Medicare Drug Benefit Algebra

Trying to understand the essence of a 678-page piece of legislation that we'll call "the Medicare bill" is much like a meditation on sausage. You do not really want to know how this was put together. (If you actually do, start with the House Ways and Means conference report, or perhaps the 10 page summary.)

As an exercise in high school algebra, I posed this question to our niece: you pay a $420 premium, have a $250 deductible, and 75% coverage up to $2250 worth of drugs. How much do your yearly drugs have to cost before you break even with the Medicare drug benefit? Given the perplexity of that, Jeanette suggested she might give the question to her first-hour math teacher (who, if she's smart, will turn around and assign it to the class, perhaps for "extra credit").

The New York Times had a "Highlights" sidebar, with a graphic titled "Deciphering the Drug Benefit," which showed what percent of the drug cost was paid for by the recipient and by Medicare for various yearly costs of drugs. It didn't include the premium, and didn't allow one to see the breakeven point. You could see that the costs were 50-50 for $3,000 worth of drugs, went up to 70/30 for the recipient at $5,000, and then slid down to about 25% at $15,000.

So how much do you spend each year on prescription drugs? (Or, for an insurance question, how much do you expect to spend? Or what amount could you spend if you had to?)

The algebraic expression for breakeven is:

420 + 250 + .25*(x - 250) = x
and the answer is $810. If you need $810 worth of prescription drugs, $67.50 a month, you'd break even with this plan: $420 premium, $250 deductible, and 25% of (810 - 250), or $140 in copayments. That's more than I -- or we -- have ever spent, but then we had an employer-paid prescription drug benefit for some time. Still, I don't think either of us have ever had $420 worth of medication prescribed in a year, let alone $810. Which is not to say that it won't happen some time in the future; drug costs are going through the roof and physicians seem ever more inclined to prescribe drugs for medical treatement.

Incredibly, this bill specifically enjoins the federal government from negotiating with drug companies for lower prices, and even more incredibly, it was the "conservatives" who refused to give up the prohibition. Let's see -- unilateral disarmament in a situation that would give a huge customer market power, yielding no benefit to recipients, no benefit to the federal government, huge benefit to Big Pharma. Yeah, that's "conservative."

For my own extra credit, I looked at a comparison of Medicare and recipient costs for varying yearly drug costs. The first figure shows the "low end" of drug costs, including the $420 premium. At $810 worth of drugs, the recipient pays $810 net, and Medicare picks up the premium (as it were). At $2250, Medicare has paid out $1500, and it won't pay any more until drug costs exceed $5100.

Recipient and Medicare drug costs at the low end

The second graph shows high end costs, where "catastrophic coverage" kicks in with 95% coverage after you've paid $3600 out-of-pocket (and the $420 premium). Your total expense doesn't hit $5,000 until you've used $24,700 worth of drugs.

Recipient and Medicare drug costs at the high end

Is it a good deal? It depends on your circumstances and catastrophe. It is definitely going to be a good deal for pharmaceutical companies, having the government signed up for "cost plus" pricing.

From the NY Times' news analysis: "There's a tremendous amount of money floating in this bill," said Dr. Judith Feder, a senior health official in the Clinton administration and a critic of the legislation. "While we think it's about prescription drugs, the promoters of this bill put money into every interest group: physicians, hospitals, rural providers, cancer doctors, on the drug side, the pharmaceutical and insurance industries."

Tom von Alten      tva_∂t_fortboise_⋅_org

Tuesday, 25-Nov-2003 14:05:10 MST
http://www.fortboise.org/MedicareDrugs.html