prescription drug coverage for seniors - csg.org · the council of state governments’ summation...

The Council of State Governments’ Summation Report

Prescriptiondrug coveragefor seniors

Enhancements in treatment and access to care forthe aging have dramatically improved life ex-pectancy and quality of life for America’s seniors.

However, as the dominant mode of care has shifted frominpatient hospital care to management of disease throughoutpatient drug therapy, health care coverage for seniorshas not kept pace. Because Medicare, the federal gov-ernment program that funds health care for seniors andthe disabled, does not pay for prescription drugs, overthe years seniors have had to buy additional coverage orpay out of pocket for the drugs they are prescribed.

According to the Department of Health and HumanServices, roughly 73 percent of seniors have some formof prescription drug coverage, either through employer-sponsored retiree health insurance, Medicaid, Medigappolicies, Medicare HMOs or other third party coverage.Yet, finding coverage is increasingly difficult for seniorsas more employer plans and Medicare HMOs drop orscale back drug coverage. Seniors without coverage of-ten pay significantly more than those with drug cover-age. If they cannot afford to pay, they may chose not tofill a prescription, potentially risking their health.

In late 2001, The Council of State Governments (CSG)held a forum to address the issue of prescription drugcoverage for the elderly. Attendees—state legislatorsfrom 11 states—heard from nationally recognized speak-ers, including:

� Gail Wilensky, Senior Fellow, Project HOPE and formerHCFA official under President George Bush

� Bruce Stuart, Director, The Lamy Center on DrugTherapy and Aging, University of Maryland School ofPharmacy

� Tom Donnelly, Principal, Jefferson Government Relations

� Wayne Pines, President, Healthcare, APCO Worldwide

� Dr. Carolyn C. Lopez, Member, American Academy ofFamily Physicians Board of Directors

� Ken Kaitin, Director, Tufts Center for the Study of DrugDevelopment

� Duane Kirking, Professor & Chair, Department of Socialand Administrative Sciences, University of Michigan

� Jack Meyer, Ph.D., President, New Directions for Policy

� Donald Muse, President, Muse & Associate

� Al Lewis, Executive Director, Disease Management Pur-chasing Consortium LLC, and past president of theDisease Management Association of America

Sessions provided an overview of how prescriptionsare developed and priced, a discussion of current trendsin coverage, prescription drug utilization by seniors,and pharmaceutical direct-to-consumer advertising. Alsoincluded was a review of state strategies for providingcoverage to seniors and a discussion of how states canreduce prescription expenditures through disease man-agement programs.

Health care for seniorsGovernment-sponsored health insurance was first debated

in Congress in 1916. After WWII, both members of Congressand the White House proposed legislation many times, butthe votes were never sufficient. Finally, in 1965, Congresspassed the Medicare amendment to the Social Security Act.1

November/December 2001

2 The Council of State Governments

Before Medicare took effect, less than 50 percentof seniors in the United States had health insurance.Coverage for elderly with chronic health conditionswas even lower: less than 30 percent.2 But while Medi-care provided coverage on par with other insuranceplans of the 1960s, the standard features of today’semployee-sponsored programs—most notably outpa-tient prescription drug coverage—were not included.In today’s health care marketplace, not havingprescription drug coverage has placed a significantburden on seniors.

Who has coverage? Who does not?According to Dr. Bruce Stuart, Director of the Lamy

Center on Drug Therapy and Aging at the University ofMaryland School of Pharmacy, from 1993 to 1998 therewas a significant growth in the number of full-year Medi-care beneficiaries with some form of prescription drugcoverage (Figure 1).

Who is most likely to have coverage? Information pro-vided by the Medicare Current Beneficiary Survey re-veals that in 1998, beneficiaries with prescription drugcoverage tended to be:

� Younger (78% of those under 70 versus 69% of thoseover 80).

� Better off financially (80% of those with incomes of$50,000 or more a year versus 72% of those withincomes less than $20,000).

� Live in a city (79% urban versus 63% rural).

Why do drugs cost so much?Many factors affect how much someone is going to have to pay

to get a prescription filled at their local pharmacy. “Research anddevelopment costs, the disease to be treated, how the drug will beused, as well as competition in the marketplace all contribute indetermining manufacturer price,” stated Dr. Ken Kaitin, Director, TuftsCenter for the Study of Drug Development. Transaction costs onthe part of wholesalers and retailers increase price as well.

Determining manufacturer price

The total time it takes to bring a drug to market increased from8.8 years during the 1960s to 13.9 in the 1990s. (See figure below.)“Clinical trial size, market oriented studies, patient recruitment/re-tention issues, and a focus on chronic and complex indications haveworked to lengthen clinical development times,” said Dr. Kaitin. Atthe same time, the price for developing a new drug has also in-creased: in 2001, the cost of new drug development, including costof failed compounds and the cost of capital, was $802 million.1

From manufacturer to pharmacy

A wholesaler buys the drug from the manufacturer at a certainprice, then sells the drug to a retailer at the manufacturer’s priceplus the cost of the transaction. The pharmacy passes these costs, aswell as its own transaction costs, on to the consumer. Once thefixed costs of retailers are added, along with taxes and profits, thefinal costs to consumers could range from “20 percent to 25 per-cent over the pharmacy’s acquisition price.”2

Role of a third-party negotiator

When a third-party payer manages benefits, the final price isoften much lower. “Because a pharmacy benefits manager maymanage the drug benefit for a large number of individuals, it cannegotiate discounts at both ends of the pricing chain: from the manu-facturer and from the retail pharmacy.”3 Discounts from the retailertake the form of previously negotiated prices plus a dispensing fee.Discounts from manufacturers take the form of rebates, the valueof which can vary. The rebate does not affect the price of the drug:it is a separate transaction between the third-party payer and themanufacturer. However, when the value of the rebate is passed onthe consumer, it is estimated that savings may average about $1.00per claim.4

1Tufts Center for the Study of Drug Development, November 2001.2”Prescription Drug Coverage, Spending, Utilization, and Price.” U.S. Department

of Health and Human Services, April 2000. www.aspe.hhs.gov/health/reports/drugstudy.3ibid.4ibid.

Figure 1. Percentage of Medicare beneficiaries with andwithout prescription drug coverage, 1993–1998

Source: Medicare Current Beneficiary Survey, 1993-1998

Time to develop a new drug, 1963–1999

■ Preclinical Phase ■ Clinical Phase ■ Approval Phase0 3 6 9 12 15

1990s

1980s

1970s

1960s

20%

30%

40%

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60%

70%

80%

76%

24%

Any Coverage No Coverage

1993 1994 1995 1996 1997 1998

Health Policy Forum 3

Source and stability ofprescription drug coverage

However, there is more to this issue than whether ornot someone has prescription drug coverage. It is alsoimportant to examine both the source of coverage andthe stability of coverage. Figure 2 looks at coverage bytype: employer, Medigap, Medicare HMO, Medicaid, otherpublic program, and those seniors combining coveragefrom multiple plans.

During the mid-1990s, many seniors bought supple-mental drug coverage through Medigap and MedicareHMOs. As costs grew too high to make offering suchcoverage profitable, however, some companies pulledout of certain markets. One comparison showed that thepercent of Medicare beneficiaries offered at least oneMedicare + Choice plan with prescription drug coveragefell from 61.5% in 1999, to 54.7% in 2000, to 46.9% in2001.3 Those companies that remained often reducedcoverage and raised premiums in order to cover costs.

Figure 2 reveals the role of Medicare HMOs in ex-panding coverage to more seniors. “Of those gainingcoverage during this time, the majority—77 percent—did so through Medicare HMOs,” stated Dr. Stuart. Mean-while, public sector prescription drug coverage declinedfrom 16 percent to 12 percent.

An important element in understanding the number ofseniors with coverage is comparing those with stable anddependable coverage with those who have patched to-gether coverage from many sources or have gaps in cov-

erage for any period of time. According to Dr. Stuart, by1998, 28 percent of beneficiaries with prescription cov-erage had a gap of at least a month. Figure 3 provides anoverview of coverage stability from 1995 to 1998.

Trends in prescription drug spendingThe U.S. spends an extraordinary amount of money

on health care—nearly $1.3 trillion in 2000 according tothe Centers for Medicare and Medicaid Services (CMS).4

Prescription drugs as a percentage of total health careexpenditures has remained relatively stable over the lastthirty years, ranging from 5 to 8 percent (Figure 4).

However, although prescription drug costs make uponly a small and relatively stable percentage of overallhealth care expenditures, annual spending increases aresignificant when compared to other segments of the healthcare industry (Figure 5). During the last decade, growthof prescription drug expenditures outpaced the growthof hospital and physician expenditures every year ex-cept 1992. This growth was a reflection of the move away

Figure 2. Prescription drug coverage of Medicare beneficiares by source (percentage), 1993–1998

As the dominant mode of care has shiftedfrom inpatient hospital care to manage-ment of disease through outpatient drugtherapy, health care coverage for seniorshas not kept pace.

■ Medicaid ■ Other public ■ Multiple plans

1993 1994 1995 1996 1997 19980%

5%

10%

15%

20%

25%

30%

■ Employer ■ Medigap ■ Medicare HMO



from more expensive inpatient hospital care towards lessexpensive outpatient care and drug therapy.

“There are two ways that medication costs can go up:you pay more or you use more. Changing the mix ofmedication can affect both factors,” stated to Dr. DuaneKirking, College of Pharmacy and School of Public Health,University of Michigan. Dr. Kirking’s research has dem-onstrated that both increased utilization as well as chang-ing the mix of prescriptions—switching from an older,less expensive medication to a newer, more expensivemedication—accounts for the majority of expendituregrowth, although increases in drug prices plays a role aswell (Figure 6).

Drug costs and usage among seniorsIn the debate over drug coverage for seniors, cost and

utilization of prescription drugs play major roles in thechoice of policy options. Chief among the concerns isthat seniors without prescription drug coverage tend topay more for the same prescription than those with cov-erage. These seniors are often those who can least affordto pay higher prices for prescription drugs—they maketoo much to be eligible for Medicaid but make too littleto afford Medigap or other prescription drug coverage.

A report published by the Department of Health andHuman Services (HHS) states that in 1999, “excludingthe effect of rebates, the typical cash customer paid nearly15 percent more than the customer with third-party cov-erage. For a quarter of the most common drugs, the pricedifference between cash and third parties was evenhigher—over 20 percent.”5 Because insurance companiesrepresent a large number of clients, they are able tonegotiate rebates and discounts with manufacturers and

Direct-to-consumer advertisingIn recent years, policymakers have expressed concern about

the effect of direct-to-consumer advertising (DTC) on drug costand usage. Critics fear that drug spending is going up needlesslydue to inappropriate prescription drug use fueled by DTC ads.Proponents argue that DTC advertising educates and empow-ers consumers by giving them essential health information.

DTC background and history

DTC adver tising of prescription drugs is not new: printads and, to a lesser extent, broadcast ads have been popularsince the late 1980s and early 1990s. However, visibility ofthese ads has increased tremendously since 1997, when theFood and Drug Administration (FDA) issued “Guidance forIndustry: Consumer-Directed Broadcast Adver tisement.” Fi-nalized in 1999, this guidance provides the pharmaceuticalindustry with instructions on how to ensure the viewer hasaccess to the product’s approved labeling information. It re-quires adver tisements contain information about both theproduct’s risks and benefits. In print ads, all risk informationabout the product must be included. For TV and radio spots,access to this information must be easily accessible through atoll-free information line, a website, a print ad, and a healthprofessional.1

The FDA regulates all promotions by prescription drug com-panies and may take action against any company it feels is beingfalse or misleading. Drug manufacturers are not required to re-ceive prior approval for DTC ads, although many companiessubmit materials at some point during production.

DTC spending by manufacturers

The last decade saw a tremendous increase in the money spentby pharmaceutical manufacturers on direct-to-consumer adver-tising: 32.9 percent.2 During this same period of time, spending onother promotional strategies also increased. The figure belowprovides exact dollar amounts for money spent on physiciansamples, detailing, professional journal advertising, as well as DTC.

Benefits and costs of DTC advertising

Better awareness of disease is one of the benefits often at-tributed to direct-to-consumer advertising of pharmaceuticals.

Figure 3. Percent of Medicare beneficiaries with year-around coverage and part-year prescription drug cov-erage, 1995–1998

0

10

20

30

40

50

60

70

■ % year-round coverage■ % with part-year coverage■ % with no coverage

continued on page 6


Spending by manufacturers on drug promotion

Source: Prescription Drug Trends—A Chartbook Update,November 2001. Kaiser Family Foundation.

0

1000

2000

3000

4000

5000

6000

7000

8000

In M

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1996 1997 1998 1999 2000

Professional Journal Advertising Detailing

Direct to Consumer Advertising Retail Value of Sampling


Figure 5. Annual percentage increases in health care spending by sector, 1970–1999

■ Prescription■ Physician■ Hospital

0

2

4

6

8

10

12

14

16

18

1993 1994 1995 1996 1997 1998 19991970 1980 1990 1991 1992

■■ Other ■ Prescriptions ■ Nursing Home/Home Health ■ Physician ■ Hospital

0%

20%

40%

60%

80%

100%

1970 1980 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Figure 4. National health care expenditures—selected categores, 1970–1999

Source: Centers for Medicare and Medicaid Services.

Source: Centers for Medicare and Medicaid Services.


pharmacies on behalf of their members. Individual se-niors without coverage, however, do not have this lever-age and often pay full retail price for prescription drugs.

Prescription drug utilizationby Medicare beneficiaries

Because utilization will have a major affect on howmuch is spent on prescriptions, estimating current andfuture use of prescription drugs presents a challenge forpolicy makers interested in providing prescription drugcoverage for seniors.

“DTC advertising promotes awareness of potential health prob-lems, thereby increasing the likelihood of early recognition ofdisease,” stated Wayne Pines, President, Healthcare, APCOWorldwide. Increased knowledge of treatment options is an-other oft-cited benefit. “It provides consumers with useful infor-mation on product availability, allowing them to become moreknowledgeable and make intelligent, informed decisions withthe advice and support of a physician,” he added.

Critics feel, however, that these adver tisements may con-fuse consumers, or encourage them to take unnecessary pre-scriptions. With the current climate of physician liability andmanaged care pressures, some analysts worry that physiciansmay simply give in to demanding consumers rather than pre-scribing older, cheaper drugs or encouraging lifestyle changes.“It may be difficult, especially for younger physicians, to sayno to a patient,” said Dr. Carolyn Lopez of the AmericanAcademy of Family Physicians.

Recent survey results

In hopes of determining just what affects DTC had on theviewing public, the FDA conducted a national survey in 1999 ofindividuals who had seen a doctor at some point during theprevious three months. The survey found that overall consum-ers are asking more questions as a result of DTC advertising,most often of their physician. Furthermore, “a significant minor-ity of respondents said that the DTC ad has caused them to aska doctor about a medical condition or illness they had not pre-viously discussed.”3 Other findings include:

� Only two percent visited the doctor because of somethingthey had seen or heard in a DTC advertisement.

� Of those patients who had talked with their physician abouta prescription drug, 81 percent said that their doctor hadwelcomed their question, 79 percent said that their doctordiscussed the drug with them, and 71 percent said that theirdoctor has reacted as though the conversation was an ordi-nary part of the visit.

� Fifty percent said the doctor prescribed the drug they askedabout, 32 percent said the doctor recommended a differentdrug, and 29 percent said that their doctor recommended abehavioral or lifestyle change to address the problem.4

Another survey conducted by the Kaiser Family Foundationin 2001 found that 30 percent of respondents had talked totheir doctor as a result of a drug ad. As a result of these conver-sations, the doctor prescribed the drug 44 percent of the timeand recommended a different prescription drug 25 percent ofthe time.5

1Statement of Dr. Nancy M. Ostrove, FDA, before the Senate Subcommitteeon Consumer Affairs, Foreign Commerce and Tourism, July 24, 2001. <http://www.fda.gov/ola/2001/drugpromo0724.html>.

2Prescription Drug Trends—A Chartbook Update, November 2001. Kaiser Fam-ily Foundation.

3ibid.4ibid.5Brodie, Mollyann. “Understanding the Effects of Direct-to-Consumer Pre-

scription Drug Advertising.” Kaiser Family Foundation, November 2001. <http://www.kff.org/content/2001/20011129a/mollyfinalchartpack.pdf>.

Direct-to-consumer advertisingcontinued from page 4

Figure 6. Components of pharmaceutical spendingincreases, 1993–1999

Price18%

Type ofMedication

39%

Utilization43%

Source: Centers for Medicare and Medicaid Services

Figure 7. Average annual prescription expenditures byMedicare beneficiar ies with and without drugcoverage, 1993–1998

$200

$400

$600

$800

$1,000

$1,200


1993 1994 1995 1996 1997 1998



In 1998, for instance, Medicare beneficiaries filled 26percent more prescriptions than in 1993. At the sametime, the average transaction price per prescription filledrose 29 percent. An examination of utilization by type ofbeneficiary—those who have some prescription drugcoverage and those who do not—reveals a distinct dif-ference in usage and costs. Seniors with prescription drugcoverage filled 40 percent more than those without cov-erage, and used newer, more expensive drugs. “By 1998,beneficiaries with coverage spent 80% more than thosewithout drug benefits,” stated Dr. Stuart.

Why do those with coverage spend more on pre-scriptions? An April 2000 HHS report suggested thatMedicare beneficiaries with coverage spend more forseveral reasons:

� Beneficiaries who take a number of prescriptions orwho expect to have higher usage in the future seekout coverage.

� Doctors may be inclined to write more prescriptions,or prescriptions for drugs that cost more, for thosebeneficiaries with coverage.

� Beneficiaries with coverage may request pre-scriptions more often or ask about new, moreexpensive treatments.

� Beneficiaries without coverage may not fill their pre-scriptions or may alter the dose so that the prescrip-tion lasts longer.6

Out-of-pocket expenditures also increased duringthis time. From 1993 to 1998, spending by Medicarebeneficiaries with prescription drug coverage increasedby 35 percent, and 43 percent for those without. Se-niors without coverage spent on average 70 percentmore out of pocket than those seniors with coverage(Figure 8).

State strategies to providecoverage to seniors

Many states have responded to seniors’ need for drugcoverage through a number of programs and strategiesover the years. In the past two years, state action to es-tablish or expand senior drug programs increased sig-nificantly. More than half of the states now have someform of senior drug assistance program.

States use different means to pay for these programs.Pennsylvania’s PACE program is funded through its lot-tery revenue. Some states, such as Nevada and Indiana,have used tobacco settlement funds to finance their newprograms. Others have used general revenues, cigarettetaxes or some combination of state and federal fundsthrough the Medicaid program.

Outlined below are various models that states haveused to provide assistance to seniors to purchase pre-

scription drugs. (See Figure 9 for a listing of states withvarious types of programs.)

State-administered drug coverage programs

The oldest and most common type of drug assis-tance program, state-administered drug assistance pro-grams generally provide broad coverage for prescrip-tion drugs. Enrollees may have some cost-sharing re-quirements, such as premiums, coinsurance, co-pay-ments or deductibles, but most of the prescription drugcosts are paid by the state.

For those states with the resources to establish andadminister such programs, state-run programs are verypopular because they resemble regular insurance. How-ever, for many states, cost is a barrier to providing thistype of pharmaceutical assistance. States must have gooddata of the number of seniors without drug coverageand their income levels as well as the pool of state re-sources available to assist seniors. Without careful plan-

Figure 8. Average annual out-of-pocket spending onprescription drugs by Medicare beneficiaries with andwithout drug coverage, 1993–1998


1993 1994 1995 1996 1997 1998$200

$300

$400

$500

$600

An important element in understandingthe number of seniors with coverage is com-paring those with stable and dependablecoverage with those who have patched to-gether coverage from many sources or havegaps in coverage for any period of time.



Helping to control costsand improve outcomes

As states have experienced severe budget problems in re-cent months, drug benefits in Medicaid and pharmaceutical as-sistance programs have come under intense scrutiny. States arelooking for ways to control costs while continuing to providecomprehensive benefits to the greatest number of seniors. Thetask is not easy.

One cost-containment strategy that state policymakers areexamining is disease management (DM) for individuals withchronic illnesses. Other strategies focus on using existing re-sources more efficiently. Don Muse, a health care analyst whohas spoken to many state officials, advises states to examinetheir claims and spending data to determine where savings canbe achieved. From his analysis of spending by various state Med-icaid programs, Muse has found that states can save money andimprove care by focusing on:

� The chronically ill

� High cost cases, particularly in drug utilization

� Providers with quality and utilization problems.

Disease management

Providing treatment to individuals with chronic conditions isexpensive. In 2000, the estimated 125 million individuals (roughly44 percent of the population) suffering from one or more chronicdiseases accounted for 75 percent of total health care spendingin the United States.1 Systematically managing the symptomsand treatment of these illnesses offers a chance for controllingcosts.

Disease management is defined as “a comprehensive, multi-disciplinary approach to healthcare delivery that seeks to man-age and improve the health status of a defined patient popula-tion over the entire course of the disease.”2 Disease manage-ment is based on the premise that coordinated care of chronicconditions such as diabetes, asthma, and congestive heart fail-ure will not only result in fewer complications and improvedhealth, but will help keep costs down. Disease management pro-grams seek to closely monitor treatment for chronic disease,educate participating patients about their disease and ensurethat patients receive care that follows the latest treatment guide-lines. The result is to minimize preventable complications fromchronic illness and thereby to lower the number of visits to theemergency room and days in the hospital.

Components of an effective disease management programinclude:

� General assessment of the population to decide which dis-eases should be targeted

� Identification of chronically ill individuals

� Case management of care that considers both the patient’sgoals and his or her health status

� Use of face-to-face provider interactions, phone calls andweb sites, printed education materials, self-monitoring pro-grams, and more to improve health outcomes

ning and good data, a state may experience budget prob-lems because enrollment is too high or drug utilization ishigher than expected. On the other hand, eligibility andcost-sharing requirements may be so complicated thatfewer seniors enroll than expected.

Discount programs

Another way that states have assisted seniors is to givethem access to the same price discounts on prescriptiondrugs that are available to those with drug coverage.Seniors still must pay out-of-pocket for their prescriptionmedications, but these programs ensure that seniors paya lower retail price.

There are several different ways to establish a discountprogram. California enacted S.B. 393 in 1999 to provideMedicare beneficiaries access to prescription drugs at theMedicaid price. California does not pay anything directlyto participants. Instead, seniors pay Medicaid prices whenthey show their Medicare cards at pharmacies that par-ticipate in the state’s Medicaid program. Other states haveestablished discount programs that have an applicationprocess and eligibility requirements just like traditionalmedical assistance programs. Other states issue discountcards to eligible seniors for use at retail pharmacies toreceive drug discounts.

Medicaid Expansions

Another option to provide drug coverage to seniors isfor states to expand their Medicaid programs to covermore seniors. This option has the advantage of usingfederal matching funds to enhance state resources. How-ever, with traditional Medicaid expansions, states havehad to apply for a Medicaid waiver and provide morethan just pharmacy benefits to seniors they enroll. Thisadded enrollment can increase state expenditures sig-nificantly, if more seniors end up using Medicaid for phy-sician services, hospitalizations and long term care ser-vices.

The U.S. Department of Health and Human Services(HHS) recently announced plans for a Pharmacy Pluswaiver that addresses these concerns. States approvedunder this special waiver could use federal matching fundsto provide pharmacy and primary care services to se-niors who make up to 200 percent of the Federal Pov-erty Level under their Medicaid program. States can usecost-sharing techniques, pharmaceutical benefits manage-ment and care coordination to contain the cost of theprogram. The main obstacle for states is the requirementthat the program be budget neutral.

In January 2002, Illinois became the first state to use awaiver for pharmacy benefits for seniors with the ap-proval of HHS. Illinois’ own pharmaceutical assistanceprogram was limited to certain drugs for certain condi-tions and was funded entirely through state revenues.Through the waiver, Illinois is able to leverage its own

continued on page 10


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� Pharmacy counseling to assess compliance with drugtreatment

� Referral to appropriate sources of financial, health care, andcommunity assistance

� Reporting and evaluating program results.3

Disease management may not work well with all chronicallyill populations. Both patient and physician cooperation is essen-tial, as is a health care delivery system that allows for integratedcare and data collection. However, several states have alreadyexperimented with disease management programs and haveseen significant savings.

The Virginia Department of Health established the VirginiaHealth Outcomes Partnership that targeted primary care phy-sicians who treated Medicaid asthma patients. Virginia providedtraining on disease management and communication skills todoctors in selected areas. In two years, emergency room visitshad declined among patients in the targeted areas and VirginiaMedicaid had saved $3-5 for every dollar spent in providingdisease management support.

Florida has launched a broader initiative that has includedasthma, hemophilia, diabetes, AIDS, congestive and renal heartfailure, hypertension, sickle cell anemia and cancer. Florida’sAgency for Health Care Administration has contracted with DMvendors creatively to ensure savings. Companies are paid a flatfee but are also given incentives based on the degree of savings.

Figures for the first few years of Florida’s DM programs showthat the state’s investments have paid for themselves or pro-duced modest savings. Because there is significant lag time be-tween interventions aimed at chronic illness and the associatedsavings, it may be a few years before officials know for surewhich programs save significant sums of money and which fea-tures improve care but only break even.

Al Lewis of the Disease Management Purchasing Consor-tium cautions policy makers to be wary of vendors who eitherpromise the moon or who need extravagant sums up front toestablish a disease management program. As with most newprograms, states do have to invest some funds up front to getDM programs going. However, smart purchasers will write con-tracts that guarantee savings and as well as provide incentivesto vendors.

In addition, not all populations are equal when it comes todisease management. Mr. Lewis advises states to focus DM onpatients with the following characteristics:

� Stable with low turnover.

� Older and sicker.

� Less educated.

� Reachable.

resources with federal matching funds. Eligible low-in-come seniors in Illinois now have access to any drugcovered by Medicaid with nominal co-payments and othercost-sharing requirements. (For more information on thePharmacy Plus waiver, see http://www.cms.gov/medic-aid/1115/rxfactsheet41202.pdf.)

Subsidies for private coverage

Some analysts have argued that the best solution tothe senior drug coverage problem is helping seniors af-ford coverage that is already available in the privatemarket. Nevada became the first state to try this approachin 1999. Although the initial legislation was changed in2001 due to implementation problems, the state has sincecontracted with a private firm and has enrolled morethan 4,000 seniors. Through this program, eligible se-niors receive a subsidy for up to 100 percent of the pre-scription drug coverage premium.

Refund Programs

Under a refund program, seniors must still go throughan application process to determine eligibility for theprogram. Once enrolled, a senior must submit receiptsor other documentation of pharmaceutical purchases tothe state. After reviewing, the state issues a partial re-fund or reimbursement for costs incurred.

Tax credits

Another option to extend drug coverage to seniors isto offer tax credits to seniors for a portion of their phar-maceutical expenditures. Usually through the state in-come tax application, seniors submit documentation oftheir total expenditures and receive a tax credit for aportion of their prescription drug costs.

Coordination of manufacturer programs

Every pharmaceutical company has a program thatassists those who cannot afford their medications. Usu-ally patients must work with their doctors to submit aletter, an application or other documentation that pro-vides evidence of both medical and financial need. Thedifficulty for low-income seniors is that they often takemultiple medications from multiple manufacturers. Sinceeach manufacturer has a different process for applyingfor pharmaceutical assistance, the process can be verycomplicated for those most in need. Some states, ham-pered by scarce resources, have designated funding forstaff who can assist seniors with filling out paperworkand managing application cycles for manufacturer assis-tance programs.

Helping to control costsand improve outcomescontinued from page 8

continued on page 11


Focusing on cost and quality problems

In addition to improving care for the chronically ill, states maybe able to hold down costs through targeted interventions to afew high cost patients and providers.

Health care analysts have long recognized that the dual eli-gible population—seniors and the disabled enrolled in bothMedicare and Medicaid—make up less than one-third of enroll-ees in Medicaid but are responsible for more than two-thirds ofMedicaid expenditures. Moreover, within the dual eligible popu-lation, individuals within nursing homes are often the most ex-pensive cases.

Some states have identified their highest cost enrollees withinMedicaid and used intensive case management to identify areasfor improvement in the efficiency and quality of care. Often,these cases are experiencing problems with effective manage-ment of disease, uncoordinated care, and unnecessary compli-cations. Don Muse indicated that overutilization of drugs in nurs-ing homes is particularly problematic. In one state Mr. Muse stud-ied, more than 68 percent of nursing home residents receivednine or more prescriptions, resulting in $83 million in expendi-tures. In the same state, more than 32 percent of nursing homeresidents received 20 or more prescriptions, resulting in $55million in costs. While much of this spending is proper, abnor-mally high pharmacy costs may indicate some degree of inap-propriate drug utilization or fraud. In addition, individuals takingmore than nine medications have a much higher risk for druginteraction problems and may experience unnecessary and costlycomplications.

Another strategy that states may use to control costs ac-cording to Mr. Muse is to target quality problems among provid-ers. States can examine data regarding complications, medicalerrors and readmissions to determine which hospitals, nursinghomes or other facilities have the most problems. Once thesefacilities are identified, the state must examine the underlyingcauses for these problems, whether the facility treats more com-plicated, high-risk cases or whether there are issues of substan-dard quality of care.

Endnotes1Anderson, Gerard, and James Knickman. “Changing The Chronic Care Sys-

tem to Meet People’s Needs.” Health Affairs, November/December 2001, v20 n6:146–160.

2“Overview: Disease Management.” New Directions for Policy.

3ibid.

Helping to control costsand improve outcomescontinued from page 10

ConclusionWhile Medicare significantly improved the lives of the

elderly in the United, its lack of a prescription drug ben-efit has left many seniors vulnerable. As access to cover-age through Medicare HMOs and employer-sponsoredcoverage has declined, many states have risen to thechallenge by instituting programs that offer seniors theprescription drug coverage that Medicare does not. Anysolutions for providing access to prescription drugs forseniors in need will continue to be an expensive propo-sition due to the aging of the population and growth inuse of prescription drugs. With serious budget problemsin almost every state, the challenge now for states is toleverage existing resources to continue to provide assis-tance to the greatest number of seniors.

Endnotes1Corning, Peter. “The Evolution of Medicare . . . from idea to law.”

www.ssa.gov/history/corning.html.

2 Friends Committee on National Legislation. www.fcnl.org/issues/hea/sup/whymed.htm.

3 Achman, Lori, and Marsh Gold. “Medicare+Choice 1999–2001: An Analysisof Managed Care Plan Withdrawals and Trends in Benefits and Premiums.”The Commonwealth Fund, February 2002.

4 “National Healthcare Expenditures.” Centers for Medicare and Medic-aid Services. www.hcfa.gov/stats/nhe-oact/tables/t2.htm.

5 “Prescription Drug Coverage, Spending, Utilization, and Prices.” U.S.Department of Health and Human Services, April 2000. www.aspe.hhs.gov/health/reports/drugstudy/.

6 ibid.

Links to additional resources

■ AARP–www.aarp.org

■ PhRMA–www.phrma.org

■ National Pharmaceitical Council–www.npcnow.org

■ Agency for Healthcare Research and Quality–www.ahrq.gov

■ Disease Management Association of America–www.dmaa.org

■ Rx Health Value–www.rxhealthvalue.com

■ Rx Assist–www.rxassist.org

_______________Trudi Matthews is Chief Health Policy Analyst and Jenny Sewell isa Health Policy Analyst for CSG. Funding for this report providedby Wyeth Pharmaceuticals.


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