Recommendations of the Texas Comptroller

Reduce the Cost of Drugs
for Medicare Recipients

Summary

More than a third of Texas’ Medicare recipients have no prescription drug insurance coverage or inadequate coverage at a time when drug prices are increasing rapidly. Elderly Texans who lack prescription drug coverage pay retail prices 20 to 40 percent higher than those paid by insurers, health maintenance organizations and Medicaid. Texas could reduce drug costs for Medicare recipients by implementing a state program similar to a California program that allows Medicare recipients to purchase prescription drugs at the Medicaid-discounted price.

Background

Senior citizens make up 12 percent of the nation’s population, but account for 33 percent of all prescription drug purchases.[1]

Medicare is a federal program that purchases doctor, hospital and limited long-term care services for the nation’s over-65 population as well as some long-term disabled persons. Medicare should not be confused with Medicaid, a joint federal-state program that purchases similar services for the poor, regardless of their age. More than a third of Texas’ 2 million-plus Medicare recipients, about 725,000 recipients, have no prescription drug insurance coverage, and many more have inadequate coverage.

Nationwide spending on outpatient prescription drugs by non-institutionalized Medicare recipients rose by 55 percent between 1992 and 1996. Even for those enrolled in Medicare health maintenance organizations (HMOs), which seek to control health care costs, spending on prescription drugs grew by 40 percent between 1996 and 1999, and would have risen even faster without an average 25 percent increase in the patient co-payments charged by HMOs.[2] The growth in drug expenditures is attributable both to higher drug prices and increased demand for drugs.

Rising drug costs are due largely to the increased use of newer, more expensive drugs. In 1998, the average price per prescription for a drug introduced in 1992 or later was $71.49, twice the average ($30.47) for older drugs.[3] and Between 1994 and 1999, the average wholesale price (AWP) for the 50 prescription drugs most frequently used by the elderly rose at twice the level of inflation. In 1998 alone, the price of these 50 prescription drugs rose four times faster than the rate of inflation.[4]

Drug prices accounted for about 64 percent of the total 1993-98 increase in drug spending.[5] The remainder of the increase was due to the increase in the number of drugs available to treat illnesses, and doctors’ willingness to prescribe those drugs for their patients.

Pharmaceutical manufacturers contend that the newer brand-name drugs are more expensive due to heavy research and development costs; the manufacturers currently spend from $125 million to $500 million to develop one pharmaceutical drug.[6] The manufacturers defend high profit margins in the US by saying they are needed to underwrite research and development. Most other industrialized nations impose price controls on prescription drugs, so the burden of funding research and development for new drugs falls disproportionately on American consumers, particularly those without prescription drug coverage through private insurance.[7] Another reason cited for high costs is the fact the pharmaceutical manufacturers often try to recoup all their costs before the patent for a new drug expires.

The increased demand for prescription drugs is another factor responsible for the rapid rise in drug expenditures. This demand is due in part to the decline in patients’ out-of-pocket costs achieved through managed care plans’ significantly lower co-payments; patients in managed care have reasonable co-payments and so can afford to buy more prescription drugs.

Another factor increasing the demand for prescription drugs was a 1997 change in the US Food and Drug Administration’s (FDA’s) policy that allows pharmaceutical companies to advertise directly to consumers. Spending on direct-to-consumer pharmaceutical advertising rose from $55.3 million in 1991 to more than $1.3 billion in 1998, and was projected to rise by another 54 percent in 1999.[8]

Drug spending is likely to continue to rise more rapidly than other health care services. The Pharmaceutical Research and Manufacturers Association reports that more than 500 drugs are under development to treat cancer, cardiovascular diseases, arthritis, osteoporosis, asthma, diabetes and Alzheimer’s disease.[9] Genetic research promises to lead to more new drugs and innovative treatments, which are likely to accelerate drug spending even further.

Finally, the aging of the Baby Boom generation will increase the number of elderly and the demand for prescription drugs. Modern medicine is relying more and more on pharmaceutical drugs as the primary treatment for many ailments. The newer drugs have improved the quality of life for all Americans, often reducing the need for more invasive medical procedures.

Pricing for Prescription Drugs

Older Americans without prescription drug coverage must pay “retail” prices for their drugs. In contrast, those with prescription drug coverage pay lower drug prices because large purchasers of prescription drugs, such as government and private insurance companies, can obtain better prices from both pharmaceutical manufacturers and retail pharmacies. Insurers, HMOs, and state Medicaid programs typically purchase brand-name prescription drugs for 20 to 40 percent less than the average wholesale price (AWP). Pharmacy retail prices generally are set at AWP plus 4 percent, but vary from one pharmacy to another.[10]

Health insurance companies offer mail-order pharmacy services to pass along the lower prices they negotiate directly with the drug manufacturer without having to add the overhead of a retail pharmacy. In 1998, mail-order pharmacies accounted for about 12 percent of the retail prescription market, and are expected to continue capturing a larger proportion of the retail market.[11] At present, only those with drug coverage can enjoy the savings negotiated on their behalf by their insurers.

As a group, the 27 percent of Medicare recipients who report that they are in fair to poor health are the heaviest consumers of prescription drugs and also face the highest average burden of out-of-pocket costs. In 1999, this group paid an average $590 per person in out-of-pocket costs, accounting for 7 percent of their annual income. [12]

Medicare recipients with no drug coverage fill an average of 16.7 prescriptions a year.[13] Eighty percent of retired persons take at least one prescription drug per day.[14] Some prescription drugs commonly prescribed for the elderly, such as Zocor (for cholesterol control) and Prilosec (an anti-ulcer medication), are particularly expensive. The retail cost of a one-year supply of Prilosec is $1,787, while a year’s supply of Zocor retails for $1,004.[15]http://www.aarp.org/bulletin/sept99/drugs.html)

The Impact on the Elderly

One constituent wrote US Representative Tom Allen: “I am writing to you because I don’t know where else to turn. Here is a list of the medications that my husband and I are supposed to take,” and listed them all. Their prices came to $650 a month—nearly half of the couple’s total monthly income.[16]http://www.aarp.org/bulletin/sept99/drugs.html)

Older Americans who cannot afford the drugs they need have resorted to a variety of measures to reduce their out-of-pocket costs. Some go to Canada or Mexico to purchase prescription drugs that cost from 33 percent to 100 percent more in the United States.[17] Others choose to take their medication every other day, or to reduce their daily dosage. Some seniors facing high prescription drug costs must decide between buying their prescription drugs or paying their rent or electric bills. In a February 2000 news conference on the plight of elderly persons unable to afford medication, US Representative Dave Bonior introduced a constituent with emphysema who “is at the point now where she’s even begging her physician for free samples of inhalers that she needs.”[18]

National and State Legislation

National and state decision-makers are grappling with this problem. The national debate centers primarily on whether Medicare should be expanded to cover prescription drugs. Several plans to add a prescription drug benefit to Medicare have been introduced in Congress.

Beginning in the 1980s, a number of states established programs to provide state-subsidized pharmaceutical coverage or assistance to the low-income elderly and persons with disabilities who are ineligible for Medicaid. In the last few years, some states have expanded their efforts to reduce drug prices by passing a variety of laws that provide for rebates, prescription drug discounts and bulk purchasing programs.

Numerous states are weighing legislation to require pharmacies to sell pharmaceutical drugs to Medicare recipients at the Medicaid price as a condition of the pharmacy’s participation in the Medicaid program. In 1999, California enacted SB 393, which requires pharmacies to sell pharmaceutical drugs to seniors at the Medicaid price. Another 12 states—Arizona, Connecticut, Colorado, Florida, Maine, Maryland, Massachusetts, Minnesota, Missouri, Rhode Island, Washington and Wisconsin—have introduced legislation modeled on California's SB 393.[19]

To receive the discounted price, California Medicare recipients must present their pharmacists with their Medicare card and their prescription. The pharmacist looks up the Medicaid price in a state computerized database and charges the patient no more than the Medicaid reimbursement level, plus a 15-cent transaction fee to cover the cost of accessing the state’s price list. Medicare recipients typically save from 10 to 40 percent on many prescriptions, depending on the medications and whether the person buys a brand name or generic product.[20]

California’s law allows the elderly to benefit from the negotiating power of a large purchaser. While California pharmacists were originally opposed to SB 393, by the time it passed, the majority of pharmacists were neutral and some even supported the bill.[21] The chief executive officer of the California Pharmacists Association expected most community pharmacies would not suffer “significant” financial distress from the law and indicated that it might draw customers back from mail order, the Internet and trips to Mexico to buy drugs.[22]

The National Conference of State Legislatures reports that some states are developing other programs to lower pharmaceutical prices for the average consumer.[23] A Maine law that became effective on May 11, 2000 authorizes state officials to negotiate lower prescription drug prices for any Maine citizen not covered by private insurance or Medicaid. Beginning in January 2001, drug prices for Maine’s uninsured will be cut to the same rate charged by the Medicaid program. In the future, Maine will negotiate directly with drug companies to obtain even better prices. Moreover, if a 12-member panel determines that drug prices are still too high by January 5, 2003, the new law authorizes the state to set drug price limits.[24]http://www.ncsl.org/programs/health/drugdisc.htm). (Internet document.) New York and California have gone one step further by introducing legislation that would require pharmaceutical drug manufacturers to sell their drugs at the lower prices charged in other countries.[25]http://www.kff.org/docs/ahl/ahl1.html). (Internet document.)

Recommendation

Texas should enable Medicare recipients to purchase pharmaceutical drugs at the lower Medicaid price.

Texas should reduce drug costs for Medicare recipients by requiring pharmacies that participate in the state’s Medicaid program to sell them drugs at the Medicaid price. Pharmacies are not required to participate in the Medicaid program and could continue to choose to participate in the Medicaid program or not. In Texas, 79 percent of eligible pharmacies participated in the Medicaid program in June 2000.[26]

To receive the discounted price, Medicare recipients would present their pharmacists with their Medicare cards and prescriptions. The pharmacist then would look up the Medicaid price in the state’s database and charge the patient no more than the Medicaid reimbursement amount, plus a small transaction fee to cover the cost of accessing the state’s price list.

Fiscal Impact

If elderly Texans without prescription drug insurance coverage could purchase medicine at the Medicaid price, they would save between 10 to 40 percent off the retail price of their prescriptions. Elderly Texans with drug coverage would have no incentive to participate in this program because they already receive the lower prices negotiated through their insurance companies.

The following estimate assumes that, on average, Medicare recipients would save 25 percent off the retail price of their drugs. According to the American Association of Retired Persons, the average Medicare recipient who lacks prescription drug insurance coverage spent $590 on prescriptions in 1999.[27]

About 725,000 Texas Medicare recipients have no supplemental insurance for prescriptions. The estimate assumes those without drug insurance coverage would obtain their drugs at the lower Medicaid price. It also assumes that Medicare recipients would be charged a 15 cent, out-of-pocket transaction fee to pay pharmacists to look up the Medicaid price online.

Texas Medicare recipients could save about $213 million in prescription drug expenses for the 2002-03 biennium, with the total net savings reaching about $549 million over five years. This proposal would entail no fiscal impact for the state.

[1] Rep. Tom Allen, “Lower Pharmaceutical Prices Are Key to Reform,” Roll Call (February 21, 2000).

[2] U.S. Department of Health and Human Services, Report to the President: Prescription Drug Coverage, Spending, Utilization, and Prices (Washington, D.C., April 2000), p. 137 (http://aspe.hhs.gov/health/reports/drugstudy/index.htm). (Internet document).

[3] American Association of Retired Persons, “Drugs Stir Up Medicare Debate,” by Walt Duka, AARP Bulletin (September 1999) (http://www.aarp.org/bulletin/sept99/drugs.html);US Department of Health and Human Services, Report to the President: Prescription Drug Coverage, Spending, Utilization, and Prices (Washington, D.C., April 2000), p.148 (http://aspe.hhs.gov/health/reports/drugstudy/index.htm). (Internet documents).

[4] U.S. Department of Health and Human Services, Report to the President: Prescription Drug Coverage, Spending, Utilization, and Prices, p.139.

[5] U.S. Department of Health and Human Services, Report to the President: Prescription Drug Coverage, Spending, Utilization, and Prices, p.148.

[6] U.S. Department of Health and Human Services, Report to the President: Prescription Drug Coverage, Spending, Utilization, and Prices, p.149.

[7] Paul Magnusson, “Why Should Uninsured Americans Subsidize Cheap Drugs for the World?” Businessweek Online: Daily Briefing (May 9, 2000) (http://www.businessweek.com/index.html). (Internet document.)

[8] National Institute for Health Care Management, Factors Affecting the Growth of Prescription Drug Expenditures, by Barents Group LLC (Washington, D.C., July 9, 1999), p. 11.

[9] National Institute for Health Care Management, Factors Affecting the Growth of Prescription Drug Expenditures, p. 28.

[10] U.S. Department of Health and Human Services, Report to the President: Prescription Drug Coverage, Spending, Utilization, and Prices, p. 98.

[11] U.S. Department of Health and Human Services, Report to the President: Prescription Drug Coverage, Spending, Utilization, and Prices, p. 151.

[12] U.S. Department of Health and Human Services, Report to the President: Prescription Drug Coverage, Spending, Utilization, and Prices, p. 145.

[13] U.S. Department of Health and Human Services, Report to the President: Prescription Drug Coverage, Spending, Utilization, and Prices, p.142.

[14] The American Association of Retired Persons, Walt Duka , “Drugs Stir Up Medicare Debate”, Walt Duka, AARP Bulletin, September 1999. (Bulletin) (

[15] The American Association of Retired Persons, Walt Duka , “Drugs Stir Up Medicare Debate”, Walt Duka, AARP Bulletin, September 1999. (Bulletin) (

[16] Rep. Tom Allen, “Lower Pharmaceutical Prices Are Key to Reform,” Roll Call (February 21, 2000).

[17] Federal Document Clearing House, Inc., “U.S. Representative Richard Gephardt Holds News Conference on Prescription Drug Benefits with other Democrats,” February 16, 2000. (Political Transcripts)

[18] Federal Document Clearing House, Inc., “U.S. Representative Richard Gephardt Holds News Conference on Prescription Drug Benefits with other Democrats,” February 16, 2000. (Political Transcripts)

[19] Trudi Matthews, The Council of State Governments, “Prescription Drug Costs: A Dose of Reality,” State Trends, (Summer 2000), p. 7.

[20] Telephone interview with Michael Ashcraft, California Senate Researcher, California Senate, Sacramento, California, March 14, 2000.

[21] “Plan Aims to Cut Seniors’ Drug Costs, ” Minneapolis Star Tribune (December 7, 1999), p. 1B.

[22] Michael F. Conlan, “California Pharmacies Asked to Give Seniors Discounts,” Medical Economics (January 3, 2000), p. 31.

[23] National Conference of State Legislatures, “Prescription Drug Discount, Rebate, Price Control and Bulk Purchasing Legislation,” July 3, 2000 (

[24] Kaiser Family Foundation, “Maine Will Negotiate Drug Prices for Residents,” May 12, 2000 (

[25] Telephone interview with Richard Cauchi, Senior Policy Specialist, Health Care Program, National Conference of State Legislatures, Denver, Colorado, April 18, 2000.

[26] Telephone interview with Nicky Green, Texas State Board of Pharmacy, Austin,Texas, June 1, 2000.

[27] American Association of Retired Persons, “Drugs Stir Up Medicare Debate.”

e-Texas is an initiative of Carole Keeton Rylander, Texas Comptroller of Public Accounts
Post Office Box 13528, Capitol Station
Austin, Texas

Privacy Policy