Drug Benefit to Cost 14% Less, Medicare Says

Medicare announced Tuesday that its new outpatient prescription benefit would cost about 14% less than estimated next year, which means less of a squeeze on seniors’ budgets and billions in potential savings for taxpayers.

Nationally, the average monthly premium that beneficiaries will pay when the program takes effect in 2006 is expected to be $32.20, down from an estimated $37.37. Premiums will vary around the country, but officials said they were expected to be lower in California because of the high level of enrollment in Medicare managed-care plans.

The new figures are based on bids from dozens of private health plans vying to offer coverage to more than 42 million elderly and disabled people who are eligible for Medicare’s first-ever outpatient drug program. Previous estimates were based on government projections of what drug companies were likely to charge.

The lower estimates were good news not only for Medicare recipients and the U.S. Treasury, but also for President Bush. He made the prescription benefit a centerpiece of his domestic agenda, but the elderly have greeted the plan with skepticism -- fearing that it would be too costly to participate in.

Tuesday’s announcement may make it easier for administration officials to drum up enthusiasm for the plan.

The figures announced Tuesday by Medicare administrator Mark B. McClellan came as something of a surprise. Until now, most analysts had predicted that the program would be much more expensive than Bush and the Republican-controlled Congress envisioned.

“This is very good news,” McClellan said. “What we are seeing is significantly lower costs.”

He attributed that to “robust competition” among private insurers and managed-care health plans.

The development may prompt more people to sign up for the benefit after Nov. 15, when Medicare starts accepting applications for coverage. Health and Human Services Secretary Michael Leavitt has cited estimates that between 28 million and 30 million will enroll in the program in 2006.

But some healthcare experts cautioned that costs and premiums may rise steeply in future years. The program is structured so that taxpayers pay 75% of the cost, and beneficiary premiums must cover the remaining 25%.

“Right now, premiums of $32 are a best guess, given that we don’t have experience with these types of plans and no one has signed up for this benefit yet,” said health economist Paul Fronstin of the Employee Benefit Research Institute. “In subsequent years, you will have real data to base prices on.”

McClellan refused to speculate on any long-range savings as a result of the new estimate for 2006, saying such projections would not be available until Bush submits his budget next year. Estimates released in February shocked many in Congress by putting the 10-year cost of the benefit at nearly $724 billion. A 14% savings would reduce that by about $100 billion.

The prescription drug benefit is the most significant expansion of Medicare in decades and is seen as a signature domestic policy achievement for Bush. But its complex design -- featuring many coverage options at different prices -- has made some senior citizens leery. Its expected costs have drawn fire from fiscally conservative Republicans, while Democratic liberals denounce its reliance on private plans as an industry giveaway.

“There is a climate of concern that the program will grow out of control,” said John Rother, policy and strategy director for AARP. “Now to have the premiums come in lower than has been estimated is a sign that it’s not going to become unaffordable, at least in the first year.”

AARP provided crucial support for passage of the drug benefit, although it has opposed Bush’s plan for private investment accounts in Social Security.

The cost of the drug benefit will be much lower for low-income beneficiaries, no matter what part of the country they live in. About one-third of Medicare beneficiaries -- about 14 million people -- will be eligible for government subsidies of their premiums. “Most beneficiaries with limited incomes will also have no deductibles, no gaps in coverage, and only small co-payments for each prescription,” Medicare officials said in a statement.

The government began sending out applications for the low-income assistance in June, but service and advocacy groups said progress in signing up beneficiaries had been difficult.

“We are killing ourselves to enroll people who are eligible for low-income subsidies, but it’s slow going,” said Robert M. Hayes, president of Medicare Rights Center, a New York-based national advocacy organization.

He cautioned against “singing happy songs,” because details of the drug plans would not be known until open enrollment begins in November. “This is a very difficult decision for consumers,” Hayes said. “How the plans get to these [premium] numbers is a complex equation based on medical packages and different forms of consumer out-of-pocket expenses.”

In addition to monthly premiums, beneficiaries will have to pay an annual deductible of $250. After that, Medicare will pay 75% of prescription costs up to $2,000.

But because of budget constraints, beneficiaries will face a coverage gap, dubbed the doughnut hole, between $2,250 and $5,100 of annual expenses. Above that, Medicare will cover 95% of drug costs.

Because private insurers have some leeway in how they structure the benefit, industry officials say most senior citizens should be able to find plans that offer no deductible in exchange for some limits on their choices of drugs.

The nonpartisan Congressional Budget Office has estimated that the typical senior who signs up will save about $465 on prescriptions in the program’s first year.

But it’s unlikely that even the most cost-conscious insurers will be able to eliminate the doughnut hole. And some studies indicate that middle- and upper-income beneficiaries with chronic health conditions will face the highest out-of-pocket costs.

Leavitt, who has launched a 75-city bus tour to promote the benefit, said Tuesday that the time for debate and skepticism was past.

“Most of us who saw this unfold on Capitol Hill saw a robust political debate,” he said. “The politics of this is over out in the heartland. It’s now about finding a way to help our seniors in this country make an informed decision.”

It is still too early to tell how the elderly will respond to the benefit. Some may be put off by the paperwork and keep ordering low-cost Canadian drugs.

“Our surveys suggest that seniors haven’t really focused on the drug benefit in any kind of detail,” said Tricia Neuman, a Medicare expert with the Kaiser Family Foundation.

“When they do, the monthly premium could be an important consideration, but it’s still too early.”