MEDICARE DRUG PROGRAM FIVE-YEAR NET COST UNDER CLINTON PLAN WOULD BE $59 BIL., LEWIN-VHI STUDY FINDS; EXPANDED COVERAGE WOULD RAISE DRUG SPENDING 6% IN 1998

Executive Summary

The five-year net cost to the federal government for the Medicare prescription drug benefit in the Clinton Health Security Act would be $59.3 bil., according to an analysis of the proposed legislation by Lewin-VHI. The private analysis comes in more than $6 bil. below Clinton Administration estimates. Lewin-VHI predicts that the net government cost of the outpatient drug program would be 10.6 bil. in 1996, $11.1 bil. in 1997, $11.8 bil. in 1998, $12.5 bil. in 1999 and $13.3 bil. in 2000. The net cost figure takes into account government receipts associated with the program from manufacturer rebates, beneficiary premiums and the federal share of Medicaid savings. The Medicaid savings would derive from switching those Medicare beneficiaries who now fill prescriptions under Medicaid to the new Medicare program with its rebates and premiums. The HHS estimate of the five-year net cost to the government of the Medicare drug program is $66 bil., based on gross expenditures for "benefits, administration and pharmacists' costs" minus manufacturer rebates. For each of the years 1996 through 2000, HHS estimates the net cost at $6.6 bil., $13.5 bil., $14.2 bil., $15.2 bil. and $16.2 bil., respectively. The difference in the first-year costs is presumably related to the HHS assumption that the first year would not include a full 12-month period because of the difference between calendar and fiscal years. Although the Lewin-VHI analysis estimates a lower not cost to the government, it projects a much higher gross expenditure total: $98.7 bil. over five years compared to $80.8 bil. in the HHS estimates. That figure is significant given that Lewin-VHI assumes a smaller aggregate payment to the government from manufacturer rebates. The Lewin inclusion of beneficiary premiums is apparently one major reason for the lower net cost. From a larger political perspective, the Lewin estimates were hailed by the White House as support for the possibility of universal health care without a major tax increase. Treasury Secretary Bentsen called the Lewin report "most encouraging" at a press conference on Dec. 9. "I think these things we've seen in the way of estimates are fortifying our position as to being able to accomplish [universal coverage] without any broad-based tax... [while] paying for it in full, with some left over to curtail the deficit," he maintained. While the Lewin study indicates that the health program could be paid for without taxes, it carries the tough political message of a predicted 17% increase in alliance premium costs above those calculated by the Administration. From the drug program, the government would receive manufacturer rebates of $9.2 bil. over the five-year period, Lewin estimates -- $1.6 bil. in 1996, $1.7 bil. in 1997, $1.8 bil in 1998, $2 bil. in 1999 and $2.1 bil. in 2000. Rebates would fund 9.3% of the total cost of the drug benefit according to the Lewin analysis, compared to 18.6% under the figures given by HHS. The department predicts that rebates would total $15 bil. over five years. One of the key assumptions behind Lewin's lower estimate of drug rebate payments is a 10% average rebate level. While the proposal calls for 17% rebates for single-source drugs and innovator multi-source products, generics would be exempt from the rebate. The 10% average rebate figure was used by Lewin to account for that difference, Lewin-VHI President Robert Rubin, MD, explained at a Dec. 9 workshop. The gross cost of the Medicare drug benefit to the government, assuming that administrative costs would be equal to 2.5% of benefits payments and everyone now covered under Medicare Part B would enroll, would range from $17.1 bil. in 1996 to $22.5 bil. in 2000, the Lewin analysis found. HHS estimates that gross cost would be $8.2 bil. in FY 1996, $16.3 bil. in 1997, and rise to $20.0 bil. in 2000. Over five years, federal Medicaid savings would total $8.2 bil., Lewin estimates, and beneficiary premiums would rise from $3.8 bil. in 1996 to $5 bil. in 2000, for a five-year total of $22 bil. According to these figures, Medicaid savings would fund 8.3% of the Medicare drug benefit, while premiums would fund 22.3%. The expansion of drug benefits to the Medicare population and inclusion of drugs in the basic benefits package under the Clinton plan would lead to an increase in drug expenditures in 1998 of 6% above the base level of what would be spent if the current system remained in place, Lewin estimates. Spending on drugs in 1998 would be $73.1 bil. under the Health Security Act, Lewin predicts, compared to $68.8 bil. under the 1998 base case. Out-of-pocket spending would decline sharply from $34.7 bil. without the Clinton plan to $14.7 bil. after enactment. Conversely, third party payments would increase from $32.6 bil. (private insurance and Medicaid) to $55.4 bil. (health alliances, Medicare and subsidies). The increased utilization of drugs by previously uninsured people would create more than half of the net rise in 1998 drug expenditures. Under current policy, the uninsured would account for $3.1 bil. of drug spending in 1998, Lewin estimates; under the Health Security Act, those newly insured people would account for $5.5 bil. in drug spending. This 77% increase compares to rises of 52% for hospital inpatient spending, 94% for hospital outpatient and 139% for physician care. Lewin estimates that the rise in prescription drug expenditures for currently insured people, considering those who do not have coverage for drugs, would be 3%, from $65.7 bil. under the 1998 base case, to $67.6 bil. under the Clinton plan. Despite the increases in prescription drug expenditures that would come from expanded coverage under the Clinton plan, the average pharmaceutical firm is likely to lose 6.7% of its revenues, Lewin found. A pharmaceutical company that would have 1998 revenues of $3 bil. without the implementation of health care reform would see revenues of $2.8 bil. under the Clinton plan, Rubin told the Lewin workshop. Included in the Lewin modeling for the average pharmaceutical firm were estimates for the overall increase in drug volume (adding $185 mil.), Medicare rebates (subtracting $77 mil.), eliminated Medicaid rebates (adding $49 mil.), increased use of generics (subtracting $300 mil. for lower prices), and increase in managed care and its accompanying cost management techniques (subtracting $45 mil.). The increased use of generics will have the greatest impact on drug company revenues under the Clinton plan. Lewin calculates a decrease of 10% to the average company's revenues from the switch to lower priced generics. Other likely effects of health care reform on the pharmaceutical industry include the continuation and expansion of current trends, Rubin noted at the workshop. "Companies will continue to evolve," Rubin maintained, with reductions in the level of selling, general & administrative expenses, increased "focus on product line management" such as generics and OTCs, increasing joint ventures with providers and continued high levels of R&D investment.