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CBO Report: 2006 Out-of-pocket cost projections under new Medicare prescription program detail savings

In 2006 when the new Medicare prescription (Part D) benefit is rolled out, the Congressional Budget Office projects that Part D enrollees will spend, on average, $792 out-of-pocket for prescription drugs, excluding premiums, or approximately 37% less than the $1,257 they would have spent prior to the new law.

Under the standard benefit in 2006, after the first $250 deductible in total drug costs, Medicare will pay 75% of costs between $250 and an initial limit of $2250, 0% of costs between $2,250 and $5100 with beneficiaries paying the whole amount. 95% of costs will be paid by Medicare for beneficiaries starting at $5100 in annual prescription costs. The out-of pocket costs for an individual with $5,000 ($418/ month) in annual prescription costs will be $3500, again not including the premium. Part D premium costs were not estimated in the CBO report.

The 29 million Americans who the CBO projects to participate in Part D in 2006 are projected to spend, on average, 37% less out-of-pocket for drugs than they do currently. The 8.7 million Medicare beneficiaries who receive low-income subsidies, will have see a larger effect with 83% savings under the new Part D program.

In 2003 Congress endeavored to improve Medicare managed care enrollment the federal government revamped its Medicare program to keep seniors and their health plans in the fold.

To expand the role of private managed care plans in Medicare and keep the plans in the market, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) provided Medicare Advantage plans with significant increases in monthly payment rates, beginning March 2004. About one-half of the payment increases were used by plans to reduce enrollee premiums and cost-sharing and enhance benefits; providers received most of the rest. Premiums had already begun to decrease in the Medicare Advantage program in early 2004 for the first time in several years, but the payment increases led to further declines — average monthly premiums dropped from $34 to $25 after the increases. This decrease in payment added to worries that Medicare Advantage would see the same plan withdrawals that the previous Medicare+Choice program did just a few years ago. The payment rate increases also slowed the trend toward generic-only drug coverage. However, overall average out-of-pocket costs declined to 2003 levels, although managed care enrollees in good health experienced a higher percentage reduction in out-of-pocket spending than those in poor health.

Medicare HMO members had paid nearly 50 percent more in out-of-pocket costs for their health care in 2001 than they did in 1999, according to two studies, and the sickest of them paid even more.

Since the inception of Medicare Advantage average payments to participating health plans rose 10.9 percent (weighted by plan enrollment) over 2003 levels and 7.4 percent over the originally slated 2004 payment schedule.

The sickest Medicare+Choice enrollees had spent 62 percent more of their own money for their health care in the three-year period, according to The Commonwealth Fund, a private foundation that supports independent research on health and social issues. Lori Achman and Marsha Gold are the authors of "Out-of-Pocket Health Care Expenses for Medicare HMO Beneficiaries: Estimates by Health Status, 1999-2001" and "Medicare+Choice 1999-2001: An Analysis of Managed Care Plan Withdrawals and Trends in Benefits and Premiums." They found that Medicare HMO members in poor health spent about three times as much each year as those in good health — $3,578 vs. $1,195 annually.

Since the inception of Medicare Advantage average payments to participating health plans rose 10.9 percent (weighted by plan enrollment) over 2003 levels and 7.4 percent over the originally slated 2004 payment schedule. Highlights of the findings include:

  • Overall, about one-half of the 2004 MMA increase was used by plans to reduce enrollee premiums and other cost sharing or to enhance benefits. Most of those benefit changes were used to reduce plan premiums, which dropped an average of $9 per month.
  • Average out-of-pocket costs declined to the 2003 level. Although all managed care enrollees received the same dollar benefit, healthier managed care enrollees experienced a higher percentage reduction in out-of-pocket spending than did those in poor health.

Thus, the Medicare program, as proven above, has made dramatic improvements to maintain health plan involvement in the program and reduce out-of-pocket costs for participating seniors. After a surge of embarrassing health plan withdrawals under Medicare+Choice, the Bush Administration has tried numerous measures to shore up the Medicare market with higher payments to Medicare Advantage plans a key component.

However, a downside that the authors point to is weaknesses in the Medicare program that provide a lopsided financial impact on the sickest beneficiaries. These individuals are also likely to have lower incomes. "Medicare was set up to protect the elderly and disabled from financial ruin because of heavy medical expenses," says Gold. "But gaps in coverage mean that the average beneficiary still pays a lot out of pocket and those in poorer health pay even more.

Prescription drugs are driving out-of-pocket increases for those Medicare HMO members in poor health. The portion of plans offering prescription drug coverage declined from 29% to 16% in the transition from Medicare+Choice to Medicare Advantage, according to a Kaiser Family Foundation report. While the majority of enrollees had drug coverage, some faced restrictions including those that had a cap of $1,000 for brand name drugs and 38% of enrollees had coverage for generic drugs only.

When the Medicare prescription plan takes effect in 2006 managed care plans must offer a minimum of one plan with drug coverage. However, among those plans that currently offer drug coverage, a higher proportion now cover brand name drugs, as opposed to only generics.

"Increasing payments to health plans alone will not solve the problems of the Medicare program," says Karen Davis, president of The Commonwealth Fund. "We should consider modernizing Medicare's basic benefit package (beyond just prescription drugs) to meet the health care needs of our growing population of older Americans in the 21st century."

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