Private Discounts, Public Subsidies

Private Discounts, Public Subsidies

How the Medicare Prescription Drug Discount Card Really Works

Joseph Antos

Ximena Pinell

The AEI Press

Publisher for the American Enterprise Institute

W A S H I N G T O N , D . C .

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© 2004 by the American Enterprise Institute for Public Policy Research,Washington, D.C. All rights reserved. No part of this publication may be usedor reproduced in any manner whatsoever without permission in writing fromthe American Enterprise Institute except in the case of brief quotationsembodied in news articles, critical articles, or reviews. The views expressed inthe publications of the American Enterprise Institute are those of the authorsand do not necessarily reflect the views of the staff, advisory panels, officers,or trustees of AEI.

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LIST OF ILLUSTRATIONS v

ACKNOWLEDGMENTS VII

INTRODUCTION 1Origins of the Discount Card Program 3Plan of the Study 4

DISCOUNT AND ASSISTANCE PROGRAMS AVAILABLE

OUTSIDE MEDICARE 5Discount Programs Sponsored by Organizations Other than

Pharmaceutical Manufacturers 5Senior Discount Card Programs Sponsored by Pharmaceutical

Manufacturers 6Patient Assistance Programs Sponsored by Pharmaceutical

Manufacturers 8State Pharmacy Assistance Programs 8

THE MEDICARE PRESCRIPTION DRUG DISCOUNT CARD PROGRAM 11Medicare Drug Discount Cards 11Transitional Cash Assistance 12

FINDING THE BEST DEAL 14Three Typical Beneficiaries 15Choosing the Right Medicare Discount Card 20

PROSPECTS FOR SUCCESS 23Encouraging Enrollment 24Competition vs. Regulation 25Catalyst for Change 26

APPENDIX 28

NOTES 35

ABOUT THE AUTHORS 37

Contents

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TABLES

1. Various Senior Discount Card Programs 7

2. State Pharmacy Assistance Programs 9

3. Three Hypothetical Beneficiaries 15

4. Medicare Savings off the Best Private Deal 18

5. The Top Five Medicare Discount Card Options for Mrs. Jones 22

A1. Three Typical Beneficiaries 28

A2. Prescription Drugs Used by Our Beneficiaries 29

A3. Prescription Drug Discounters 30

A4. Savings Available under Medicare Discount Card by Income Level 31

A5. Manufacturers’ Senior Discounts Available to Low-IncomeBeneficiaries in the Study 31

A6. How Much Can Low-Income Seniors Save on a Seven-MonthSupply of Their Medicines? 32

A7. How Much Can Moderate-Income Seniors Save on a Seven-MonthSupply of Their Medicines? 32

A8. How Much Can High-Income Seniors Save on a Seven-MonthSupply of Their Medicines? 33

FIGURES

1. Mr. Smith Can Save 75 Percent over the Next Seven Months 16

2. Mr. Smith’s Best Deals 17

Illustrations

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Acknowledgments

This study would not have been undertaken without the untiring efforts over many years of Grace-MarieTurner, president of the Galen Institute. Grace-Marie was the first to champion a consumer-oriented drug ben-efit for seniors nearly four years ago. The Medicare prescription drug discount card program that is operatingtoday owes its existence in no small measure to her efforts to educate policymakers and the public about thisnew approach to Medicare benefits. Her contribution to this study extends well beyond the usual round ofcomments and suggestions that one gratefully accumulates when engaged in such a project.

Several others provided valuable assistance to the authors at critical junctures in the development of the study.Jack Calfee, Scott Gottlieb, Robert Helms, and Richard Manning provided numerous helpful comments on thedraft. Two physicians, who will remain anonymous, helped us develop the clinical profiles of the hypotheticalMedicare beneficiaries used to estimate the value of the new program. Jenna Persico, Tara Persico, and NikhilPandey helped to collect data on pharmaceutical prices from online sources.

Not good enough. Too complicated. A program that willbenefit drug companies more than it will benefit seniors.

These charges have been leveled at the newMedicare prescription drug discount card programthat began in June. That program, part of the $400billion prescription drug benefit and Medicare mod-ernization bill signed into law in December 2003, is ashort-term measure to provide financial assistance toseniors and disabled Medicare beneficiaries for thepurchase of their prescription drugs.1 Despite theearly criticisms, the program is already having a favor-able impact on beneficiaries.

The drug discount card program is designed tobring the benefits of group purchasing to seniors,resulting in lower prices at the pharmacy. It also offerscash assistance to low-income seniors who have noother insurance coverage for prescription drugs. Inaddition, needy seniors benefit from special discountsoffered by pharmaceutical manufacturers through theMedicare-approved card.

Many critics wasted no time in pronouncing theMedicare discount card program a failure. Someclaimed the discounts under the program would beinadequate months before those discounts could beknown:

• On December 10, just two days after the presi-dent approved the new Medicare legislation, Sen.

Edward Kennedy (D-Mass.) complained that thediscount card program would “put corporateprofits ahead of patients’ needs” because it didnot impose government controls on the size ofthe discounts.2

• Six Democratic House members—John Dingellof Michigan, Henry Waxman and Pete Stark ofCalifornia, Charles Rangel of New York, SherrodBrown of Ohio, and Mike Ross of Arkansas—repeated this theme in January. They asserted thatthe “drug discount cards do not provide pricesthat are significantly lower than those alreadyavailable to seniors.”3

Others complained about the complexity of thenew program. They argued that seniors would beconfused by having to choose from too manyMedicare discount card options:

• The New York Times in early February summarizedthe concerns of consumer advocates that seniors“will face a bewildering array of new government-approved drug discount cards.”4

• In late February, Ron Pollack, executive direc-tor of Families USA, said “seniors all across the country are confused, bewildered, and per-plexed by the new legislation and have a very

1

Introduction

difficult time navigating the choices that are intheir best interest.”5

Were the critics correct? The Medicare drug discount card program began to enroll beneficiarieson May 3, and seniors began to use their cards onJune 1. Rather than speculating about how the pro-gram might function, it is now possible to do anearly assessment of the program based on its actualperformance.

The card program should be evaluated on its ownterms, not criticized because it does not do what itwas not designed to do. Bear in mind that theMedicare discount card program is not the fullMedicare drug benefit. It was intended by Congressto help Medicare beneficiaries only until the fullbenefit becomes available, with the greatest assis-tance to low-income beneficiaries without drug cov-erage. Seniors have almost nothing to lose byenrolling in the program—the annual enrollment fee is $30 or less—and potentially much to gain inreduced prescription costs. The program is tempo-rary, however, and it cannot resolve every drugfinancing problem in Medicare.

Despite complaints that the Medicare prescrip-tion drug discount card program is inadequate, theprogram provides substantial help with the cost ofprescriptions to millions of seniors and disabledbeneficiaries. Discounts negotiated by the cardsponsors are only part of the story. Low-incomeseniors without other drug coverage also receive a$600 annual cash subsidy and special discountsmade available by pharmaceutical manufacturers.Beneficiaries who need the help the most could save between half and three-quarters of their pre-scription cost for the remainder of this year throughthis public-private partnership. The Medicare drugdiscount card program was designed by Congressprimarily to help low-income seniors, and with pri-vate sector involvement, that is precisely what itachieved.

The influence of the discount card program islikely to extend well beyond temporary assistancefor several million Medicare beneficiaries. Congressopened the door to competition among private

plans through the drug discount card program. Forthe first time, consumers can compare pharmaceu-tical prices available through the card anywhere inthe country and shop for the best value. Employers,insurers, and individuals who are not in the Medicare program also can compare Medicare’s bestprices with the prices they currently pay. That newprice transparency ultimately could enhance compe-tition and leverage change throughout the pharma-ceutical industry, benefiting all consumers.

The new program has had growing pains—notsurprising given the short six-month windowallowed by Congress to have the program up andrunning. The consumer information campaignrolled out unevenly. Television advertising meantto build public support and awareness of the newdrug benefit was slowed by criticisms from politi-cal opponents, who demanded an investigation bythe General Accounting Office. An internet sitecontaining information on drug prices availablethrough each Medicare discount card had a rockystart, with complaints that some of the prices wereinaccurate and hard to access. Early reports indi-cate slow growth in enrollment, although that islikely to pick up in the coming months with moreaggressive outreach and consumer informationefforts.

For many Medicare beneficiaries, the decisionto enroll in the Medicare drug discount card pro-gram should be easy. They generally have manyoptions, each of which offers similar savings.Complexity arises for beneficiaries who are eligiblefor pharmaceutical manufacturers’ special dis-counts, available to low-income seniors who haveno drug coverage. Those beneficiaries could selecta Medicare card that provides some savings with-out much difficulty. They could save hundreds ofdollars a month more through special manufactur-ers’ discounts, but that would require greaterefforts to find the best deal. The current failure to offer clear and accessible information on thecoordination of the Medicare discount card andmanufacturers’ separate discount programs mustbe corrected if the new Medicare program is to liveup to its full potential.

PRIVATE DISCOUNTS, PUBLIC SUBSIDIES

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Origins of the Discount Card Program

It is commonly believed that seniors as a group paythe highest prices for prescription drugs. In fact,very few people at any age pay the full retail pricefor prescription drugs. Most seniors are enrolled inprivate or public health insurance plans—retireehealth plans, Medicaid, or Medigap—that coverprescriptions. Those plans negotiate discountswith pharmaceutical manufacturers, and their ben-eficiaries are responsible for an out-of-pocket pay-ment that is a fraction of the total negotiated priceof the drug. Others without such coverage can cuttheir costs through discounts offered by manyretail pharmacies, associations such as AARP, pharmaceutical manufacturers, and internet phar-macies. Perhaps 10 million Medicare beneficiariescurrently have no prescription drug coverage.Many of them and others with only modest drugcoverage have trouble paying their drug bills.

As the cost of pharmaceuticals rises, some seniorsturn to Canada and other countries for their prescrip-tion drugs. The Food and Drug Administration,major pharmaceutical manufacturers, pharmacists,and others have raised concerns about the safety andeffectiveness of drugs that reach consumers fromthose foreign sources.

The absence of a prescription drug benefit inMedicare is a significant gap in the program thathas been widely noted since its beginnings in1965. Congress enacted a drug benefit in theMedicare Catastrophic Coverage Act of 1988, but astorm of protest from seniors over the high cost ofpremiums led to its repeal in 1989. The issue wasrejoined in 1999 when then-President Bill Clintonproposed a drug benefit costing $168 billion overten years.

In an effort to give all Medicare beneficiaries theadvantage of price discounts through group purchas-ing, President George W. Bush, on July 12, 2001,announced a new Medicare-endorsed prescriptiondrug discount card program. That initiative, vigor-ously promoted by Thomas Scully, then administratorof the Centers for Medicare and Medicaid Services(CMS), was a stopgap measure intended to help

seniors until a full prescription drug benefit could bepassed by Congress. Unlike the current program, nofunds were made available to subsidize the purchaseof prescription drugs by low-income seniors.

Less than a week later, the National Associationof Chain Drug Stores (NACDS) and the NationalCommunity Pharmacist Association filed suit in U.S.District Court to block that program on the groundsthat any consumer savings would come straight outof the pockets of pharmacists. Subsequent effortsover several years to implement the discount cardprogram without new legislative authority failed.

That same year a proposal for a funded discountcard was advanced by policy analysts at the Ameri-can Enterprise Institute and the Galen Institute.6

That proposal was intended to be the vehicle for thefull Medicare drug benefit, rather than serve as a tem-porary measure. It combined a discount card, a cashsubsidy for low- and moderate-income seniors, andcatastrophic insurance coverage offered as a pack-age by competing private firms. Such an approachoffered strong incentives to hold down unnecessarycosts while providing financial support targeted tothose who were most in need.

By 2003, a narrow consensus had formed inCongress that a Medicare drug benefit could andshould be enacted. The Medicare Prescription Drug,Improvement, and Modernization Act was signedinto law on December 8 of that year. According tothe Congressional Budget Office (CBO), the newdrug benefit will cost $409 billion between 2004and 2013.7 The Office of Management and Budgetpegs the cost at $534 billion.

Controversy raged over the role of competition ina modernized Medicare program, but in the finalbill, the drug benefit was to be delivered throughcompeting private plans. That decision remains asore point for many politicians.

Recognizing that a full drug benefit could not beimplemented for several years, Congress created theMedicare prescription drug discount card program,including cash assistance for low-income beneficiar-ies, that operates today. Even though the Medicareprescription drug discount card program is tempo-rary, it is a proving ground for the full drug benefit,

INTRODUCTION

3

scheduled to begin in 2006. This temporary pro-gram also operates through competing private dis-count card sponsors, and as such, it has drawnconsiderable scrutiny and criticism from thosewho prefer a more traditional government-runbenefit. Any failures in the discount card programwill serve as evidence to critics that a competitivesystem does not work in Medicare.

Plan of the Study

Will the Medicare prescription drug discount cardprogram be a success? We focus on how muchbeneficiaries might save over the remainder of2004 by enrolling in a Medicare-approved dis-count card plan. Estimates are based on the pricesof prescription drugs posted on the Medicare web-site www.medicare.gov as of June 1, the first daythat discounts were available to seniors under thenew program. Although prices are likely to changeover the year, these data provide a reasonable earlyindication of how well seniors might do under aMedicare discount card compared to their otheralternatives for discounted drug prices. This is thesame information many seniors themselves arereviewing as they consider whether to enroll in theprogram.

As background to this analysis, the next sectiondiscusses discount and subsidy programs outsidethe Medicare program available to help seniors withthe cost of their prescriptions. The section after thatsummarizes the provisions of the Medicare drug dis-count card program and briefly explains how the

non-Medicare savings options dovetail with theMedicare program.

Then, we analyze the costs that three typicalbeneficiaries will pay for prescription drugs thisyear under the Medicare drug discount card pro-gram. Those individuals have health conditionsthat frequently occur in an elderly population,such as hypertension, diabetes, and congestiveheart failure. We investigate several ways in whichthey can reduce their out-of-pocket spending forprescription drugs, including switching frombrand-name pharmaceuticals to their genericequivalents and purchasing through a mail orderservice rather than at a retail pharmacy. We com-pare the amounts spent by each person under theMedicare drug discount card program with thespending they would incur using alternative dis-count and subsidy programs currently available toseniors. Our evaluation of the program, therefore,is against the discounts that a savvy shopper couldobtain outside of Medicare.

The concluding section provides a broader assess-ment of the likely performance of the Medicare drugdiscount card program. Will the prices we see todayremain relatively constant over the year, or will theyrise sharply once seniors are locked into specific drugdiscount cards? Can seniors be sure that the drugsthey use will remain available to them at low pricesover the entire year? If the program is successful, willfunded discount cards remain available after the fullMedicare drug benefit begins in 2006? How mightthe Medicare drug discount card program affect thebroader market for pharmaceuticals? Will Congressallow this program to succeed?


4

Prescription drugs pose a large and growing costto many seniors. Various options are available to seniors to make their drug bills more affordable,however. Lower prices are available through

• Discount programs sponsored by organizationsother than pharmaceutical manufacturers. Thesecan be administered by associations (such asAARP), pharmacies (such as Eckerd), pharmacybenefits managers (such as ExpressScripts), andonline pharmacies (like Drugstore. com). Manyof these programs offer mail order services thatcan increase savings to consumers.

• Senior discount card programs sponsored by phar-maceutical manufacturers. Low- and moderate-income seniors often can obtain very large savingsthrough such programs.

• Patient assistance programs (PAPs) sponsored bypharmaceutical manufacturers. These programsmake drugs free to low-income patients of all ages.

• State pharmacy assistance programs. Many stategovernments subsidize or obtain discounts on pre-scription drugs for their residents without drugcoverage.

Most of the existing programs and purchasingoptions will remain available to seniors and other

consumers now that the Medicare prescription drugdiscount card program is available. In many cases,seniors will be able to use a combination of pro-grams with the Medicare discount card to get thebest deal on their prescription drugs.

Discount Programs Sponsored byOrganizations Other than PharmaceuticalManufacturers

Many seniors without drug coverage continue topay full retail price at their local pharmacy, and thatprice can vary widely across outlets. However,most could lower their costs through discount pro-grams offered by retailers, membership organiza-tions, pharmacy benefits managers, and internetpharmacies.8 These programs offer discounts onprescription drugs from numerous manufacturers,but the level of savings can vary widely. Many ofthese programs are open to seniors regardless oftheir income.

A wide variety of options are available to con-sumers, including private discount cards and low-margin retailers. For a $20 annual enrollment fee,AARP’s MembeRx Choice boasts average discountsof nearly 20 percent off retail prices. Major retailpharmacy chains like CVS also sponsor drug

5

Discount and Assistance Programs Available Outside Medicare


6

discount programs. CVS’s Health Savings Pass, aprogram for people age fifty and older, offers dis-counts on various health services, including pre-scription drugs. For an annual enrollment fee of$70 per couple, the drug discounts range from 5 to50 percent off retail prices when no insurance isapplied. Individuals can generally obtain evengreater savings filling prescriptions through mail-order pharmacies than they could at retail outlets.Drugstore.com, an internet pharmacy that pro-vides mail-order service, advertises average savingsas high as 30 percent. Mail-order programs arewidely available.

Senior Discount Card Programs Sponsored byPharmaceutical Manufacturers

Most of the major pharmaceutical companies havesponsored senior discount programs in recentyears to help low-income seniors without prescrip-tion drug coverage afford their medicines.Enrollment in these programs is typically free.Seniors who qualify for discount card programscan obtain sizable discounts on drugs manufac-tured by the card sponsor. For example, theGlaxoSmithKline Orange Card entitles eligible sen-iors to discounts on the order of 30 to 40 percentoff retail prices for many GSK drugs, like the dia-betes drug Avandia and the depression medicationPaxil.

While the specific eligibility criteria vary amongcards, the programs target individuals who are eligi-ble for or enrolled in Medicare and have no pre-scription drug coverage, public or private. Medicarebeneficiaries receiving prescription drug coveragethrough Medicaid, therefore, are excluded fromthese programs. The maximum incomes to qualifyare generally 200 or 300 percent of poverty, a designthat helps a segment of the elderly population finan-cially strained by prescription drug costs but notcovered by Medicaid.

The first senior discount card programs werelaunched in 2002 to help low-income seniors accesstheir medicines until the Medicare program was

expanded to cover prescription drugs. Consequently,when Part D begins in 2006, these programs nolonger will be in play.

There are two models of drug discount cardprograms for seniors. One employs discounts offretail prices; the other charges a flat fee for amonth’s supply of a drug. See table 1 for programdetails on several discount cards. For bothschemes, the price breaks apply only to drugsmanufactured by the card sponsor. Under the firsttype of program, average discounts of up to 40 per-cent are extended to those eligible for Medicarewith incomes as high as $30,000 for an individual(approximately 300 percent of the federal povertyline). The second type of program offers a month’ssupply of a medicine for a small administrative feeof $15 or less. These programs are typically offeredonly to individuals with incomes up to 200 percentof poverty.

Under both program models, pharmaceuticalmanufacturers partner directly with pharmacies toreimburse the discounts. Therefore, not all phar-macies necessarily participate, and the size of thediscounts can vary among outlets based on thepharmacy’s markup.

Discount card programs strive to be simple andaccessible for seniors that qualify. Separate applica-tions must be submitted for each program, but theycan be fully completed by the patient and do notrequire physician approval. Forms are generally avail-able at pharmacies, physician’s offices, and companywebsites. Once seniors are enrolled, they simply pre-sent their discount card at the drugstore to receive thediscount.

The Percentage Discount Cards. The first seniordiscount card programs were sponsored by indi-vidual pharmaceutical companies and coveredonly their own products. The only program thatcovers the products of several companies is theTogether Rx card, formed in June 2002 by a coali-tion of drug manufacturers. The Together Rx cardis jointly sponsored by seven pharmaceutical companies: Abbott, AstraZeneca, Aventis, Bristol-Myers Squibb, GlaxoSmithKline, Johnson &


DISCOUNT AND ASSISTANCE PROGRAMS AVAILABLE OUTSIDE MEDICARE

7

Johnson (and its subsidiaries Janssen andOrthoMcNeil), and Novartis. The program cur-rently offers discounts on more than 170 prescrip-tion drugs. To avoid antitrust violations, eachcompany individually sets the discounts off thewholesale prices of its products. Actual savings toconsumers are expected to average 20 to 40 per-cent off retail prices and could be as high as 70percent for some drugs. Above a certain minimumdiscount, firms can vary the level of savings theyoffer at any time. Nearly all retail pharmacies par-ticipate in the program. Discounts under TogetherRx are also available for some generic drugs. InSeptember 2003, program membership surpassed1 million.

The Flat Fee Cards. Discount cards that offerdrugs for a flat fee make their own drugs available

to qualifying patients for an extremely modestmonthly sum: $12 for Lilly medicines and $15 for Pfizer drugs. Such cards are considered by the sponsors to be patient assistance programsrather than discount cards. However, they differfrom the broader class of PAPs in several importantways: They do not require a physician’s approval,prescriptions are typically filled by retail phar-macies, and they are limited to Medicare-eligiblepatients.

Medicare enrollees with incomes as high as$18,000 for an individual (about twice the federalpoverty level) are eligible for the Pfizer and Lillycards. The Pfizer Share Card was launched inJanuary 2002 and has enrolled more than half a mil-lion patients to date. LillyAnswers was introduced inApril 2002, and several hundred-thousand peoplehave benefited from the program since then.

TABLE 1VARIOUS SENIOR DISCOUNT CARD PROGRAMS

GlaxoSmithKline Novartis Together Rx Pfizer LillyAnswers Orange Card Care Card (7 companies) Share Card Card

Eligibility Medicare eligibles; Medicare eligibles; Medicare eligibles; Medicare eligibles; Medicare eligibles;Income <$30,000 Income <$28,000 Income <$28,000 Income <$18,000 Income <$18,000individual, individual, individual, individual, individual,$40,000 couple $38,000 couple $38,000 couple $24,000 couple $24,000 couple (~320% poverty); (~300% poverty); (~300% poverty); (~200% poverty); (~200% poverty);No drug coverage No drug coverage No drug coverage No drug coverage No drug coverage

Discount/ Discount: 25% off Discount: 25% off Discount: Each Fee: $15 for one Fee: $12 for oneFee wholesale prices wholesale prices company sets 30-day supply 30-day supply

discounts above a minimum 15%off wholesale prices

Scope of All GSK drugs All Novartis drugs >170 drugs All Pfizer drugs All Lilly drugs Coverage manufactured by

participating companies

Comments GSK also part of Novartis also part Together Rx of Together Rx

Source: Pharmaceutical Research and Manufacturers of America, “Prescription Drug Discount Card Programs for Seniors,”November 2003.


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Patient Assistance Programs Sponsored byPharmaceutical Manufacturers

All pharmaceutical companies have long-standingprograms that offer their drugs free of charge to indi-viduals of any age without the means to pay forthem. Member companies of the PharmaceuticalResearch and Manufacturers of America (PhRMA)alone enrolled 6.2 million people in their patientassistance programs in 2003. They donated morethan 17 million prescriptions valued at $3.3 billion.However, these programs are usually difficult toaccess, and some eligible seniors may prefer toforego the potential savings for a simpler alternative.

Pharmaceutical companies have traditionallystrived to ensure that their medicines reach patientsthat could not otherwise afford them. As health carehas grown increasingly reliant on pharmaceuticals,charitable efforts to assure access to them haveevolved, too. While some PAPs date back to the1950s, most were formalized in recent decades.

Each pharmaceutical company has its own stan-dards in place to qualify individuals for its patientassistance program. To be eligible for a PAP, anindividual cannot have any prescription drug cov-erage or must have already exhausted his drug ben-efit. Income limits to qualify vary among programsbut are generally lower than they are for senior dis-count card programs. Part of the application forpatient assistance programs usually must be com-pleted by the patient’s physician. Most often, theprescription is then mailed to the physician, whodispenses it to the patient. Other times, although farless frequently, the medicines are mailed directly tothe patient or the patient is given a voucher topresent at the pharmacy.

While PAPs are extremely generous, they areoften faulted for being too cumbersome to access.Not only does each pharmaceutical company have aseparate application, but each prescription refillrequires a new application. Particularly for low-income clinics that rely on these programs, theprocess can be difficult to keep up with. This mayhave made sense in an earlier era when few patientshad chronic need for high-cost medications, but that

is no longer the case, in large part due to the devel-opment of successful new drugs. The enrollmentprocess for PAPs by and large has not evolved toaccommodate the increased need for such pro-grams. However, the Merck company, in an effort tofacilitate access to its program, has extended theenrollment period between applications to one year.

Efforts to increase public awareness of andaccess to patient assistance programs are under-way. PhRMA recently launched an interactive web-site, www.helpingpatients.org, to help patientsidentify the programs for which they could qualify.After responding to a few brief questions aboutincome, prescription drug needs, and insurancestatus, individuals are directed to the appropriateprogram websites and application forms. PhRMAis also working to streamline the applicationprocess with a dynamic form available on its web-site. Patients submit information in a general ques-tionnaire, which is used to fill out the individualPAP applications of forty participating companies.The physician then completes the prescriptioninformation, and the patient submits the applica-tion to the program sponsor. While the dynamicform facilitates applying to some PAPs, not all pro-gram applications can be accessed by it. Moreover,the website itself may be challenging for seniors tonavigate.

The pharmaceutical industry is also working topromote the visibility of its patient assistance pro-grams so that more individuals that qualify actuallyenroll. Campaigns to publicize the programs areunderway in several states.

State Pharmacy Assistance Programs

States also sponsor programs to help seniors affordprescription medicines. Twenty-nine states currentlyadminister a state pharmacy assistance program(SPAP), and nine more have legislated their creation(see table 2). All SPAPs cover the elderly, and abouthalf extend the benefit to the under-sixty-five dis-abled population as well. The income thresholds toqualify vary widely, from 100 percent of poverty in

Louisiana to as high as 500 percent in Massa-chusetts. Some states offer the benefit to all incomelevels but adjust enrollee cost sharing according toan individual’s means. Other states modify the eli-gibility requirements for patients with catastrophicdrug spending. Most do not consider a person’sassets in determining eligibility.

There is generally no enrollment fee for SPAPs,but all require some degree of patient cost sharing.Like senior discount card programs sponsored bypharmaceutical companies, state pharmacy assis-tance programs can follow two models. In most

cases, the state subsidizes the cost of the medicineand the enrollee contributes a modest copayment,between $1 and $30. SPAPs can also function as dis-count programs, where enrollees obtain better drugprices through discount cards or the formation ofpurchasing pools. Some state programs employ bothdirect subsidies and discounts. Under both models,states negotiate directly with drug manufacturers forbetter deals on the drugs that seniors use most often.State programs cover most prescription drugs, butsome lifestyle drugs and over-the-counter medica-tions are excluded.

DISCOUNT AND ASSISTANCE PROGRAMS AVAILABLE OUTSIDE MEDICARE

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TABLE 2STATE PHARMACY ASSISTANCE PROGRAMS

State Year Created Type of Program Pharmacy Plus Waiver

Arizona 2003 DiscountCalifornia 1999 DiscountConnecticut 1986 SubsidyDelaware 1981 SubsidyFlorida 2000 Subsidy & Discount YesIllinois 1985 Subsidy & Discount YesIndiana 2000 SubsidyIowa 2002 DiscountKansas 2000 SubsidyMaine 2000 Subsidy & DiscountMaryland 1979 Subsidy & DiscountMassachusetts 1996 SubsidyMichigan 1988 SubsidyMinnesota 1999 SubsidyMissouri 1999 SubsidyNevada 1999 SubsidyNew Hampshire 2000 DiscountNew Jersey 1975 SubsidyNew York 1987 SubsidyNorth Carolina 1999 SubsidyOhio 2002 DiscountOregon 2003 DiscountPennsylvania 1984 SubsidyRhode Island 1985 SubsidySouth Carolina 2000 Subsidy YesVermont 1996 SubsidyWest Virginia 2000 DiscountWisconsin 2001 Subsidy YesWyoming 1988 Subsidy

SOURCE: National Health Policy Forum, “The Basics: Medicare Prescription Drug Discount Card Programs,” George WashingtonUniversity, April 26, 2004, available at www.nhpf.org/pdfs_basics/Basics_DrugDiscountCard.pdf.

While state pharmacy assistance programs are typ-ically supported by state budgets, four states receivefederal Medicaid funds as well. Pharmacy PlusWaivers allow states to extend Medicaid prescription

drug coverage to low-income seniors not otherwiseeligible for Medicaid. Federal funds are used to insureSPAP enrollees with incomes below 200 percent ofpoverty.


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11

The Medicare Prescription Drug Discount Card Program

The Medicare prescription drug discount card pro-gram offers immediate assistance to seniors anddisabled Medicare beneficiaries until the full drugbenefit goes into effect in January 2006. Accordingto a recent U.S. Department of Health and HumanServices study, prices for brand-name drugs underthe discount card program could range from 10 to17 percent below retail, about as good as otherwidely available discount programs.9 Many Medi-care drug discount cards also offer lower-cost mail-order service. Although the Medicare drug discountcard is available to most Medicare beneficiaries, it isof greatest value to those who have no other sourceof prescription drug coverage regardless of theirincome.

Low-income seniors who enroll in a Medicaredrug discount card program are eligible for a sub-sidy of $600 a year to help with their drug pur-chases if they have no other drug coverage. Inaddition, many of those beneficiaries are also eligi-ble for special low prices offered by pharmaceuti-cal manufacturers through senior drug discountprograms and patient assistance programs. The Medi-care drug discount card often can enable those eligible to take advantage of such special pricesseamlessly, without requiring low-income seniorsto juggle several discount cards to get the lowest pos-sible price.

Medicare Drug Discount Cards

Enrollment in the Medicare drug discount cardprogram is voluntary and open to all Medicarebeneficiaries except those who have prescriptiondrug coverage through Medicaid. Seniors whodecide to enroll must select only one Medicare-approved card, but they also may use other dis-count cards that have not been endorsed byMedicare. Enrollment began on May 3 and willcontinue for the remainder of this year. Once ben-eficiaries have selected a card, they have only oneopportunity in late 2004 to switch to another cardfor 2005. Discounts offered by the programbecame available June 1.

Medicare discount cards are offered by a widearray of private sponsors, including retail pharma-cies, pharmacy benefits managers, and health plansoperating under the Medicare Advantage (MA)program. Forty Medicare drug discount cards areavailable to beneficiaries nationally, and thirty-three other plans operate regionally. In addition,eighty-four discount card plans are available tomembers of MA plans.

Sponsors may charge an annual enrollment fee upto $30. That fee is waived for beneficiaries withincomes up to 135 percent of the federal povertylevel. Most MA plans and five national sponsors offer

discount cards at no charge. Sponsors must assurethat beneficiaries have ready access to their prescrip-tions through bricks-and-mortar pharmacies, andsponsors may also offer mail-order service.

Card sponsors may use formularies, or specificlists of discounted drugs, which are expected toresult in deeper discounts for their enrollees. Thoseformularies must cover 209 categories of the phar-maceuticals most commonly used by Medicarebeneficiaries. At least 55 percent of these categoriesmust have a generic equivalent available, and phar-macists are required to notify beneficiaries if alower-priced generic is available for the prescrip-tion they seek to fill. Card sponsors can add ordrop drugs from their formularies as long as theykeep at least one product in each of the 209 thera-peutic categories.

Sponsors can change the discounts available onindividual pharmaceuticals, but price increases can-not be arbitrary. Any price increases not reflectingchanges in actual costs or price levels prevailing inthe market can be rejected by the CMS. Moreover,the card sponsors are constrained by their own self-interest: They want to increase enrollment in theirplans next year. Sponsors are likely to offer the fullMedicare drug benefit in 2006 and want to retain asmany of those beneficiaries as they can over the longterm. Arbitrary price increases or changes in theavailability of pharmaceuticals would only reducetheir future prospects for commercial success.

The beneficiary education campaign mounted bythe CMS faced some early difficulties, but most ofthose problems are easing as information systemsmature. The CMS provides information on eachMedicare drug discount card, including the prices ofpharmaceuticals and their availability at retail loca-tions and by mail order, at www.medicare.gov. Thatwebsite also provides information about other pre-scription drug assistance programs that may beavailable to beneficiaries through state agencies,pharmaceutical companies, and other private organ-izations. A telephone hotline (1-800-MEDICARE) is also available, although the volume of calls hasoverwhelmed this system in the first month of theenrollment process.

Transitional Cash Assistance

A key part of the program is a cash subsidy for thecost of prescriptions, available to some low-incomebeneficiaries in both 2004 and 2005. The $600 sub-sidy is available only through a Medicare-approveddiscount card, which functions as a debit card tosimplify access to the funds. The federal governmentalso pays the annual enrollment fee for the drug dis-count cards for those eligible.

Individuals without drug coverage whose incomesare less than 135 percent of the poverty rate qualifyfor the cash subsidy. For singles, this means thosemaking less than $12,569 per year; for married cou-ples, it means those making less than $16,862 peryear. Medicare beneficiaries who are also eligible toreceive assistance for prescription drugs throughMedicaid, TRICARE for Life,10 or an employer grouphealth plan cannot receive the cash subsidy.

Medicare beneficiaries eligible for transitionalassistance receive the full $600 subsidy for 2004even though the program did not begin until mid-year. Any balance left over from the $600 subsidyat the end of 2004 will be added to the 2005 allo-cation. This rollover provision could be particu-larly important for beneficiaries who enroll in theMedicare discount card program late and mightnot spend their entire subsidy by the end of thisyear.

Legislators decided that even low-income seniorsshould pay at least something for their drugs so thatthey would appreciate the value of the benefit. Thenew law establishes two categories of recipients forwhom assistance will be offered:

• Those with incomes below 100 percent of thepoverty rate would pay 5 percent of the cost oftheir prescriptions until they exhaust their cashsubsidy, with the rest deducted from their Medi-care account. That amounts to $30 in out-of-pocket payments for a beneficiary spending$600 for prescriptions.

• Those with incomes of 100 percent to 135 per-cent of the poverty rate would pay 10 percent ofthe cost until they exhaust their cash subsidy.


12

That amounts to $60 in out-of-pocket paymentsfor a beneficiary spending $600 for prescriptions.

After the cash subsidy is spent, low-income bene-ficiaries are liable for the full discounted cost of theirprescriptions. However, many beneficiaries can takeadvantage of deep discounts offered by pharmaceuti-cal manufacturers through their senior discount cardprograms.

With the implementation of the Medicare dis-count card program, the special manufacturer-specific discounts are typically limited to seniorswith incomes below 200 percent of the federalpoverty level. Eligible seniors receiving the cash sub-sidy qualify for the larger discounts once they havespent the $600. For example, a prescription thatretails for $75 might cost a higher-income seniorwho is not eligible for any special discount $60 amonth through a Medicare discount card. The samemedication might be obtained by a low-income sen-ior for $15 or less after the beneficiary has exhaustedhis or her cash subsidy.

Several drug manufacturers contracted with mostMedicare discount card sponsors to make their sen-ior discounts available to low-income beneficiarieswithout having to enroll in a separate discount cardprogram. Other companies adopted different mar-keting strategies. Pfizer, for example, appears to have

contracted exclusively with the United U Share Cardto offer its products to eligible beneficiaries for only$15 a month. Sponsors of the Together Rx card andthe GSK Orange Card decided not to integrate theirdiscount programs with the Medicare discount card.Instead, seniors have the option of using theMedicare-approved card or an alternative such asTogether Rx or the Orange Card to get the greatestsavings.

Some low-income seniors also are eligible for no-cost pharmaceuticals through patient assistance programs sponsored by the drug companies. As dis-cussed previously, those programs require a specialapplication process and are available only to people(of any age) who lack the resources to buy necessarymedications. They typically distribute pharmaceuti-cals through physicians’ offices rather than throughretail pharmacies. Moreover, state pharmacy assis-tance programs may provide additional support tolow-income seniors once the $600 federal subsidyhas been spent.

Both the temporary discount card program andthe $600 annual subsidy end in 2006, to be replacedby the full Medicare prescription drug benefit pro-gram, often called Part D. At that time, seniors canenroll either in one of the new subsidized MedicarePart D prescription drug plans or in a MedicareAdvantage plan to receive drug coverage.

THE MEDICARE PRESCRIPTION DRUG DISCOUNT CARD PROGRAM

13

Finding the Best Deal

14

Much of the analysis of the Medicare prescriptiondrug discount card naturally focuses on the size ofthe discounts that could be available under that pro-gram. Most studies compare the price of a thirty-daysupply of a drug under the Medicare discount cardwith some measure of the retail price (perhapsobtained from a local retail pharmacy) or pricesavailable through other discount card programs orinternet sites. On the basis of these kinds of stud-ies, some commentators concluded that discountsunder the Medicare program are no better than dis-counts available elsewhere.

Such discount comparisons can be a misleadingindicator of the savings available to seniors under theMedicare drug discount card program. The actualvalue of the new program to an individual over thecourse of the year depends on other important factorstypically overlooked by studies that simply comparethe prices of a few top-selling drugs. A senior mightbe eligible for the $600 cash subsidy depending onhis or her income. Even a person who is not eligiblefor the government’s subsidy may qualify for deeperdiscounts on specific manufacturers’ products thanfound on the Medicare website.

Considering all savings options generally availableto seniors, we find that the new Medicare programoffers substantial savings to low-income seniors compared to the amount they would spend on their

prescriptions at retail prices or through other widelyavailable sources of discounted drugs. A significantportion of those savings is due to the $600 subsidy,but senior discount programs sponsored by pharma-ceutical manufacturers that coordinate with theMedicare program also account for a sizeable share ofthe savings.

Higher-income seniors who do not receive thecash subsidy can also save using a Medicare discountcard, depending on their specific prescriptions andwhether they are already shopping aggressively forthe lowest price. We found significant savings, evencompared to the cost of prescriptions available fromAARP and internet pharmacies, for seniors who useonly the baseline discounts offered by Medicare cardsto all beneficiaries.

The confusion caused by looking only at drugprices and not considering the cost of prescriptionsover the year could lead many seniors astray. Criticsassert that the Medicare discount card does not offerlower prices than Canadian pharmacies or the cost ofdrugs to the U.S. Department of Veterans Affairs (VA),at least on branded drugs. While prices for such drugsare generally higher through the Medicare program,that program also provides easier access to pharma-ceuticals through thousands of retail pharmacies andother features that add to operating costs. None-theless, many low- and moderate-income seniors

without drug coverage could, in fact, save moremoney under the Medicare discount card program.By taking advantage of privately negotiated discountsand special manufacturers’ prices, those seniorswould pay much less over the course of the year thanthey could even with VA and Canadian prices.

Many seniors have a wide choice of Medicare-approved discount cards that offer savings at orvery close to their best deal. The beneficiaries weanalyzed had between thirteen and twentyMedicare card options within 5 percent of the low-est cost plan as reported on Medicare’s website.However, low- and middle-income seniors withoutother coverage should check to see if pharmaceuti-cal manufacturers’ senior discounts are available tothem. Under some circumstances, one card couldprove to be a much better deal than any other, evenif its baseline prices reported on the Medicare web-site are not the lowest.

There is no universal answer to how much sen-iors will save by enrolling in the Medicare drug

discount card program. Actualsavings depend on both whatthe Medicare card offers andwhat the individual has alreadydone to reduce the cost of pre-scriptions. Some seniors preferthe familiarity of the local phar-macy, even though the price ishigher than other options. Theyare likely to find that theMedicare drug card allows themto continue to shop locally atreduced prices. They probablycould save more through aMedicare mail-order option or,for that matter, an internetpharmacy, but cost savings maynot be their only consideration.

The new program will spurseniors to look more carefullyat their options, and some mayreconsider the way they cur-rently purchase their prescrip-tions. Even if they do not

enroll in the Medicare card program, some seniorsare likely to find other alternatives that will savethem money on their prescriptions compared totheir current costs.

Three Typical Beneficiaries

To understand the full impact of the new program,we must put ourselves in the place of a typical sen-ior. We developed three hypothetical patient pro-files for seniors with arthritis, hypertension, highcholesterol, diabetes, and other health conditionscommon to an older population (see table 3). Foreach person, we identified medicines typically pre-scribed for his or her health conditions and identi-fied generic drugs frequently substituted for branddrugs when appropriate.

Price information was current as of June 1, thefirst day Medicare beneficiaries could take advan-tage of discounts using the card. We determined

FINDING THE BEST DEAL

15

TABLE 3THREE HYPOTHETICAL BENEFICIARIES

Prescription Age Conditions Drugs*

Robert 66 Diabetes GlucophageSmith High blood pressure metoprolol

High cholesterol ZocorErectile dysfunction Viagra

Mary 74 Congestive heart failure LasixJones High blood pressure metoprolol, Zestril

High cholesterol LipitorOsteoarthritis VioxxGastric reflux disease Prevacid

Fred 78 Chronic lung disease albuterolGreen Blood clots Coumadin

Seasonal allergies AllegraHypothyroidism LevoxylDepression Paxil

SOURCE: Authors’ assumptions.

* These prescription drugs make up the “branded” basket of drugs used by ourhypothetical seniors. Another set of drugs making greater use of generic substituteswas also considered (the “generic” basket); see the appendix.

the cost of pharmaceuticals prescribed for each ofour beneficiaries under the Medicare discount cardprogram and six other sources of low-priced drugs.Since subsidies and discounts depend on a benefi-ciary’s income, we repeated the exercise for seniorsat three different income levels:

• Up to 135 percent of the federal poverty level,no other drug coverage—eligible for the $600subsidy and special manufacturers’ discountsfor some drugs.11

• Between 135 percent and 200 percent of poverty,no other drug coverage—eligible for special man-ufacturers’ discounts for some drugs.

• Above 200 percent of poverty or any lower-income beneficiary with drug coverage—eligiblefor only the standard discounts reported on theMedicare website.12

Savings were calculated over the seven months(June through December) that the new Medicare program will be in operation this year. The

assumptions made in this studyare more fully documented inthe appendix.

Savings for Low-Income Sen-iors. Consider Robert Smith, a sixty-six-year-old man withmodestly well-controlled dia-betes, high blood pressure andcholesterol, and the need foran occasional Viagra pill. Healso takes Glucophage (abranded drug for diabetes),metoprolol (a generic drug forhypertension), and Zocor (abranded drug for cholesterol)on a daily basis.

Mr. Smith is married, lives inBrooklyn, and has a familyincome of $16,000—just under135 percent of the poverty level.He is a member of AARP and

purchases his drugs through AARP’s retail pharmacyprogram. Although he is eligible for senior discountprograms offered by drug manufacturers, he has notapplied for those programs. His monthly drug spend-ing, with the AARP discount, comes to just over$255. Between June and December, he will spend$1,787 on prescription drugs. The retail price of thosedrugs would be even higher without the AARP dis-count, approximately $2,070 over the next sevenmonths.13

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’senior discount programs through the Medicarecards. For his medications, the best Medicare cardoption available to him on June 1 was the U SharePrescription Drug Discount Card. (The same Medi-care discount card will not necessarily be the best buyfor different people, depending on the drugs they takeand where they prefer to fill their prescriptions.)Using that card and with all the other subsidies forwhich he is eligible, Mr. Smith can purchase his med-icines at a retail pharmacy for $495 for the remainder


16

FIGURE 1MR. SMITH CAN SAVE 75 PERCENT OVER THE

NEXT SEVEN MONTHS

1,787

495

1,664

388

0

500

1,000

1,500

2,000

2,500

Retail Average

AARP Retail

Medicare Retail

AARP Mail

Medicare Mail

7-m

onth

sup

ply

(dol

lars

)

2,073

SOURCE: Authors’ calculations. Data collected June 1, 2004.

of this year, or about $70 a month. He could saveeven more if he purchased his prescriptions by mailorder, which would cost about $388 for the sevenmonths (see figure 1).14

Mr. Smith stands to save almost 75 percent offthe cost of his prescriptions over the rest of thisyear compared to his current spending using theAARP discount. Just over half the saving, about$690, is the result of the discount prices and theprice breaks from the drug company discount pro-grams. The other $600 in savings represents thecash subsidy given to low-income seniors. Ignoringthat subsidy and looking only at price discountsclearly understates the value of the program tosomeone like Mr. Smith.

Could Mr. Smith beat the savings from theMedicare discount card by just taking advantage of manufacturers’ senior discount programs andshopping around? That is unlikely. If Mr. Smith were to enroll in those discount programs available tohim, his cost through an AARP retail pharmacywould drop to $1,610. If he also switched to AARP’s

mail-order option for all his pre-scriptions, his cost would fall to $1,500, somewhat belowwhat he is now paying but cer-tainly not below his $388 costunder the best Medicare mailorder service. Other mail orderoptions—including Eckerd,Drugstore.com, and Costco—offer savings similar to AARP’sfor Mr. Smith (see figure 2).

This result is repeated in theother cases we examined. Table4 shows the analysis for ourthree typical seniors using dif-ferent assumptions about theirincomes and eligibility for the$600 subsidy and special man-ufacturers’ discounts. For eachsenior, we priced two drug bas-kets (one with mostly brandedproducts, the other with moregenerics) at retail pharmacies

and through mail order. We assumed that each seniortakes advantage of all discounts available under bothMedicare and private discount plans.

A typical low-income senior might save betweenhalf and three-quarters of his or her drug costs forthe remainder of this year compared to the next bestprivate alternative. Low-income seniors who are eli-gible for the cash subsidy almost certainly will savemoney through the Medicare discount card programcompared to other legitimate sources of discountedpharmaceuticals.

Additional savings are possible if the beneficiaryis willing to shift some prescriptions to generic for-mulations or purchase them through mail orderrather than at a retail pharmacy. We switched some(but not all) of the branded drugs in our examplesto generics. Our low-income seniors purchasingthrough the Medicare discount card program typi-cally save around 10 percent compared to the cost ofprescriptions that were mainly branded drugs.Greater savings are generally possible if more of abeneficiary’s prescriptions are generic, although we


17

FIGURE 2MR. SMITH’S BEST DEALS*

1,7691,621 1,610 1,568 1,533 1,500

495

0

400

800

1,200

1,600

2,000

388

CVS Mail

Eckerd Mail

AARP Retail

Drugstore.com

Mail

Costco Mail

AARP Mail

Medicare

Retail

Medicare

Mail

7-m

onth

sup

ply

(dol

lars

)


* These package prices account for the regular low prices offered by each retailerplus any available manufacturers’ discounts.

found some branded products are less expensivethan generics if the beneficiary is eligible for anexceptionally generous manufacturer’s senior dis-count program.

Mail order could save between 12 and 31 per-cent compared to retail purchases through theMedicare card program for our beneficiaries.However, one of our typical seniors would spendmore on mail order than on retail purchase. Mailorder generally requires that an individual buy athree-month’s supply, which can delay when a man-ufacturer’s senior discount goes into effect. The sen-ior discounts apply after the $600 subsidy has beenspent, but an individual could meet that limit part-way through a three-month mail-order cycle andnot immediately capture the discounts for which heis eligible.

Savings for Higher-IncomeSeniors. Seniors with higherincomes are likely to see modestbut real savings under theMedicare drug discount cardprogram, particularly if theyhave no other coverage for theirprescriptions. Moderate-incomeseniors, with incomes between135 percent and 200 percent of poverty, are eligible for manu-facturers’ senior discount pro-grams through Medicare inaddition to the baseline dis-counted prices posted on theMedicare website. In addition,the Together Rx card, the GSKOrange Card, and perhaps oth-ers continue to be available out-side Medicare to some seniorswithout coverage.

High-income seniors, withincomes above 200 percent of poverty, can access only the baseline discounts offered by Medicare card sponsors.Discounts from Together Rxand the Orange Card also

are available for seniors with incomes up to about300 percent of poverty who have no insurance cov-erage for prescriptions. For our analysis, weassume that a high-income senior is eligible foronly the baseline discounts under the Medicare-approved card.

Accounting fully for senior discount programs,the typical moderate-income beneficiaries in ouranalysis could save from 10 to 38 percent under theMedicare discount card program compared to theirnext-best private alternative. High-income seniors,who would pay the prices shown on the Medicarewebsite for each card option, could save from 6 to 24 percent in our examples. Although those sav-ings may not be viewed by some commentators aslarge enough, they are nonetheless real savings com-pared to what higher-income seniors without drug


18

TABLE 4MEDICARE SAVINGS OFF THE BEST PRIVATE DEAL

Low-income senior (at or below 135% of the federal poverty level*)

“Brand”** Retail 53–69%Mail 60–74%

“Generic”† Retail 50–78%Mail 58–72%

Moderate-income senior (between 135 and 200% FPL)

“Brand” Retail 10–34%Mail 16–37%

“Generic” Retail 10–38%Mail 16–29%

High-income senior (above 200% FPL)

“Brand” Retail 8–13%Mail 15–23%

“Generic” Retail 6–23%Mail 14–24%


* In 2004, the FPL is $9,310 for individuals, $12,490 for couples.

** “Brand” refers to a basket where branded drugs are generally included over generic alternatives.

† “Generic” refers to a basket where generic alternatives are generally substitutedwhere they are available.

coverage typically spend, even when they are care-ful comparison shoppers.

Those seniors can save more if they switch togenerics or purchase through mail order under theMedicare discount card program. Moderate-incomeseniors might see additional savings of 2 to 17 percentby shifting to more generic drugs. Higher-incomeseniors would also save from that switch, particularlybecause they do not benefit from special manufactur-ers’ discounts on branded drugs. In our examples,savings ranged from 6 to 16 percent.

Mail order also yielded significant additional sav-ings, ranging from 9 percent to as much as 19 percentcompared to retail pharmacy purchases for higher-income seniors. Once again, however, mail ordercould prove more costly than retail purchases for amoderate-income senior who is eligible for a generoussenior discount card program because of the three-month purchasing cycles.

To test whether the baskets of drugs we identifiedfor our typical seniors might give a false indicationof savings, we also compared Medicare discountcard prices for the ten top-selling pharmaceuticalswith prices charged by other well-known discount-ers.15 (Those prices were posted on June 5.) Medi-care’s best price for retail sales undercut AARP’sdiscounted retail price in every case, with savingsranging from 7 to 35 percent. Medicare’s best mail-order price was also best, ranging from 5 to 53 per-cent lower than the mail-order prices offered byfive discounters. This confirms that the prices cur-rently posted on the Medicare website are, in fact,highly competitive.

Medicare Card vs. VA and Canada. Senate minor-ity leader Tom Daschle (D-S.Dak.) and his colleaguesrecently asserted that the new discount card programdoes not show real savings compared to Canadianpharmacies or the U.S. Department of VeteransAffairs (VA).16 That statement confuses price withcost to the consumer. Despite higher prices onbranded drugs, many seniors could pay less overthe year through the Medicare discount card pro-gram than with VA or Canadian prices, particularlyif they qualify for the $600 subsidy.

Prices for the top-selling branded drugs availablethrough the VA and Canadian pharmacies are sub-stantially lower than Medicare discount card prices.According to price data for May 24 from FamiliesUSA, the VA paid between 6 and 69 percent lessthan the Medicare discount card price (measured asthe best price available through retail sales) for thetop ten pharmaceuticals.17 The Canadian pricesused by Sen. Daschle were between 27 and 63 per-cent lower than the Medicare prices reported byFamilies USA.

Those price comparisons are not completelyfair. They do not include generic drugs, which represent about half of pharmaceutical sales in the United States and offer substantial savings.They compare discounted retail prices underMedicare with prices not available at retail phar-macies in the United States. Americans who takeadvantage of Canadian prices generally purchaseby mail order for obvious reasons, and the VA dis-penses drugs through a limited number of facilitiesrather than through thousands of retail pharmacies,as Medicare card sponsors do. Other requirementsof the Medicare program, including consumer hot-lines and other information for seniors, may not beavailable through Canadian pharmacies. The VAtightly controls what drugs may be prescribed bytheir physicians, while there is no such restrictionunder the Medicare program. These differencesadd to the cost of the Medicare discount card program, but they also represent added value toseniors.

Low-income beneficiaries eligible for the subsidyand special discounts almost certainly would savemore under the Medicare program than they couldeven at very low Canadian prices. Seven of the topten drugs are available to those low-income seniorsfor $15 or less per month after they have spenttheir $600 subsidy. Even moderate-income seniorswould save if they were eligible for those manufac-turers’ discounts. Higher-income seniors would paya higher price under Medicare than Canadian or VA prices, but as we have seen, those prices aresubstantially below prices available through populardiscounters in the United States.


19

Other Evidence of Potential Savings. The pattern ofsavings to Medicare beneficiaries by enrolling in thenew drug discount card program that we found isbroadly consistent with other studies, including a pre-liminary analysis we completed in early May and laterstudies by the Centers for Medicare and MedicaidServices (CMS) and the Lewin Group. Each of thosestudies documents the large savings possible for low-income seniors under the new program, with lessersavings available to seniors who are not eligible for the$600 subsidy. Unlike the CMS and Lewin studies, weexplicitly account for the additional savings availableto low- and moderate-income seniors through manu-facturers’ senior discount programs.

Our earlier study18 followed the same three typicalbeneficiaries but estimated drug spending usingprices listed on Medicare and other websites on May 3. More Medicare discount cards report prices onthe Medicare website currently, and the prices ofmany drugs have come down since the first week inMay. Savings for prescriptions filled between June andDecember of this year were calculated by comparingthe best price under the Medicare program with thebest available alternative outside Medicare. With thatmetric, savings for seniors below the poverty levelranged from 30 to 70 percent.19 Savings percentageswould have been somewhat higher if we had com-pared the cost under the Medicare discount card withthe cost of prescriptions at full retail price.

A May 6 study by the CMS20 reports the cost of athirty-day supply of pharmaceuticals for six hypo-thetical beneficiaries living in different parts of thecountry and compares that with an estimate of theaverage national retail price. Price data were collectedMay 3. That study finds discounts ranging from 10 to17 percent below retail, in line with our savings esti-mates for high-income seniors who are eligible onlyfor the normal discounted prices found on Medicare’swebsite. They found that the mail-order savingsranged from 4 to 13 percent below Drugstore.com orCostco.com for three Medicare-approved cards, but afourth card charged about 20 percent more. A subse-quent CMS analysis published May 24 (using pricesfrom May 19) found savings from Medicare mail-order outlets ranging from 7 to 24 percent.21

In a May 19 study,22 the CMS also looked at thesavings possible to low-income seniors between Juneand December using the discount card and the $600subsidy. Using prices available on May 17, the studyfound savings ranging from 11 to 19 percent belowthe national retail cost when taking only price dis-counts into consideration. These are somewhat lowerprices than captured in the May 6 CMS study.Factoring in the $600 subsidy raises the net savingsto eligible seniors to between 37 and 77 percent offthe retail cost. Similar large savings are reported inthe CMS analysis of twelve commonly prescribeddrugs. None of these estimates accounts for addi-tional savings possible through manufacturers’ sen-ior discounts, available through many of theMedicare-approved cards.

The Lewin Group23 published preliminary find-ings indicating a wide range of savings under theMedicare discount card program, depending on thespecific drug prescribed. They found little state-to-state variation in prices. Total savings for twenty-fivecommonly prescribed drugs ranged from 16 to 24percent off retail. The study also examines the costsencountered by patients with eleven chronic condi-tions. Savings from price discounts alone ranged from13 to 29 percent over a year; accounting for the $600subsidy, savings ranged from 29 to 92 percent.

Choosing the Right Medicare Discount Card

How can seniors know whether they should enrollin the Medicare prescription drug discount cardprogram? How important is it for seniors to choosetheir Medicare-approved card carefully?

For at least one group of seniors, the answer to thefirst question is easy. Those who are eligible for the$600 subsidy can access that money only through aMedicare-approved card. As the previous analysisdemonstrates, those seniors stand to save much morethan $600 by enrolling in the new Medicare program,and there is no cost to them since the enrollment feeis waived.

Most beneficiaries need information on the coststhey will incur under a Medicare discount card


20

compared to the costs they will pay if they do notenroll. That means a pricing exercise similar to theone we performed in this study for our typical sen-iors. The exception to this rule is a beneficiary whois a member of a Medicare Advantage plan. Thoseplans typically integrate drug discounts with insur-ance coverage for prescriptions. MA plan membersare automatically enrolled in their plan’s approvedprescription discount card program.

Other factors could sway a beneficiary’s decision toselect one Medicare-approved card over another.Some seniors may find that the lowest cost optiondoes not include their favorite pharmacy, for example.Seniors living in institutional settings may face specialrequirements (such as the need for certain kinds ofpackaging) that may limit their choices. However,most beneficiaries gravitate to the lowest-cost plan—and for many, a large number of cards offer roughlyequivalent savings.

Limited Price Dispersion. A striking result of ourinvestigation into the cost of prescriptions under thenew Medicare program is the large number ofapproved discount cards that offer prices very closeto the best deal possible. This is relevant primarily tohigher-income beneficiaries, who are not eligible formanufacturers’ senior discount programs, many ofwhich operate through the Medicare discount card.Because high-income seniors get no additional pricebreaks, the thirty-day or ninety-day supply pricesavailable from the Medicare website represent theactual cost they will incur over those time periods.

We analyzed the baseline prices of Medicare dis-count cards available to our three typical beneficia-ries, as reported on the Medicare website. Betweenthirteen and twenty Medicare-approved cards werewithin 5 percent of the cost of the card offering thebest deal on retail purchases of prescriptions. Overthe course of seven months, a card plan that was 5percent more expensive would add between $45and $120 to the cost paid by those beneficiaries. If a beneficiary could tolerate as much as a 10 percentincrease in cost, between twenty-two and twenty-eight plans would be feasible for the three people inour examples.

This wide choice of competitive plans might beexpected in a heavily urbanized area such asBrooklyn. But the previously mentioned CMS andLewin studies confirm that the prices for specificpharmaceuticals do not vary much from place toplace. We would expect therefore that most beneficia-ries have a wide choice of card options that are simi-larly priced.

The majority of Medicare beneficiaries, who arenot eligible for manufacturers’ senior discounts, caneasily determine from the Medicare website which ofthe approved discount cards makes the most sense forthem. Lower-income beneficiaries must look morecarefully.

Access to Manufacturers’ Discounts. Seniorswith incomes up to 200 percent of the federalpoverty level (and in some instances, 300 percent)are eligible for senior discount programs offered bypharmaceutical manufacturers if they have no othercoverage for drugs. Many of those special discountsare available directly through the Medicare discountcard for seniors receiving the $600 subsidy.Moderate-income beneficiaries submit an additionalapplication, but they too often get the benefit of theextra discount automatically with the use of theircard.

There is, however, no general rule of thumb toguide seniors on what could result in very large sav-ings to them. Some manufacturers plan to contractwith every Medicare card sponsor to make this spe-cial discount available. Others are likely to contractwith only a few sponsors. Pfizer, for example,apparently contracts with only one sponsor, UnitedHealthcare’s U Share card. At least two senior dis-count programs, the Together Rx plan and the GSKOrange Card, remain independent of the Medicareprogram. In addition, some of these programs givesubstantial discounts on all of a manufacturer’sproducts, while others give discounts on onlyselected products.

Beneficiaries who are eligible for senior discountprograms are provided only general guidance fromthe Medicare website, indicating whether a manufac-turer has contracted with a card sponsor but giving


21

little additional information. Not surprisingly, thewebsite does not calculate prices for beneficiaries thattake into account these special discounts. Althoughthose discounts could be substantial and might bemade available automatically, a beneficiary wouldhave to call the Medicare-approved card sponsor toknow whether that is the case.

The potential importance of selecting the bestMedicare discount card is brought into sharp focus byour example of Mrs. Jones, who uses Lipitor to lowerher cholesterol. Lipitor is a Pfizer product, so if herincome were below 135 percent of poverty, Mrs.Jones would be eligible to purchase that drug forabout $15 a month, but only if she enrolls in the UShare card. The Medicare website shows five drugcards available to Mrs. Jones that are nearly equivalentin cost, varying by less than $5 for a month’s supply

of all her prescriptions (see Table 5). The PreferredPrescription Discount Card is the lowest price, at$353.95 for a month’s prescriptions filled at a retailpharmacy. The U Share card appears to come in sec-ond, at $355.94.

Many seniors would be tempted to go with thelowest-cost card, even if the savings are only a fewdollars a month. That would be sensible for higher-income seniors not eligible for special discounts, butthat would be a $540 mistake for Mrs. Jones over thenext seven months.

It is essential that Medicare beneficiaries find outthe details of special discount programs for the drugsthey take that may be offered through approved dis-count cards. As Mrs. Jones’s example illustrates,selecting the best card could bring substantial savingscompared to the next best alternative.


22

TABLE 5THE TOP FIVE MEDICARE DISCOUNT CARD OPTIONS FOR MRS. JONES

Seven-Month Cost with Card Monthly Retail Price* Manufacturer Discounts

1. Preferred Prescription Discount Card $353.95 $1,538.09

2. U Share Prescription Drug Discount Card $355.94 $994.79

3. myPharmaCare $356.20 $1,543.96

4. EnvisionRx Plus $357.77 $1,561.62

5. Prescription Discount Card $358.07 $1,546.07

SOURCE: Authors’ calculations.

* Price is for the “branded” basket of drugs (refer to table 3) and applies no special manufacturer discounts or Together Rx prices.

23

Prospects for Success

The Medicare prescription drug discount card pro-gram was developed in remarkably little time. TheCenters for Medicare and Medicaid Services pub-lished a regulation detailing the requirements of thenew program in December, just two days after theMedicare legislation was signed by the president.That sparked a flurry of interest among firms seek-ing to participate in the program. By January, theCMS had received applications from 104 prospec-tive card sponsors. A few months later, the CMSapproved seventy-three discount card plans open toany Medicare beneficiary and another eighty-fourplans open to beneficiaries in managed care plansoperating in the Medicare Advantage program.

In contrast to this vigorous response from poten-tial card sponsors, Medicare beneficiaries have beenslow to enroll in the new discount card program.Initial reports indicated that 2.9 million people wereenrolled in the Medicare prescription drug discountcard program by the first week in June, far below the7.4 million the CMS eventually expects to sign up.About 2.3 million of those beneficiaries were auto-matically enrolled as a result of being a member of aMedicare managed-care plan. Perhaps as few as600,000 people signed up for a discount card on theirown.

Is this an indication that seniors are not ready ornot able to make decisions about their health care?

Does this mean that competition cannot work evenwhen competitors line up at the door?

The failure is more mundane. People at any ageneed time and information to adapt to changing cir-cumstances. Congress required that the Medicare dis-count card program begin operating in only sixmonths. The CMS has met that timetable, but con-sumer information efforts continue to be developed.Many seniors remain uncertain about the value of theprogram to them, and uncertainty breeds inertia.

Despite mounting evidence to the contrary, criticsremain skeptical that the discount cards offer lowerprices than seniors could find elsewhere. They arguethat allowing card sponsors to set their own pricesrather than having the government negotiate directlywith pharmaceutical companies will lead to higherprices and greater cost to beneficiaries and taxpayersalike. Prices offered by card sponsors in early Maymay have been somewhat disappointing, seeming togive credence to those fears. Since then, better dealshave become available to seniors, due at least partly tothe entry of more competitive firms seeking to attracta large share of the Medicare market.

Critics also have charged that card sponsorscould pull a bait and switch, raising prices anddropping expensive drugs after seniors are lockedinto plans that they cannot leave until January2005. Although such changes are permitted, the

companies sponsoring Medicare drug cards arewell-established firms that see the discount cardprogram as an entry to the full drug benefit in 2006.Competition and the desire to build a customerbase is likely to force prices down and improve cus-tomer service, not raise prices and drive beneficia-ries away.

The Medicare drug discount card programintroduced a new element of competition into aprice-controlled government entitlement. The pro-gram is an unusual partnership between the federalgovernment and the private sector, with a taxpayer-provided cash subsidy and privately negotiateddiscounts that together could substantially reducethe cost of prescriptions for millions of seniors. Ifthat were the sole outcome of the program, it wouldbe a runaway success.

There is even greater potential for good in thisfledgling program. For the first time, anyone canlearn the price of prescription drugs from a nationaldatabase that is updated weekly. Over 40 millionMedicare beneficiaries are now able to compareprices and get the best deal under the discount cardprogram. The database is limited to prices availablethrough Medicare discount card sponsors and doesnot include retail prices. Even that level of pricetransparency is unprecedented in the market forhealth services.

Consumers must know the price of a productbefore they can get the best value, and that informa-tion has been missing in health care until now. Thereis reason to hope that the Medicare discount card pro-gram could be a catalyst for larger changes in the waywe buy health care in this country.

Encouraging Enrollment

It should not be surprising to anyone that enroll-ment in the Medicare drug discount card programhas gotten off to a slow start. According to pollstaken months after the Medicare provisions hadbecome law, a sizeable fraction of seniors were onlydimly aware of the new benefit provisions enactedby Congress. That speaks more to a lack of need

rather than a lack of interest in the new program.Most seniors already have some type of prescrip-tion drug coverage, and many probably guessedthat a discount card program would be of littlevalue to them. Under those circumstances, a rea-sonable person would not work very hard to findout about the Medicare discount card program.

AARP’s experience may have been typical. Itreports receiving thousands of inquiries aboutMedicare drug discount cards in the weeks prior toJune 1.24 Despite that interest, only about 400 peo-ple enrolled in AARP’s own Medicare-approved cardprogram by the end of May.

The apparent lack of interest in the AARP-sponsored card points to another potential prob-lem: Seniors may believe that they do not need aMedicare-approved card because they already havea private card under a similar corporate name. Aswe found in our analysis of three typical seniors,that error could cost low-income beneficiaries hun-dreds of dollars in savings this year.

The information available to beneficiaries from theCMS and other sources has improved greatly over thepast several months, and more improvements areforthcoming. However, many beneficiaries are likelyto decide whether to enroll, and which Medicare cardto select if they do so, using incomplete information.

The Medicare website provides only limited infor-mation on manufacturers’ senior discount programsthat coordinate with many Medicare-approved cards.The card sponsors’ websites provide some additionalinformation but often not enough to tell a beneficiarywhat his actual costs will be with the special dis-counts. Telephone calls to several card sponsors maybe the only way to accurately determine which of sev-eral card options is best for a beneficiary.

This problem conceivably could be resolved bycollecting massive amounts of additional data fromcard sponsors and further complicating the way ben-eficiaries access that information. Most people wantless complication, not more.

A newly formed coalition of organizations mighthold the solution to this information problem.Chaired by the National Council on Aging, the Accessto Benefits Coalition (ABC) is a group of sixty-eight


24

organizations serving seniors and persons with dis-abilities. Those organizations include aging andhealth care organizations (such as AARP and theCatholic Health Association), charities (such asEaster Seals), and disease-specific groups (such asthe American Diabetes Association). The ABC hasjoined with the CMS to encourage low-income ben-eficiaries to enroll in the Medicare discount cardprogram.

The ABC could become a clearinghouse for consumer-friendly information. In addition to pro-moting awareness of the new program, the ABCwill soon offer on its website a consumer’s guide todiscount card plans, possibly including a summaryrating. Some ABC members also might make rec-ommendations on which card sponsors may offerthe best deal to a beneficiary with particular healthneeds. Even though such advice would not pin-point the single best option for a specific individual,advice that cuts through the thicket of technical detailwould be welcomed by many.

Competition vs. Regulation

The role of private competition in Medicare hasbeen a major point of contention in Congress. TheMedicare drug discount card is the latest field onwhich this battle is being waged. Those who favor agovernment-run system assert that competition willnot hold down costs. On the contrary, Medicare dis-count cards undercut the prices offered by privatecompetitors from the outset. They also fear that cardsponsors could raise prices indiscriminately withoutdirect government controls. That problem is unlikelyto materialize because most of the sponsors have alonger-term interest in the success of the Medicareprescription drug program.

Competition and Better Card Options. Skepticismabout the effectiveness of competition in keepingdown drug costs was heightened by the CMS’srelease of the first pricing information in late Apriland early May. The early offers by Medicare-approved card sponsors were not dramatically

lower than competitors, prompting federal officialsto respond that prices would come down in subse-quent weeks. That has been borne out.

We examined the lowest-priced Medicare discountcards (not accounting for any special discounts) avail-able to our typical beneficiaries on May 3 and againon June 1. The number of cards reporting prices onthe CMS website increased significantly over thatperiod. For example, our Mrs. Jones of Brooklyn hadfourteen Medicare card options for her drug set whenthe price finder was launched on May 3. A monthlater, she had thirty-three cards to choose from. Thesurge of new cards that have become available to seniors has already bred competition and drivendown prices. The best Medicare cards for our threeBrooklyn seniors in June were on average 3.5 percentlower than their best options in early May.25

Seniors are already getting better deals than ourfirst look at prices, one month ago, suggested. Thisis a result of competition among Medicare drugcards and the influx of new plans that offer deeperdiscounts.

The initial pricing decisions by card sponsorsreflected the substantial costs and uncertainty associ-ated with the new Medicare market. Although manysponsors have experience with private discount cardprograms, the requirements of the Medicare programare more costly and less familiar to them. Greater cus-tomer support is necessary, for example, and sponsorsmust develop secure ways of administering the cashsubsidy component of the program. Those require-ments add significantly to the cost of operating thecard plan. Sponsors may charge an annual enrollmentfee (which can be no higher than $30), but that rev-enue offsets only a small part of the cost. The remain-der must be recouped through higher prescriptionprices.

Uncertainty about how competitors would pricetheir cards also contributed to prescription pricesjudged by some as too high initially. We shouldbegin to see card sponsors competing for enroll-ment by more aggressively bidding down pricesand offering better customer service (which mightsimply mean offering more pharmaceuticals at discounted prices). Some consolidation may be

PROSPECTS FOR SUCCESS

25

expected as less successful sponsors drop out of theMedicare market after 2004, and their increasedmarket shares may give the remaining plans addi-tional leverage with pharmaceutical companies onthe cost of their products.

Bait and Switch. Critics argue that card sponsorscould raise prices sharply once beneficiaries haveenrolled. Beneficiaries must remain with the dis-count card plan that they first enroll in for the year,with one opportunity to switch plans for 2005.That could place beneficiaries at a disadvantage ifplans change their discounts or drug lists after theopen enrollment period.

Few, if any, card sponsors are likely to pursue abait-and-switch strategy, where they advertise pricesthat are too good to be true, then raise prices afterseniors are locked into the plan. Safeguards built intothe program limit price increases to a limited rangethat reflects increases in the drug’s average wholesaleprice or changes in the card sponsor’s cost of opera-tion. In addition, prices are posted on the CMS web-site, and drugs cannot be dropped from companydrug lists without notifying the CMS in advance. Thethreat of public disclosure can be a significant deter-rent to inappropriate business practices.

The risk of bait-and-switch tactics would begreater if drug card sponsors had only a short-terminterest in the Medicare program, so that the loss ofmarket share after the first year would be of little con-sequence. But most, if not all, prospective sponsors ofthe Medicare discount card are well-established firmswith reputations to protect, and the majority of them are considering continued involvement withMedicare through the Part D benefit. For such spon-sors, bait-and-switch practices would be bad busi-ness, placing them at a competitive disadvantage.

Catalyst for Change

The Medicare prescription drug card program isclearly a work in progress, and much more needsto be done to make the program known and acces-sible to seniors, especially low-income seniors,

who have the most to gain from it. If public- andprivate-sector outreach and consumer informationefforts are successful, perhaps 7 million beneficiarieswill receive substantial assistance with their pre-scription costs. We may well approach that enroll-ment target by the end of this year.

The discount card program is a significant depar-ture from the way Medicare typically functions. Theprogram is not a health benefit in the traditionalsense but an assistance program. It does not guaran-tee federal payments for health services, but it givesseniors access to lower prices and, for many, somecash assistance. Enrollees in the discount card pro-gram have a strong incentive to find the lowest-costproduct that works for them, since in fact they arespending their own money. Those without otherinsurance coverage who are eligible for the $600subsidy have always had a strong reason to econo-mize on their prescriptions. That has not changed,but now they have more funds to help with theirexpenses.

The extent of private sector involvement in thisprogram is also a departure from the Medicarenorm. Low-income seniors benefit from a federalsubsidy and savings from privately negotiated dis-counts on pharmaceuticals. Perhaps half the benefitthat those seniors receive is the result of privateactions rather than government expenditures ormandated prices. Already, some evidence suggeststhat competition among card sponsors will drivedown the cost of prescriptions under this program.

The Medicare drug discount card program wasdesigned as a temporary measure to help those whoneed the help until the full drug benefit becomesavailable. The full benefit is a more complex andexpensive undertaking than the discount card pro-gram. Implementing that benefit in only two years is ambitious and perhaps unrealistic.

If more time is needed, Congress may have anoption: Extend the discount card program into2006 and broaden eligibility for the cash subsidy tomoderate-income beneficiaries. Some of the moneythat would have been spent during the first year of a delayed Medicare drug benefit could be used togive more people cash assistance. An extended and


26

enhanced drug discount program could give theCMS an additional year to implement the morecomplex drug benefit.

Policymakers are appropriately focusing theirattention on how well the Medicare drug discountprogram will work for seniors. But the impact of thissmall program could be much wider. Actions thatalready have been initiated in the drug discount pro-gram ultimately could leverage change in the phar-maceutical market as a whole.

The catalyst for that change is the much-maligned price information posted on the Medi-care website. Despite its limitations, this databaseof pharmaceutical prices is a unique resource.Although there are private sources of informationon drug prices, that information is closely held.Medicare now provides such information fromMedicare card sponsors freely to anyone withaccess to the internet. That could be the beginningof a broader move toward price transparency in themarket for prescription drugs.

Secrecy over prices is not news in health care.Unlike any other item bought and sold in this coun-try, health care products and services are routinelyprovided to consumers who do not know what they

cost. Without knowing the price, the consumer canhardly be expected to purchase wisely.

Price transparency could revolutionize the phar-maceutical industry. Once prices can be comparedwith little difficulty, consumers inside and outsideMedicare will begin to ask whether they are gettingtheir money’s worth.

Moreover, Congress will also ask whether the tax-payer is getting his money’s worth, and therein lies adanger. The price information that can fuel smartshopping by consumers could just as easily be aninvitation to the government to fix prices. There isclearly strong sentiment on Capitol Hill and aroundthe country for such a policy, even though the long-term consequences of federal price controls could beless innovation and fewer effective pharmaceuticalsto treat the diseases of an aging population.

We are nearing a crossroad: One path leads to amarket catering to consumers, the other to a mar-ket dominated by bureaucrats. Congress favored aconsumer-oriented approach in the MedicareModernization Act but by only a slim margin. If theMedicare prescription drug discount card programmatures successfully, there is reason to hope thatCongress will continue down that path.

PROSPECTS FOR SUCCESS

27

Appendix

Measuring Prescription Costs and Savings

28

Savings available to Medicare beneficiaries underthe new prescription drug discount card programdepend on the drugs they use, how they choose topurchase those drugs, and their income levels. Webegan by developing clinical profiles for threehypothetical seniors having chronic conditionscommonly seen in aging populations (see tableA1).

We identified drugs frequently prescribed foreach of these patients, as well as generic equiva-lents where available (see table A2). Since mostpeople with chronic conditions take amix of brands and generics, we identi-fied a combination of prescriptions thatwere more heavily weighted towardbrands and another combination moreheavily weighted to generics.

We tracked the costs each personwill incur for their prescriptions fromJune through December 2004 underthe lowest-cost Medicare-approved cardand under other well-known sources ofdiscounted pharmaceuticals (see tableA3). Price information was current as ofJune 1, the first day Medicare beneficia-ries could take advantage of discountsavailable under the card program. Bynecessity, we assumed that those prices

would hold throughout the remainder of 2004.However, it is reasonable to expect that drug pricesgenerally move in tandem between the Medicarediscount card program and the broader pharma-ceutical market.

Information was collected for people living inBrooklyn, New York, but our conclusions general-ize to the rest of the country. Pharmaceutical pricesoffered by a Medicare-approved card sponsor do notseem to vary much from place to place (althoughprices between sponsors may differ considerably). A

TABLE A1THREE TYPICAL BENEFICIARIES

Robert Smith, Diabetes, high blood pressure, high66 years old cholesterol, erectile dysfunction (ED)

Mary Jones, Congestive heart failure, high blood 74 years old pressure, high cholesterol, osteoar-

thritis, and gastric reflux disease

Fred Green, Chronic lung disease, a history of 78 years old blood clots in his legs, seasonal aller-

gies, hypothyroidism, and depression


NOTE: All three patients live in Brooklyn (zip code 11201). Because of thelarge number of available retail pharmacies, a 1-mile search radius wasused in the price finder on www.medicare.gov.

recent analysis by the CMS suggests that prescrip-tion prices may be fairly consistent in differentregions of the country.26

Low-income seniors have more opportuni-ties to save under the Medicare drug discount cardthan higher-income people (see table A4). Every-one is eligible for the baseline discounts negotiatedby card sponsors and posted on the Medicare web-site.27 Additional discounts on some manufacturers’drugs may be available through the Medicare cardprogram to beneficiaries with incomes up to 200percent of poverty. Not all Medicare cards offer thesame manufacturers’ discounts, and some manufac-turers’ senior discount cards (such as Together Rx,which offers discounts to people with incomes to

300 percent of poverty) remain availableoutside the Medicare program.

The amount of extra savings frommanufacturers’ senior discounts dependson the specific drugs prescribed for theindividual and his or her income level.Beneficiaries eligible for the $600 sub-sidy must generally spend that amountbefore receiving the larger discount.Since they have received a governmentgrant, these beneficiaries are no worse offthan moderate-income seniors who areeligible for only the manufacturers’ sen-ior discounts.

We identified nine prescription drugsfor our three typical beneficiaries thatcould be obtained using these specialdiscounts (see table A5). Note that Pfizeris phasing out its Pfizer Share Card butextending those discounts to beneficia-ries enrolling in United Healthcare’s UShare discount card. Where applicable,we attributed those same manufacturers’discounts to purchases made throughnon-Medicare sources of discountedpharmaceuticals.

We did not consider additional sav-ings that might be available to some sen-iors through patient assistance programsoperated by pharmaceutical manufactur-

ers and some states. Manufacturers’ PAPs are charityprograms that donate drugs to needy patients at nocost to them. These programs do not operate in thesame way as the discounts available through theMedicare discount card, and they must be appliedfor outside the Medicare program. State PAPs are notavailable nationally and could not be incorporatedinto our analysis. However, PAPs can be an impor-tant source of savings for Medicare beneficiaries whoare eligible for them.

New information required one significantchange between our May analysis28 and the currentstudy. In the earlier study, we assumed that Merckoffered a senior discount card program similar tothat of Pfizer and other companies. As with the

APPENDIX

29

TABLE A2PRESCRIPTION DRUGS USED BY OUR BENEFICIARIES

Mr. Smith

“Brand”* Glucophage 500 mg (2/day†), metoprolol 50mg (2/day), Zocor 40 mg, Viagra 50 mg(8/month)

“Generic”** metformin 500 mg (2/day), metoprolol 50 mg(2/day), Zocor 40 mg, Viagra 50 mg (8/month)

Mrs. Jones

“Brand” Lasix 40 mg (2/day), metoprolol 50 mg(2/day), Zestril 40 mg, Lipitor 20 mg, Vioxx12.5 mg, Prevacid 30 mg

“Generic” furosemide 40 mg (2/day), metoprolol 50 mg(2/day), lisinopril 40 mg, Lipitor 20 mg, Vioxx12.5 mg, Prevacid 30 mg

Mr. Green

“Brand” albuterol 95 mcg (1 vial/month), Coumadin2.5 mg, Allegra 180 mg, Levoxyl 125 mcg,Paxil 40 mg

“Generic” albuterol 95 mcg (1 vial/month), warfarin 2.5 mg, Allegra 180 mg, Levoxyl 125 mcg, Paxil 40 mg


* “Brand” means branded drugs are generally included over generic alternatives.

** “Generic” means generic alternatives are generally substituted wherethey are available.

† Standard is 1 tablet per day; exceptions noted.

other senior discounts, we applied the generousterms of the Merck program to AARP and the otherdiscount purchasing options outside Medicare. Wesubsequently found that the Merck program oper-ates as a patient assistance program, requiring aphysician’s approval and delivering the productdirectly to the physician’s office or to the patient’shome rather than through a retail pharmacy. Sincewe do not attempt to incorporate the savings pos-sible through PAPs in this study, we no longerapply the Merck PAP terms to non-Medicare dis-count purchasing options. However, Merck hasmodified its program for low-income Medicarebeneficiaries who enroll in the Medicare discountcard program, allowing them to purchase their pre-scriptions at retail pharmacies (who may charge asmall fee). Thus, the Merck program operates with-in the Medicare discount card program like othercompanies’ senior discount programs. For that rea-son, we continue to apply Merck’s terms to eligiblebeneficiaries in the Medicare card program. Thathas the effect of raising the savings possible

through the Medicare program com-pared to other alternatives.

One point of comparison—the costof prescriptions at full retail price—isdifficult to measure with any precision.Retail prices are generally not available. Discounts offered by pharmaceuticalcompanies, pharmacies, membershiporganizations, and other sources areoften couched in terms of reductionsfrom the average manufacturer’s price(AMP) rather than the retail price. Theretail price might vary considerablyfrom the AMP, depending on what dis-counts the retail pharmacy itself can

negotiate with pharmaceutical manufacturers andon the local retailer’s markup.

The CMS has used a proprietary database fromIMS Health to estimate the national retail cost of athirty-day supply of certain commonly prescribeddrugs for six beneficiaries.29 We calculated the cost ofthose same drugs available from the AARP retail dis-count program and computed the average discountover the six people to be 16 percent. The measureused in our study for the retail cost of drugs is simplythe AARP price increased by 16 percent. This is, atbest, a crude approximation.

The cost of each basket of prescriptions for ourthree typical seniors under the Medicare discountcard and the best private alternative is presented intables A6–A8. We repeated the pricing exercise forseniors at three income levels, accounting for all sub-sidies and discounts normally available to seniorsthrough Medicare or private vendors. As previouslydiscussed, the Medicare approved card offering thebest deal varies from patient to patient; that is alsotrue for the best private alternative.


30

TABLE A3PRESCRIPTION DRUG DISCOUNTERS

Membership Organization AARP—retail and mail order

Pharmacy Chains CVS, Eckerd’s*—mail order only

General Merchandiser Costco—mail order only

Internet Pharmacy Drugstore.com—mail order only


* Our analysis of prices on May 3 included Walgreen’s pharmacy.However, we were unable to capture Walgreen prices in our June 1 price survey because its website was not functioning that day.

APPENDIX

31

TABLE A4SAVINGS AVAILABLE UNDER MEDICARE DISCOUNT CARD BY INCOME LEVEL

$600 Baseline Discounts Manufacturers’Income Subsidy under Medicare Card Senior Discounts Mail Order

Low income: <135% X X X Xfederal poverty level ($12,569 individual/ $16,862 couple)Moderate income: X X XBetween 135% and 200% FPLHigh income: >200% X XFPL ($18,620 individual/$24,980 couple)

SOURCE: Authors’ analysis.

TABLE A5MANUFACTURERS’ SENIOR DISCOUNTS AVAILABLE TO LOW-INCOME BENEFICIARIES IN THE STUDY

Contracts with DiscountsDiscounts Offered through Medicare Card Offered outsideMedicare Card Sponsors Sponsors (no.) Medicare Card

Mr. Smith

Zocor, Merck $15/mo. after $600 subsidy exhausted* 23

Viagra, Pfizer $15/mo. after $600 subsidy exhausted 1 Phase-out: $15/mo. for June,only under U Share card July, and August only

Mrs. Jones

Lasix, Aventis – N/A $18/mo. under Together Rx**

Zestril, AstraZeneca $15/mo. after $600 subsidy exhausted† 7

Lipitor, Pfizer $15/mo. after $600 subsidy exhausted 1 Phase-out: $15/mo. for June, only under U Share card July, and August only

Vioxx, Merck $15/mo. after $600 subsidy exhausted 23

Mr. Green

Coumadin, Bristol- – N/A $20/mo. under Together RxMyers Squibb

Allegra, Aventis – N/A $65/mo. under Together Rx

Paxil, Glaxo- – N/A $74/mo. under Together RxSmithKline

SOURCE: Communications with pharmaceutical companies.

NOTE: Many manufacturers of branded drugs offer senior discount programs, but generic manufacturers do not.

* Merck provides drugs at no cost. Pharmacies may charge a fee, assumed to be $15 but could be lower. Outside of the Medicareprogram, Merck offers only a patient-assistance program.

** Together Rx will remain an independent option, but many of its sponsors are negotiating contracts with Medicare card sponsors.

† AstraZeneca has contracted with the U Share card to offer its products to low-income seniors for free or at low cost, here assumedto be $15.


32

TABLE A7HOW MUCH CAN MODERATE-INCOME SENIORS SAVE ON A

SEVEN-MONTH SUPPLY OF THEIR MEDICINES? Assume incomes are between 135 and 200% of the federal poverty level.

Medicare’s Best Deal Best Private Deal Percentage SavingsRetail Mail Retail Mail Retail Mail

Mr. Smith

“Brand”* $1,054.61 $947.49 $1,609.62 $1,499.77 34% 37%

“Generic”** $871.63 $928.97 $1,407.10 $1,306.85 38% 29%

Mrs. Jones

“Brand” $1,554.74 $1,436.75 $2,280.13 $2,218.75 32% 35%“Generic” $1,530.06 $1,348.28 $1,952.26 $1,867.11 22% 28%

Mr. Green

“Brand” $1,192.91 $1,020.62 $1,318.85 $1,217.31 10% 16%“Generic” $1,139.36 $960.77 $1,271.84 $1,149.55 10% 16%


* “Brand” refers to a basket where branded drugs are generally included over generic alternatives.

** “Generic” refers to a basket where generic alternatives are generally substituted where they are available.

TABLE A6HOW MUCH CAN LOW-INCOME SENIORS SAVE ON A SEVEN-MONTH

SUPPLY OF THEIR MEDICINES?Assume incomes are below 135% of the federal poverty level.


Mr. Smith

“Brand”* $494.66 $387.54 $1,609.62 $1,499.77 69% 74%

“Generic”** $311.68 $369.02 $1,407.10 $1,306.85 78% 72%

Mrs. Jones

“Brand” $994.79 $876.80 $2,280.13 $2,218.75 56% 60%

“Generic” $970.11 $788.33 $1,952.26 $1,867.11 50% 58%

Mr. Green

“Brand” $622.91 $450.62 $1,318.85 $1,217.31 53% 63%

“Generic” $569.36 $390.77 $1,271.84 $1,149.55 55% 66%




APPENDIX

33

TABLE A8HOW MUCH CAN HIGH-INCOME SENIORS SAVE ON A

SEVEN-MONTH SUPPLY OF THEIR MEDICINES?Assume incomes are above 200% of the federal poverty level.


Mr. Smith

“Brand”* $1,574.58 $1,321.76 $1,787.48 $1,664.32 12% 21%

“Generic”** $1,364.93 $1,140.35 $1,584.94 $1,480.01 14% 23%

Mrs. Jones

“Brand” $2,460.43 $2,116.73 $2,662.45 $2,477.30 8% 15%

“Generic” $2,193.17 $1,872.15 $2,326.42 $2,167.62 6% 14%

Mr. Green

“Brand” $1,224.23 $990.62 $1,404.66 $1,283.31 13% 23%

“Generic” $1,027.81 $930.77 $1,333.65 $1,221.99 23% 24%




35

1. The Medicare prescription drug discount card isavailable to all Medicare beneficiaries, regardless of age,except for those who receive drug benefits throughMedicaid. Temporary cash assistance under the pro-gram is available to certain low-income beneficiarieswithout other drug coverage, also without regard to age.As a shorthand in what follows and when the context isclear, we refer to seniors even though the program isavailable to both seniors and people under age 65 whoare eligible for Medicare because of disability.

2. Robert Pear, “Medicare to Monitor Prices in NewDrug Plan,” New York Times, December 11, 2003.

3. Robert Pear, “Drug Discount Cards Give the ElderlySmall Savings,” New York Times, January 4, 2004.

4. Milt Freudenheim, “Drug Discount Card for ElderlyMay Confuse as Well as Help,” New York Times, February6, 2004.

5. Vicki Kemper, “Prescription Drug Law LeavesSeniors Perplexed,” Los Angeles Times, February 26, 2004.

6. A funded drug discount card is part of thePrescription Drug Security Plan proposed by Joseph Antosand Grace-Marie Turner in 2001. For more information,see www.galen.org/pdrugs.asp?docID=608. See alsoJoseph Antos and Grace-Marie Turner, “What CongressShould Do about Prescription Drugs for Seniors,” AEI onthe Issues, September 1, 2002, available at www.aei.org/publications/filter.all,pubID.14231/pub_detail.asp.

7. The CBO estimated the net cost of the entire bill at$395 billion over ten years, reflecting other provisions thatreduce federal outlays. See Douglas Holtz-Eakin,“Estimating the Cost of the Medicare Modernization Act,”testimony before the House Committee on Ways andMeans, March 24, 2004, available at www.cbo.gov/showdoc.cfm?index=5252&sequence=0.

8. A good resource on prescription drug assistanceprograms is the Medicare Rights Center. A listing of programs is available at www.medicarerights.org/rxframeset.html.

9. See Centers for Medicare and Medicaid Services,“Medicare-Approved Drug Discount Cards Provide DrugPrices Significantly below Average Paid by Americans,”May 6, 2004, available at www.cms.hhs.gov/media/press/files/rxcard_savings_analysis.pdf.

10. TRICARE for Life is the health insurance programfor military retirees and dependents.

11. We do not include manufacturers’ or state patientassistance programs in what follows, although thoseprograms can provide substantial additional savings toeligible beneficiaries.

12. Some manufacturers, including those sponsoringthe Together Rx card, extend their senior discounts to people with incomes up to 300 percent of poverty.We assume in what follows that high-income seniors are not eligible for any manufacturers’ senior discount programs.

13. Retail drug prices generally are not published. Weapproximated the retail cost Mr. Smith’s prescriptionsby adding back the estimated 16 percent discountoffered by the AARP retail discount program.

14. Note that the out-of-pocket costs for a senior withan income between the federal poverty level and 135percent of poverty are $30 greater than an individualwhose income is below the poverty level. This is theresult of having to pay 10 percent of the cost of hisdrugs until the $600 cash subsidy has been spent, ratherthan 5 percent if his income were lower.

15. The list of top-selling drugs is from Families USA,Sticker Shock: Rising Prescription Drug Prices for Seniors,

Notes

June 2004, available at www.familiesusa.org/site/DocServer/Sticker_Shock.pdf?docID=3541.

16. Deborah B. Berry, “Dems Blast Medicare Cards,”Newsday, June 3, 2004.

17. Authors’ calculations based on Families USA, “PriceComparison: The Department of Veterans Affairs and theMedicare Discount Card,” June 2, 2004, available atwww.familiesusa.org/site/DocServer/Top_20_and_VA_comparison.xls?docID=3601. That document reports seem-ingly higher percentage savings compared to VA but onlybecause they divided the price difference by the lower VAprice.

18. Joseph R. Antos and Grace-Marie Turner, “NewDrug Plan: There’s More for the Poor,” Wall Street Journal,May 6, 2004.

19. We made a change in estimating beneficiary sav-ings between our May analysis and the current study,which has the effect of increasing the savings estimatesfor low-income seniors. See the appendix for moredetails.

20. CMS, “Medicare-Approved Drug Discount CardsProvide Drug Prices Significantly below Average Paid byAmericans,” May 6, 2004, available at www.cms.hhs.gov/media/press/files/rxcard_savings_analysis.pdf.

21. CMS, “Medicare-Approved Drug Discount CardsContinue to Show Significant Savings—Including forMail-Order/Internet Prescriptions,” May 24, 2004, avail-able at www.cms.hhs.gov/medicarereform/drugcard/reports/online_comparison_report.pdf.

22. CMS, “Medicare-Approved Drug Discount Cards Provide Additional Savings to Low-Income Medicare Beneficiaries,” May 19, 2004, available atwww.cms.hhs.gov/medicarereform/drugcard/reports/lowincomestudy5-19-04.pdf.

23. The Lewin Group, “New Study on Discount Drug Cards Shows Average Savings Will Top 20 Percent,”May 26, 2004, available at www.lewin.com/Spotlights/Features/SF_Medicare_Drug_Discount_Cards.htm.

24. Robert Pear and Milt Freudenheim, “Drug Dis-counts Beginning Tuesday, but Sign-ups Lag,” New YorkTimes, June 1, 2004.

25. Interestingly, several of the best cards in Juneposted substantially higher prices in May, suggestingthat they reduced their prices to meet the competition.This calculation compares the retail cost of the brandeddrug baskets in May and June.

26. See the previously cited CMS report of May 6, 2004.27. Drug prices on the Medicare website are

guaranteed by the sponsor to be available at partici-pating retail pharmacies and mail-order services, but the actual price could be lower. See Mark B.McClellan, “Statement on Improvements to 1-800-MEDICARE and www.medicare.gov,” May 20, 2004,available at www.cms.hhs.gov/cmedia/press/release.asp?Counter=1060.

28. Antos and Turner, “New Drug Plan.”29. See the previously cited CMS report of May 6,

2004, p. 3 and table 1.

NOTES TO PAGES 19–30

36

37

About the Authors

Joseph Antos is the Wilson H. Taylor Scholar in Health Care and Retirement Policy at the AmericanEnterprise Institute and an adjunct professor in the School of Public Health at the University of NorthCarolina at Chapel Hill. His recent research focuses on the economics of health policy, including Medicarereform, health insurance regulation, and the uninsured. Mr. Antos was formerly an assistant director of theCongressional Budget Office, and he held senior positions in the U.S. Department of Health and HumanServices, the Office of Management and Budget, and the Council of Economic Advisers. He holds a PhD ineconomics from the University of Rochester.

Ximena Pinell is a research assistant at the American Enterprise Institute. Her work includes a variety ofprojects on health system reform, such as the Medicare prescription drug benefit, drug pricing, and impor-tation. Ms. Pinell graduated from Georgetown University in 2003 with a BA in economics. She will enterthe School of Medicine at Emory University in Atlanta, Georgia, in the fall of 2005.

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