New Drug Plan: There's More For the Poor

Tommy Thompson is wrong, and for once we can all be glad he is. The secretary of Health and Human Services recently announced that the Medicare prescription-drug discount card program that begins June 1 will cut pharmaceutical prices by an average of 17%. On the contrary, the people who need help most could save between 30% and 70% this year. Congress passed this program intending to help low-income seniors, and with private sector involvement, that is precisely what they have achieved.

Mr. Thompson's focus on the 17% figure plays into the critics' claim that the new private drug discount cards approved by Medicare will not beat the discounts that already are available to seniors. But discounts are only part of the story. For instance, seniors with incomes of less than $12,569 (or $16,862 for a couple) will get a government cash subsidy of $600 this year and next toward their drug purchases. That subsidy is available only through the Medicare discount card. Needy seniors also will benefit from the rock-bottom prices offered by many big drug companies through their patient assistance programs. For example, Eli Lilly & Co. offers a month's supply of any of its drugs to needy patients for $12; and Pfizer offers theirs for $15.

Taken together, price discounts, the $600 subsidy, and private patient-assistance programs offer real relief to some 8 million low-income seniors who currently have no insurance coverage for prescription drugs.

Health plans, pharmacy benefits managers, and other private firms sponsoring a Medicare-approved card will make it easy for seniors to take advantage of cost savings. The card itself will function as a debit card, making access to the $600 transparent. Most plans will offer mail-order pharmacy as a lower-cost option, in addition to retail purchases. Plans also will automatically charge the lowest price available to each senior, rather than requiring them to apply separately (as they do now) for each manufacturer's patient assistance program.

None of these cost-saving features of the Medicare discount card program is captured by simply comparing the prices of a few top-selling drugs. To understand the full impact of the new program, we must put ourselves in the place of a typical senior. For a forthcoming study, we developed a number of hypothetical patient profiles for seniors with arthritis, hypertension, high cholesterol, diabetes and other health conditions common to an older population. Price information was current as of May 3, the first day Medicare beneficiaries could enroll in the card program. Changes since then are unlikely to affect our conclusions.

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Consider Robert Smith, a 66-year-old man with modestly well-controlled diabetes, high blood pressure and cholesterol, and the need for an occasional Viagra pill. He also takes Glucophage (a branded drug for diabetes), metoprolol (a generic drug for hypertension) and Zocor (a branded drug for cholesterol) on a daily basis. Mr. Smith is married, lives in Brooklyn and has a family income of $12,000 -- just under the poverty level. He is a member of AARP, and purchases his drugs through AARP's retail pharmacy program. Although he is eligible for patient-assistance programs offered by drug manufacturers, he has not applied for those programs. His monthly drug spending, with the AARP discount, comes to $250. Between June and December he would spend $1,750 on prescription drugs. The retail price of those drugs would be even higher without the AARP discount.

Under the Medicare discount card program, Mr. Smith is eligible for the full $600 subsidy, as well as special low prices offered by drug manufacturers' assistance programs. For his medications, the best Medicare card option available to him on May 3 was the Preferred Prescription Discount Card. (The same Medicare discount card will not necessarily be the best buy for everyone; it depends on the drugs they take and where they prefer to fill their prescriptions.) Using that card, and with all the other subsidies for which he is eligible, Mr. Smith could purchase his medicines at a retail pharmacy for $687 for the remainder of this year, or for less than $100 a month. He could save even more if he purchased his prescriptions by mail-order, which would cost about $592 for the seven months.

Mr. Smith stands to save about 60% off the cost of his prescriptions over the rest of this year under the new program. Just under half of the saving, or about $460, is the result of the discount prices and the price breaks from the drug company assistance programs. The other $600 in savings represents the government subsidy given to low-income seniors. Ignoring that subsidy and looking only at price discounts clearly understates the value of the program to someone like Mr. Smith.

Could Mr. Smith beat the savings from the Medicare discount card by just taking advantage of patient assistance programs and shopping around? Our study says it's unlikely. If he were to enroll in the available patient assistance programs, his cost through an AARP retail pharmacy would drop to $833. If he also switched to AARP's mail-order option for all his prescriptions, his cost would fall to $778 -- considerably below what he is now paying, but not below his $592 cost under the Medicare program. Other mail-order options offered savings similar to AARP's for Mr. Smith. This result is repeated in numerous other cases. Low-income seniors who are eligible for the cash subsidy will almost certainly save money through the Medicare discount card program compared to other legitimate sources of discounted pharmaceuticals.

The critics are correct about the Medicare discount card, at least in one sense. A government program cannot beat the prices available in a vigorously competitive market. What critics fail to realize is that Congress has opened the door to that kind of competition among private plans through the new discount card program. Let's hope that this competitive spirit carries over when Medicare's full drug benefit becomes available in 2006.

Dr. Antos is the Wilson H. Taylor scholar in health care and retirement policy at the American Enterprise Institute. Ms. Turner is president of the Galen Institute.

This commentary originally appeared in "The Wall Street Journal" on May 6, 2004.