus plays an important role in understanding how much Medicare beneficiaries spend on prescription medications. What are the characteristics of Medicare beneficiaries with and without drug coverage?
More than 90 percent of Medicare beneficiaries have some form of supplemental health insurance coverage, either by qualifying for public assistance programs or by enrolling in private insurance policies through employee benefits, retiree plans or individually purchased plans. There is no centralized database that records the characteristics of these supplemental policies or of the beneficiaries who obtain them. Instead, our information on coverage rates depends almost entirely on survey data. The best nationally representative survey (and the one used by most researchers in this area) is the Medicare Current Beneficiary Survey (MCBS). Since 1992, longitudinal samples of approximately 12,000 aged and disabled beneficiaries have been queried three times a year about their supplemental insurance (including prescription drug coverage), health status, access to care, and use and cost of all health services. The scientifically rigorous methods used in selecting the respondents and soliciting accurate information make MCBS data the most reliable single source for estimating prescription drug coverage for the Medicare population.
According to 1995 MCBS data, 65.2 percent of community dwelling Medicare beneficiaries had some prescription drug coverage for at least part of the year (Poisal, et al., 1999). Over 70 percent of the disabled Medicare population had drug coverage in that year. Rates were lower among elderly beneficiaries, ranging from 66 percent of those aged 65-69 to just 60 percent of those over age 85 (Poisal, et al., 1999). Males and females have similar coverage rates (70 and 68 percent, respectively in 1995). White beneficiaries were less likely to have coverage (64 percent) than blacks (69 percent) or persons of other races (75 percent). Coverage rates rise with income from 65 percent among beneficiaries with annual incomes below $10,000 to 72 percent among beneficiaries with incomes above $30,000 per year (Poisal, et al., 1999). Beneficiaries who reside in metropolitan areas are much more likely to have prescription coverage (69 percent) compared to those who do not (54 percent) (Poisal et al., 1999). In 1995, 64 percent of beneficiaries reporting excellent health had drug coverage compared to 69 percent of those in poor health (Poisal, et al., 1999). The differences are much greater when health status is measured by counts of chronic conditions. In 1996, 65 percent of Medicare beneficiaries reporting having none of ten common chronic conditions had some prescription coverage compared to 77 percent of beneficiaries with five or more of these conditions (Stuart, et al., 2000).
The reasons for these differences are varied and complex. For beneficiaries above the poverty line, coverage rates rise with income. This could be due to higher purchasing power and the fact that retirees with higher incomes are more likely to qualify for employer-sponsored health insurance. The reason that prescription coverage is higher among nonwhites is probably not because of race per se, but rather because nonwhite retirees have lower incomes and therefore higher Medicaid eligibility rates. The negative correlation of coverage rates and self-reported health status might mean that those who need coverage the most are the most likely to seek it out, but it could also capture the impact of income and Medicaid eligibility status.
To date there has been just a single study of the determinants of prescription drug coverage for Medicare beneficiaries (Lillard, et al., 1997). It showed no evidence of adverse selection into prescription coverage, but the data for this study are quite old (1968-1990). There is a substantial body of research on selection into Medicare supplemental policies independent of benefit coverage. Recent studies of Medicare HMO enrollment (Hellinger, 1995; PPRC, 1996; Riley, 1996; Hamilton, 1999; Call, et al) find strong evidence of favorable rather than adverse selection. Indications of adverse selection in the Medigap market have been found by Ettner, (1997), Wolfe and Goddeeris (1991), and Atherly (1999). Other researchers (Cartwright, Hu, and Huang, 1992; Hurd and McGarry, 1997; Lillard, et al., 1999) find none. Most researchers assume that there is no selection into retiree plans given the nature of plan sponsorship, but Atherly (1999) finds evidence of adverse selection in this market. These thoroughly mixed findings do little to clarify the issue of possible adverse selection into prescription coverage.
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