Hard to Swallow: Older Americans and the High Cost of Prescription Drugs
Prescription Drugs: A Big Part of Health Care
People today are living longer than ever before. That’s certainly something to celebrate, but even longevity has its downside. Unfortunately, aging often means acquiring chronic illnesses — conditions such as heart disease, diabetes, high cholesterol, hypertension, arthritis and many others. The longer we live, the more likely we are to develop one or more.
Recently, however, revolutionary medical discoveries have resulted in the manufacture of some highly effective pharmaceuticals in the treatment of chronic illness. Statin drugs, for example, lower cholesterol for millions at risk of heart disease.
But back in 1965, when Medicare was enacted into law, such breakthroughs were rare. In fact, prescription drugs were such a negligible part of health care that few insurance plans even bothered to cover them. Because Medicare was patterned after private insurance, it didn’t cover drugs either.
Over the years, as drug therapies became more important in treating serious illness, the majority of employer-sponsored health plans started covering drugs. Not so for Medicare, however. Scared off by the big price tag, Congress never approved a drug benefit for seniors until 2003. The new voluntary drug benefit, which takes effect in 2006, has many drawbacks, however. It provides limited coverage, and seniors will still have to cope with soaring drug prices.
Seniors Use Lots of Prescription Drugs
The facts about senior citizens and prescription drugs are hard to ignore:
- Americans over age 65 are only 13 percent of the population, but account for 34 percent of all prescriptions dispensed and 42 cents of every dollar spent on drugs.
- Over 80 percent of all seniors take at least one prescribed drug each day.
- Annual drug spending per senior grew from an average of $559 in 1992 to over $1,200 in 2000.
- The average cost of a prescription in 2000 was $42.30, up from $28.50 in 1992; the cost is projected to grow to $72.94 in 2010 — an increase of 72 percent over today.
Average Prescription Drug Cost for Seniors 1992-2010
Year Average Prescription Drug Cost 1992 $28.50 1994 $31.23 1996 $33.99 1998 $37.08 2000 $42.30 2005* $55.54 2010* $72.94
* Projections
Source: Data compiled by PRIME Institute for Families USA
Seniors Need Reliable Drug Coverage
Medicare — the basic health plan for nearly every American over 65 — has always covered most hospital and doctor bills, but not prescription drugs. Supplemental health plans that are designed to fill gaps in Medicare also have had limitations:
- Less than 30 percent of seniors get prescription coverage from former employers. Fortunately, a majority of AFSCME retirees are in this group (though a minority are not). But retirees must constantly fight to protect these benefits from cutbacks. Employer drug costs are rising sharply, resulting in higher copays and more limited coverage. Soaring drug costs have spurred many private-sector employers to completely eliminate their retiree health plans.
- About 13 percent of seniors get drug coverage from Medicare HMOs, but a third of these plans now cap the benefit at $500 a year, and most cap it at under $1,000.
- Another 8 percent of seniors buy a Medigap plan that includes a drug benefit, but the benefit can add $1,500 a year to the Medigap premium while providing only limited drug coverage (low caps, high co-pays).
Help for Low-income Seniors.
Low-income seniors may qualify for state means-tested prescription drug assistance programs, which have strict income limits.
- About 13 percent of seniors get drug coverage from state-run Medicaid. Most states set qualifying income at around $6,000 a year.
- About 24 states operate their own drug assistance programs for low-income seniors. Qualifying income limits are somewhat higher than Medicaid’s — usually $12,000 to $17,000. Outreach is minimal, so, on average, less than 35 percent of eligible seniors actually sign up.
High drug costs and lack of decent coverage are problems that affect millions of average seniors — not just the low-income. In fact, nearly half of those who lack coverage have incomes that are more than twice the poverty level (exceeding $17,000 a year).
Growth in Drug Spending
Year
Spending on Prescription Drugs
for Seniors 1992-2010 (in billions)1992
$18.5 2000
$42.9 2010*
$113.6
* Projection
Source: PRIME Institute for Families USA
Highest Prices in the World
If you add up all the seniors covered by all the various sources of prescription drug coverage, 35 percent of the senior population still lacks coverage. That’s a serious problem, made all the more serious because seniors without coverage end up paying more for drugs than anyone else in the industrialized world!
Why? Other western governments have national health plans that either negotiate prices with drug companies or establish price ceilings for every drug. Similarly, Medicare could negotiate prices on behalf of its 40 million beneficiaries. So far, however, Congress has barred Medicare from doing so.
As a result, older Americans with no coverage (along with 44 million younger, uninsured Americans) have been the only folks paying full retail at the pharmacy. The drug companies — forced to negotiate with all other payers — shift costs to U.S. seniors and make them subsidize the rest of the globe.
Soaring Profits for Drug Makers
The big drug companies often manufacture miraculous products and deserve a fair return. But they currently are the world’s most profitable industry, with profit margins nearly four times those of the average Fortune 500 company. At the same time, their high prices are threatening drug coverage for millions of workers and retirees, while millions of uninsured are forced to choose between food and medicine.
- The Bureau of Labor Statistics says drug prices rose 306 percent from 1981-1999, while general inflation was only 99 percent.
- Major drug companies such as Pfizer, Merck and Bristol-Myers Squibb spend more than twice as much on marketing, advertising and administration as on research and development of new drugs.
- The drug industry spent almost $2.5 billion on direct-to-consumer TV and print advertising in 2000. Critics say this drives up demand for the newer, more expensive drugs.
- In 2000, the annual compensation for Pfizer’s chairman was over $40 million, and over $18 million for Eli Lilly’s chairman.
Changes in Medicare
In November 2003, Congress enacted the Medicare Prescription Drug Improvement and Modernization Act, which made dramatic changes in the Medicare program. AFSCME believes the new law moves Medicare in the direction of a privatized system controlled by HMOs and insurance companies. As a result of some of the changes that will come from this law, seniors will pay more for health care in the future than they do today.
To win favor for a major overhaul of Medicare, congressional supporters of the plan folded it into legislation that featured a benefit change seniors really need: prescription drug coverage. Unfortunately, the drug benefit in the new law has big coverage gaps and high out-of-pocket costs, and it puts employer-paid coverage at serious risk.
The law passed without the support of most senior, consumer and labor organizations, who have raised numerous concerns. Following is a summary of how the law’s drug benefit works, as well as some of the problems it may cause:
Skimpy Rx benefits with a big gap in coverage: The prescription drug benefit in the new law has an estimated premium of $35 a month or $420 per year, a $250 annual deductible and 25-percent co-pays for annual drug costs from $251 to $2,250. After $2,250 in drug expenses, the coverage stops and seniors are required to pay 100 percent out of pocket for the next $2,850 in prescription drug costs each year.
This gap is known as the "doughnut hole." While in the "hole," seniors continue to pay the $35 monthly premium but get no benefits. After $5,100 is reached in annual drug spending, the plan covers 95 percent of drug expenses for the remainder of the year, with no limit.
The drug benefit will be provided through private, prescription-drug-only insurance policies and by Medicare HMOs. Signing up for these plans is completely voluntary.
Employer-sponsored Drug Coverage at Risk: Hoping to prevent employers from canceling coverage and shifting retirees to the new drug plans, Congress gave employers cash subsidies to help underwrite their high drug costs. But the subsidies are too small and may not be sufficient to stop many plan terminations as drug and other health care costs continue to rise. The Congressional Budget Office (CBO) estimates that three million retirees could lose their coverage.
Unfortunately, part of the employer subsidy is in the form of a tax credit. But tax credits can’t be used by public and non-profit employers, who will get no comparable relief under the new law. The result could be higher premiums and co-pays for AFSCME retirees who are covered by employer plans (or even plan terminations by some of our smaller employers), as prescription drug prices continue to rise and drive up the cost of retiree health care.
Inability to Contain Drug Costs: The law prohibits Medicare from negotiating with the drug companies for lower prices, thus foregoing the enormous buying power of a system that represents 40 million beneficiaries. While the law includes a provision to legalize re-importation of prescription drugs from Canada, this can occur only if the Department of Health and Human Services (HHS) certifies that there are no safety risks. With no reported cases of fraud or abuse, HHS has consistently refused to provide certification.
Effective Date – 2006: The new drug benefit won’t take effect until January 2006. Because drug prices will continue to soar unchecked, CBO estimates that within seven years of the effective date, the annual deductible for drugs will grow from $250 to $445. The doughnut hole will grow too. In 2013, there will be no coverage between $4,000 and $9,066 in individual drug spending — a 78 percent increase over 2006.
Drug Discount Card: These cards are a temporary measure, effective only until 2006, when the drug benefit starts. Under this program, Medicare-approved discount cards are being sold by private pharmaceutical benefit managers for $30 a year. Discounts are estimated at 10 to 25 percent, although many experts say they will be much less. Seniors with income below $12,569 a year will get an extra benefit: $600 toward annual drug costs.
Big Winners – The Drug Companies: After spending millions in campaign contributions and lobbying expenses, the highly profitable drug industry (the most profitable in the world) will receive a bonanza from the new Medicare law. The law’s drug coverage for seniors will result in a higher volume of drug sales, while the total absence of cost-containment means nothing will get in the way of increased profits. It’s estimated that the drug companies will gain an additional $139 billion over 10 years.
American Federation of State, County
and Municipal Employees, AFL-CIO
AFSCME Retiree Program
1625 L Street, N.W.
Washington, D.C. 20036-5687