Purchasing Medicare Prescription Drug Benefits: A New Proposal

PROLOGUE: Almost thirty-five years ago, Congress modeled Medicare's original package of medical benefits after those offered by Blue Cross and Blue Shield plans at the time. Few benefits have been added since then, although the nature of the illnesses that afflict Medicare's 38.4 million beneficiaries have changed considerably, as has the capacity of medicine to cope with them. On 1 July 1988, when President Ronald Reagan signed into law the Medicare Catastrophic Coverage Act, the federal government corrected what many elderly people believed was the program's most serious missing benefit: the coverage of outpatient prescription drugs. However, less than two years later Congress repealed the law in response to opposition vociferously expressed by some elderly people and some pharmaceutical companies. Now, as prescription drugs consume a larger share of the health care dollar, political pressure is building again for adding an outpatient drug benefit. Whether Congress takes definitive action may depend largely on whether it can forge a private/public collaboration that is acceptable to the competing parties. In this lead paper Lynn Etheredge, an independent consultant widely respected for his policy acumen, proposes an approach that seeks to accommodate the concerns of both government and the private sector regarding a new drug benefit, and two leading stakeholders respond with perspectives that follow. Etheredge directed the professional health staff of the president's Office of Management and Budget during the administrations of Jimmy Carter and Ronald Reagan. He is now a consultant with the Health Insurance Reform Project at the George Washington University, a project that is supported by the Robert Wood Johnson Foundation. ABSTRACT: Medicare policymakers are considering using private-sector firms to offer and manage a prescription drug benefit. In such arrangements Medicare and its potential contractors will need to consider four major areas of risk: selection risk, cost management risk, risks of government as a business partner, and risks that new Medicare benefits will change competitive advantages. This paper considers these risk factors and suggests a model for Medicare prescription drug coverage. By adapting private-sector purchasing practices and using competitive markets, Medicare could offer prescription drug benefits--at affordable premiums for beneficiaries--without resorting to national price controls for pharmaceutical products.