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Drug Cost Growth

Growing Differences Between Medicare Beneficiaries With And Without Drug Coverage

Abstract

 
Using data from the 1998 Medicare Current Beneficiary Survey (MCBS), we examine changes in beneficiaries’ prescription drug coverage from 1997 to 1998 and compare drug use and spending data for beneficiaries with and without drug coverage. The data show that in 1998 the aggregate prescription drug coverage rate of Medicare beneficiaries may have reached a plateau. Also, prescription drug use declined for beneficiaries without drug coverage and increased for those with drug coverage. Covered beneficiaries also paid a larger percentage of their total drug costs out of pocket in 1998 than in 1997. The result was a widening of use and spending differences between beneficiaries with and without coverage.

This paper updates previous analyses on prescription drug coverage, use, and spending among community-based Medicare enrollees using the most current data available, the 1998 Medicare Current Beneficiary Survey (MCBS).³ We also compare changes in coverage and use focusing on the differences between beneficiaries with and without coverage.

Data Sources And Methods

Top Data Sources And Methods Trends In Drug Insurance... Demographic Characteristics Health Status, Supplemental... Out-Of-Pocket Drug Spending Discussion And Policy... NOTES

 
Data source. This paper is based on data collected for the MCBS 1998 Cost and Use File. The MCBS is a continuous, multipurpose survey of a representative sample of the entire Medicare population. One of the survey’s strengths is its collection of information about goods and services not covered by Medicare. MCBS respondents are interviewed every four months and are asked to record their drug purchases and save their medicine containers to aid their recall.

Measuring drug coverage. Prescription drug coverage was determined in a two-step process. First, beneficiaries were classified by their primary supplemental health insurance and were counted in only one of the following categories (in hierarchical order for beneficiaries with more than one type): Medicare risk health maintenance organization (HMO), Medicaid, employer-sponsored, individually purchased, other public, and fee-for-service Medicare only).⁴ Second, drug coverage was assigned using self-reports and any third-party payments for prescription drugs provided by the beneficiary. In earlier studies using the MCBS, we cast a wide net to capture the possibility of drug coverage originating from either a beneficiary’s primary supplemental insurance policy or some secondary supplemental source of coverage beyond traditionalMedicare.⁵ The same strategies were used for this analysis.

Possible underreporting. One of the limitations when using survey data for this type of analysis is the extent to which respondents underreport the number of prescriptions used and their costs. The figures referenced here are not adjusted for any underreporting because we believe that covered and noncovered beneficiaries are equally likely to underreport, which minimizes any effect on the comparisons between the two groups.

Establishing payment amounts. Whenever possible, we used the transaction amounts reported by the beneficiary to estimate spending. However, many respondents were able to report only the out-of-pocket amount for which they were responsible. In such cases, a "total" transaction price was imputed.⁶ To do so we assigned an average wholesale price (AWP) to the drug by matching the survey-reported prescription to a drug-pricing compendium. This AWP was then adjusted based on the most likely payer for that drug purchase. Possible likely payers, each with their own payment factor, include Medicare risk HMOs, Medicaid, employer-sponsored insurers, Veterans Affairs (VA), other public programs, and the beneficiary.⁷ To illustrate, a drug with an AWP of $10 purchased via an employer-sponsored plan would be discounted by 13 percent. Next we would add a $2.40 dispensing fee, bringing the transaction price to $11.10. The same $10 drug purchased directly by the beneficiary would be adjusted upward by 18 percent for a final transaction price of $11.80.

We made major improvements in matching survey-reported drugs to our drug-pricing compendium for the 1998 Cost and Use File. As a result, imputed transaction prices were made more accurate by greatly reducing the number of drugs classified as untranslatable. Untranslatable drugs, which do not crosswalk to the drug pricing compendium, rely on less precise strategies for imputing a final transaction amount. This enhancement also raised the estimate of total spending. Applying this newer methodology to the 1997 MCBS drug data increased per capita total drug spending for covered beneficiaries by approximately 8 percent. However, the effect on out-of-pocket spending (and on total spending for the noncovered) was much less: 1997 per capita out-of-pocket spending for covered and noncovered beneficiaries increased by less than 1 percent. All references in this paper to changes from 1997 to 1998 reflect this adjustment. Furthermore, our analysis ignores price inflation, which amounted to 1.6 percent between 1997 and 1998, and drug insurance premiums paid by covered beneficiaries.⁸ All spending is shown in 1997 and 1998 dollars rather than in constant dollars.

Trends In Drug Insurance Coverage, 1997–1998

Top Data Sources And Methods Trends In Drug Insurance... Demographic Characteristics Health Status, Supplemental... Out-Of-Pocket Drug Spending Discussion And Policy... NOTES

 
In 1998, 73 percent of community-dwelling Medicare enrollees had drug coverage at some point during the year, leaving just over ten million beneficiaries, or 27 percent, with no drug coverage (Exhibit 1). Those estimates are virtually unchanged from 1997. Given that coverage rates had increased in every year after 1992, the lack of an increase in 1998 may indicate that seekers of drug coverage are less able to find such coverage.⁹

Among all insurance groups, enrollees covered by individually purchased insurance in 1998 recorded the lowest level of drug coverage. Approximately one in six covered enrollees obtained that coverage from a secondary supplemental insurance source and not from their own individually purchased plan.¹³ Also, there was substantial movement out of the individual insurance market in 1998. About half of those who moved out switched to Medicare risk HMOs between 1997 and 1998. During this migration a slightly higher percentage of covered than noncovered enrollees moved away from individually purchased policies, resulting in a small decline in the percentage of beneficiaries covered for drugs by such plans.

Demographic Characteristics

Top Data Sources And Methods Trends In Drug Insurance... Demographic Characteristics Health Status, Supplemental... Out-Of-Pocket Drug Spending Discussion And Policy... NOTES

 
Medicare enrollees without drug coverage for prescription drugs continued to receive fewer medications and spend less in total for drugs than was the case for covered beneficiaries (Exhibit 2). On average, noncovered beneficiaries filled 16.7 prescriptions in 1998—a 2.4 percent decline from 1997. At the same time, those beneficiaries spent an average of about $550 on their prescription purchases, nearly identical to that spent the previous year. Beneficiaries with drug coverage, meanwhile, purchased slightly more than twenty-four prescriptions per person, up 9 percent from 1997. Total spending (out-of-pocket plus all third-party payments) for this group was up 14 percent. These patterns hold across all demographic categories.

The age factor. For Medicare beneficiaries age sixty-five and older, the number of prescriptions used per person generally increased with age. Persons with drug coverage used more prescriptions on average than those without coverage in every age category. The difference was greatest for disabled beneficiaries under age sixty-five, a group that has high levels of drug use. Noncovered beneficiaries in this age group used fewer than half as many prescriptions (16 versus 33) as the covered disabled did, and they spent only 33 percent as much per beneficiary ($493 versus $1,483). That spending rate was 36 percent in 1997.

The gender gap. Women continued to use more prescription drugs than men did, and thus their total drug spending was higher. However, the influence of coverage may be changing. In 1996 not having drug insurance affected men and women almost identically. By 1998, the rate of utilization for noncovered males had declined faster than the rate for noncovered females. Concurrently, the utilization rate for covered males grew faster when benchmarked to covered females. The result was that noncovered males used 40 percent fewer prescriptions than covered males did, while noncovered females used 27 percent fewer than covered females did. A similar pattern emerged for per capita total spending: Males without coverage had only about 47 percent as much in total spending on their medications compared with covered males, while noncovered females’ spending totaled 60 percent of those of their counterparts with drug coverage.

Ethnicity and race. There was consistently higher prescription drug use and spending among persons with drug coverage than among those without coverage in every racial/ethnic category, but the differences were greater for minorities than for whites. Minorities without drug coverage used fewer prescriptions on average than did whites without drug coverage, although the pattern was reversed for persons with coverage. In 1996 covered whites used 8 percent fewer prescriptions than covered minorities used. By 1998 that difference shrank to less than 1 percent. Noncovered whites spent only 56 percent as much on drugs as did covered whites. The difference is even wider for minorities, for whom, on average, the noncovered spent 43 percent of what covered minorities spent.

Urban versus rural. Noncovered beneficiaries in both urban and rural areas also fell further behind covered beneficiaries in both prescription drug use and total spending. Regardless of residence, noncovered beneficiaries reduced their use while covered persons increased it.

Health Status, Supplemental Insurance, And Income

Top Data Sources And Methods Trends In Drug Insurance... Demographic Characteristics Health Status, Supplemental... Out-Of-Pocket Drug Spending Discussion And Policy... NOTES

 
Health status. The gap in use and spending by coverage status and self-reported health status widened from 1997 to 1998 (Exhibit 3). In 1998 covered beneficiaries in poor health spent $910 more in total for drugs than their noncovered counterparts spent. That divergence was a 30 percent increase from the difference in 1997 ($695).Covered beneficiaries in poor health also filled almost fifteen more prescriptions, on average, than did noncovered enrollees in poor health. Drug spending by beneficiaries in excellent health was also higher ($250) among those with coverage than among their noncovered peers, up from a $203 difference in the previous year.

Supplemental coverage. Examination of use and spending shifts by type of supplemental insurance coverage reveals a variety of changes. Differences in utilization grew for those insured by employer and individually purchased plans with and without drug coverage and remained about the same for beneficiaries covered by publicly funded insurance with and without drug coverage. Medicaid beneficiaries without drug coverage, however, maintained the widest gap when compared with their covered counterparts, at eighteen fewer prescriptions. This reflects the importance of full Medicaid coverage for low-income persons. As for total expense differences between the covered and noncovered, they grew at a minimum of 23 percent across all supplemental insurance types. Medicaid registered the largest rate increase, 71 percent, going from a difference of $178 in 1997 to more than $300 in 1998.

Income. There continued to be large differences in use and spending between covered and noncovered beneficiaries with incomes below the federal poverty level. For all levels of income, utilization was higher for covered beneficiaries. But the lower the beneficiary’s income, the larger the difference in utilization, reaching a disparity of almost fourteen prescriptions for beneficiaries living below poverty. In every income category, the utilization difference widened relative to 1997, and, correspondingly, in all but one category (176–200 percent of poverty) the total spending disparity grew to at least $299.

Out-Of-Pocket Drug Spending

Top Data Sources And Methods Trends In Drug Insurance... Demographic Characteristics Health Status, Supplemental... Out-Of-Pocket Drug Spending Discussion And Policy... NOTES

 
On average, beneficiaries without drug coverage spent $546 ($33 per prescription) out of pocket in 1998, compared with $325 ($13 per prescription) for beneficiaries with coverage (Exhibit 4). Out-of-pocket expenses were virtually unchanged for beneficiaries without coverage between 1997 and 1998 but increased for those with coverage. The out-of-pocket spending gap actually narrowed slightly between 1997 ($272) and 1998 ($221), although it is the result of decreased use by the noncovered and increased use and larger cost sharing by the covered population.

Impact of health status. The disparity in out-of-pocket spending for those with and without drug coverage increased for beneficiaries in poor health or with chronic conditions. The 4.2 million beneficiaries with three or more chronic conditions who did not have prescription drug coverage purchased nearly 25 percent fewer prescriptions than did those with coverage. However, the noncovered paid nearly $375 more out of pocket. The picture was the same for those in poor health (these two groups likely include many of the same beneficiaries). Those without coverage spent $820 out of pocket, or $330 more than their covered peers, to purchase 35 percent fewer prescriptions.

Trends remain the same when using median out-of-pocket expenses that eliminate, to an extent, the effect of outliers. Half of all beneficiaries with drug coverage spent $165 or more in out-of-pocket costs in 1998. Median out-of-pocket spending for the noncovered was $319.

Discussion And Policy Implications

Top Data Sources And Methods Trends In Drug Insurance... Demographic Characteristics Health Status, Supplemental... Out-Of-Pocket Drug Spending Discussion And Policy... NOTES

 
Since the first year of the MCBS in 1992, the data have shown that the prescription drug coverage rate for Medicare beneficiaries has risen steadily, which indicates that enrollees who wanted drug coverage acquired it. Starting in 1998 the MCBS and other sources suggest that drug coverage may have leveled off.

HMO enrollment. One of the primary reasons for the escalation in coverage over the past decade was the rapid increase in Medicare risk HMO enrollment. During the mid-to-late 1990s this enrollment was growing at about 30 percent annually within the noninstitutionalized portion of Medicare. As a result of the high rate of drug coverage in Medicare riskHMOs, coupled with rapid enrollment increases, more than 15 percent of all Medicare beneficiaries received drug coverage from such an HMO in 1998. That represented a two-percentage-point increase from 1997 and a seven-percentage point increase from 1995

Although a fairly high proportion of Medicare beneficiaries had drug coverage in the 1990s, analysis of the data on a month-by-month basis reveals that this coverage was far from stable. For instance, only 46 percent of beneficiaries were covered for all twenty-four months of 1995 and 1996.¹⁵ Even having a steady source of supplemental insurance did not guarantee continuous drug coverage. In 1996 and 1997 only 54 percent of beneficiaries continuously enrolled in a risk HMO, Medicaid, an employer-sponsored plan, or an individually purchased plan were covered for drugs for the entire twenty-four-month period, and 20 percent had no coverage at any time.

Since 1998 access to one of the sources of drug coverage, risk HMOs, has been declining. In 2000 about 73 percent of risk HMO beneficiaries belonged to a plan that offered drug coverage with no additional premium beyond the premium (if any) that was charged for a basic Medicare risk offering. That represents an eleven-percentage-point decline from 1999. By 2001 fewer than half of all beneficiaries will have access to a risk plan with a "no-cost" drug coverage feature.¹⁶ With fewer Medicare HMOs offering drug coverage at little or no additional premium, and some Medicare HMOs pulling out of the program altogether, drug coverage offer and take up rates could decline.¹⁷

Changes in drug use. Turning from enrollment to use, we saw utilization for all Medicare beneficiaries without drug coverage decline slightly from 1997 to 1998, while their total spending remained essentially unchanged. Concurrently, per capita use and total expenditures for covered beneficiaries grew. Over the two-year period, the result was a widening of utilization and total expenditure gaps between enrollees with and without prescription drug coverage. While many of these changes are small, they generally point toward greater differences between the two groups.

Noncovered enrollees continued to pay much more out of pocket for their drugs relative to covered beneficiaries, even though they used fewer medications. Covered beneficiaries, however, paid a larger percentage of their total drug bill in 1998 than they did the previous year, as insurers passed a greater portion of the cost on to the consumer.

Editor's Notes

 
John Poisal is a statistician and Lauren Murray, an economist, in the Health Care Financing Administration (HCFA) Office of Strategic Planning.

The authors thank Carlos Zarabozo, Michael Slater, Andrew Shatto, and Kim Skellan for their contributions to this paper.

NOTES

Top Data Sources And Methods Trends In Drug Insurance... Demographic Characteristics Health Status, Supplemental... Out-Of-Pocket Drug Spending Discussion And Policy... NOTES

 

1. Henry J. Kaiser Family Foundation, "Prescription Drug Trends," fact sheet (Menlo Park, Calif.: Kaiser Family Foundation, September 2000).
2. Retail prescription prices increased 6.7 percent annually from 1991 to 1998. Sonderegger Research Center analysis based on average prescription prices by pharmaceutical consulting firm Scott-Levin, Source Prescription Audit (SPA) (December 1999), <www.scottlevin.com>.
3. J.A. Poisal and G.S.Chulis, "Medicare Beneficiaries and Drug Coverage," Health Affairs (Mar/Apr 2000): 248–256; and M. Davis et al., "Prescription Drug Coverage, Utilization, and Spending among Medicare Beneficiaries," Health Affairs (Jan/Feb 1999): 231–243.
4. Beneficiaries were assigned to the first insurance category in which they spent all of their Medicare-eligible months. Enrollees who switched categories during the year were assigned to the first insurance category for which they had at least one month of exposure. This differs slightly from previous studies in which beneficiaries who did not spend all of their Medicare-eligible months in a single category were referred to as "switchers."
5. Davis et al., "Prescription Drug Coverage."
6. Ibid.; and J. Poisal et al., "Prescription Drug Coverage and Spending for Medicare Beneficiaries," Health Care Financing Review (Spring 1999): 15–27.
7. Payment factors include the following: HMO = AWP * 0.857 + $2.06, Medicaid = AWP * 0.908 * 0.82 + $4.25, employer-sponsored insurance = AWP * 0.87 + $2.40, other public = AWP * 0.90 + $3.50, VA = AWP * 0.67, Retail = (if AWP $5.00, AWP * 3.07); (if $5.00 < AWP $20.00, AWP * 1.18); (if AWP > $20.00, AWP * 0.81).
8. Price inflation figures are from Bureau of Labor Statistics, <www.bls.gov> (3 December 2000), Consumer Price Index for all items, annual average.
9. 1992 was the first year that data on prescription drug coverage were available in the MCBS.
10. We believe that in 1998 much of this decline was from access being extended to areas with lower levels of Medicare risk HMO payment and areas with no existing Medicare HMOs. Also contributing was a faster growth rate among existing HMOs that did not offer drug coverage in their basic benefits package than among existing HMOs that offered that benefit.
11. State Medicaid programs are not obligated to provide drug benefits to enrollees. We assume drug coverage for QMBs and SLMBs only if a beneficiary indicated Medicaid payments for drugs.
12. Retirees in the FFS sector without drug coverage would have the most incentive to join a Medicare HMO that provided a drug benefit. Employers generally could reduce their insurance payments by encouraging their retirees to leave FFS and join a Medicare HMO. See, for example, T. Bodenheimer and K. Sullivan, "How Large Employers Are Shaping the Health Care Marketplace," New England Journal of Medicine (14 April 1998): 1003–1007.
13. Davis et al., "Prescription Drug Coverage."
14. Overall, the utilization rate among Medicare enrollees has grown by 5 percent annually since 1992.
15. B. Stuart, D. Shea, and B. Briesacher, "Dynamics in Drug Coverage of Medicare Beneficiaries: Finders, Losers, Switchers," Health Affairs (Mar/Apr 2001): 86–99.
16. Unpublished HCFA data.
17. Largely as a result of plan withdrawals, there was a net drop of 124,000 in the number of enrolled beneficiaries from 1998 to 1999. From 1999 to 2000 the net drop was 157,000.

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