Report to the President: Prescription Drug Coverage, Spending, Utilization, and Prices.. 2.4 Impact of Prescription Coverage on Drug Use and Cost

04/01/2000

Surely the most compelling issue for policy makers regarding a possible Medicare drug benefit is the question of cost. For any given proposal, actuaries can readily determine that part of the program cost which represents a shift in financial responsibility from beneficiaries or other third party payors. It is much more difficult to predict the impact that coverage will have on the utilization patterns of previously uninsured beneficiaries. This issue has two important components: Does drug coverage encourage Medicare beneficiaries to use more outpatient prescription medications? Does drug coverage influence the type and cost of the medications prescribed and used? The available literature on these topics is primarily descriptive, representing cross-tabulations of utilization and expenditure by presence and source of coverage. Taken at face value, the reported differences suggest that insurance plays a very significant role in the drug utilization decisions of Medicare beneficiaries and their prescribers. A sampling of these findings tells the story:

  • Beneficiaries with drug coverage filled an average of 20.3 prescriptions in 1995 compared to 15.3 for beneficiaries without coverage (Davis et al, 1999).
  • Beneficiaries enrolled throughout 1996 with full-year prescription coverage filled an average of 22.4 prescriptions compared to 20.7 for those with part year coverage and 16.7 for those with no coverage (Stuart, et al., 2000).
  • Average spending on outpatient prescriptions by covered individuals was 66 percent higher in 1996 compared to non-covered beneficiaries (Poisal, et al., forthcoming).

The differences in utilization and annual drug spending by insurance status extend to all major population subgroups categorized by age, income, and health status:

  • In 1996, disabled Medicare beneficiaries under age 44 who had drug coverage spent 300 percent more on prescriptions than their counterparts without coverage, $1,077 to $268. (Poisal, et al., forthcoming).
  • Among the oldest of the elderly (aged 85 plus), those with drug coverage spent 60 percent more on prescriptions than those without coverage (Poisal, et al., forthcoming).
  • Beneficiaries with annual incomes in 1996 below the poverty line and no drug coverage filled only 13.8 prescriptions compared to 25.4 prescriptions if they had coverage (Poisal, forthcoming).
  • Beneficiaries reporting their health as fair or poor filled 36.7 prescriptions in 1996 if they had full-year drug coverage, but only 27.2 prescriptions if they had no coverage. Those with part-year drug benefits filled 34.3 prescriptions for the year (Stuart, et al., 2000).

The source of coverage also appears to matter:

  • In 1995, Medicare beneficiaries with Medicaid drug coverage filled an average of 27 prescriptions compared to 16.2 for Medicare risk HMO enrollees and 18.6 for those with employer-sponsored coverage (Poisal, et al., forthcoming).

There have been no systematic studies of the relationship between drug coverage and the composition of drug utilization, i.e., the selection of specific therapeutic products for a given disease. However, there is a widely held belief that insurance affords better access to newer, more expensive therapeutic agents. One recent finding consistent with this view shows that Medicare beneficiaries in 1996 who reported good to excellent health utilized drug products with an average cost of $40.70 if insured, but only $28.74 if they were not covered for prescription drugs (Stuart, et al., 2000).

All of these reported findings are subject to a major caveat. Although the differences in drug cost and use associated with insurance coverage appear both large and consistent, they are purely descriptive and do not necessarily mean that drug coverage causes or induces beneficiaries to use more. Indeed, some analysts argue that the differences are primarily due to the fact that sicker individuals who are heavy users of prescription medication are more likely to purchase drug coverage or enroll in public plans that provide it. While it is true that beneficiaries in poorer health are more likely to have prescription coverage (as noted in section 2.3 above), that does not rule out an independent insurance effect on demand.

There is a small but growing analytical literature that attempts to disentangle the various influences on the demand for prescription drugs by the elderly. Early studies by Long and Gordon (1989) and Long (1989) support the view that observed differences in drug use for persons with drug coverage under Medigap plans are the result of adverse selection rather than an insurance effect. These authors find no insurance effect among Medicare beneficiaries with employer coverage (where there is presumably little adverse selection).

More recent work supports the opposite view that drug coverage does induce additional usage. Based on data from a survey of Pennsylvania elderly, Coulson and Stuart (1995) and Coulson et al. (1995) found that prescription coverage increased drug use by approximately 3 percent for every 10 percent reduction in out-of-pocket cost to beneficiaries, all else being equal. These authors also found that the primary effect of drug coverage is to induce additional persons to use prescription medicine as opposed to increasing prescription use among users. This “hurdle” phenomenon associated with patient cost-sharing was first observed in the famous Rand Health Insurance Experiment of the late 1970’s and early 1980’s (Manning et al., 1989). It has since been observed in a number of recent studies of the insurance effect of drug coverage on elderly Medicare beneficiaries (Stuart and Grana, 1998; Stuart and Zacker, 1999; Ya-chen, 1999; Lillard, Rogowski, and Kingston, 1999). These studies all reach the same basic conclusion—drug coverage increases the probability of drug use but has minimal effect on the number of prescriptions filled by users. This conclusion is strengthened by the fact that the studies focused on different groups of elderly using a variety of databases. Stuart and Zacker (1999) used MCBS data to assess the impact of drug copayments on elderly Medicaid/Medicare dual eligibles. Stuart and Grana (1998) analyzed survey data on medicine use for 23 common health problems reported by a large sample of Pennsylvania elderly. Ya-chen (1999) used pharmacy records from the Dialysis and Morbidity and Mortality Study to study non-Medicare covered drug use by ESRD patients. Lillard, Regowski and Kingston (1999) analyzed survey data on prescription use in the RAND Elderly Health Supplement to the 1990 Panel Study of Income Dynamics.

The empirical estimates of insurance effects produced by these studies vary within a relatively narrow range. The addition of drug coverage is estimated to increase the probability of any prescription being filled by between 4 and 16 percent depending on population subgroup and generosity of drug coverage. The effect of adding a comprehensive drug benefit to Medicare is estimated to increase overall drug spending among elderly beneficiaries by between 20 percent (Lillard, Regowski and Kingston, 1999) to 34 percent (Coulson and Stuart, 1995).

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