Medicare beneficiaries who have no prescription coverage must, by definition, bear the entire cost of their drug purchases out of pocket. However, the obverse does not follow; no prescription plan currently available to Medicare beneficiaries covers the entire cost of outpatient prescription drugs. Were Medicare to adopt a drug benefit, it would presumably provide the greatest benefit to those who are presently most vulnerable to high out-of-pocket spending for drugs. The obvious question for policy makers is: What factors make Medicare beneficiaries most vulnerable to high out-of-pocket drug costs?
The literature on this issue identifies five principle factors: (1) total spending on prescription drugs, (2) insurance coverage, (3) income, (4) health, and (5) functional status. According to the Health Care Financing Administration, half of all drug spending by Medicare beneficiaries in 1995 was paid for out of pocket (Poisal, et al, 1999). The single greatest predictor of high out-of-pocket spending, is high total spending. The National Academy of Social Insurance estimates that 14 percent of Medicare beneficiaries had drug spending exceeding $2,000 from all payment sources in 1999 (Gluck, 1999). Almost a third of these individuals also had out-of-pocket drug spending greater than $2,000 for the year (Gluck, 1999).
The presence of prescription coverage mitigates against high out-of-pocket drug costs, but does not preclude them. A recent study published by AARP, estimates that Medicare beneficiaries with some drug coverage in 1999 spent just 3 percent of income on out-of-pocket drug purchases compared to 6 percent for beneficiaries without coverage (Gibson, et al, 1999). The income of Medicare beneficiaries is often lower in proportion to other populations, thus the out of pocket expenses are relatively burdensome. However, 42 percent of those with out-of-pocket drug spending exceeding $1,000 also maintained some prescription coverage. The principal reason for this is the limited scope of benefits offered by health plans that supplement Medicare, particularly individual Medigap policies (Gibson, et al, 1999). The three Medigap policies with drug coverage all have a $250 deductible followed by a 50 percent coinsurance up to maximum payment caps of $1,250 or $3,000. Stuart et al. (2000) found that Medicare beneficiaries with continuous coverage spent about half as much out-of-pocket in 1996 on prescription drugs ($219) as persons with part year coverage ($424) or no coverage at all ($468).
There is surprisingly little variation in total or out-of-pocket drug spending by income level (Poisal, et al., 1999; Gibson, et al, 1999; Poisal, et al., 1999 forthcoming). In 1995, for example, beneficiaries with annual incomes below $10,000 spent an average of $707 for prescription drugs of which $206 represented out-of-pocket payments. Those with annual incomes over $30,000 spent an average of $642 of which $226 was out of pocket (Poisal, et al., 1999). However, this similarity in dollar spending means that low-income beneficiaries spend proportionately more of their income on prescription drugs. Gibson, et al., (1999) estimate that beneficiaries below the poverty level in 1999 ($8,760 for individuals and $11,334 for couples) spent nine percent of their incomes on drugs compared to just 2 percent for those with income above 400 percent of the poverty line.
Twenty-seven percent of Medicare beneficiaries report being in fair or poor health. These individuals are the heaviest consumers of prescription medicines of any group and bear the highest average burden of out-of-pocket costs. Gibson, et al. (1999) estimate that they paid $590 per-person in out-of-pocket prescription drug payments in 1999, representing seven percent of annual income. Being uninsured and in poor health magnifies the burden. Stuart, et al. (2000) show that beneficiaries self-reporting poor health and no drug coverage spent $732 out of pocket in 1996 compared to just $318 for those with continuous drug coverage for the year.
As this last statistic demonstrates, the burden of out-of-pocket drug expenses varies widely depending on the constellation of attributes that beneficiaries manifest. Because these attributes tend to be inter-correlated, to understand the independent effect of each predictor requires multivariate analysis. To date there are no published papers in this area. A study by Crystal et al. (in press) examines predictors of aggregate out-of-pocket spending by Medicare beneficiaries for all types of health care combined using standard multivariate techniques. They find that self-reported health status, number of medical conditions reported, privately purchased Medicare supplemental health insurance, and functional impairment all increase the level of predicted out-of-pocket payments, while only HMO participation predicts lower payments (Crystal, et al., in press). Given that outpatient prescription drugs comprise approximately a third of all out-of-pocket health spending by beneficiaries (Crystal, et al., in press), one would expect these multivariate findings to hold true for prescription drug spending by itself.
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