South-Western College Publishing - Economics  

Policy Debate: Should Medicare Provide Prescription Drug Coverage?


Issues and Background

Pharmaceutical therapies have become increasingly important in the treatment of virtually every major illness. In many cases, new drugs substitute for or allow patients to avoid more expensive therapies such as hospitalization and surgery. In other cases, drugs facilitate treatment or provide treatment where none existed before, thus improving the quality and length of life for the patient. While nearly all private health insurance plans include some type of outpatient prescription drug coverage, Medicare does not. Put simply, prescription drugs in Medicare are smart medicine.
~Esther "Tess" Canja, May 27, 1999


If Medicare offered prescription drug coverage with taxpayer subsidies, then the incentive seniors would have to purchase Medigap or Medicare HMO coverage would diminish. Moreover, employers could become less inclined to offer private health plans to their elderly employees. (If drugs already were covered by someone else, why would employers spend the extra money?) This new subsidized benefit would crowd out the more efficient private market from the drug market. In addition, the price controls embodied in this approach would stifle incentives for innovative pharmaceutical companies to develop new medicines--an enterprise that is so crucial in combating today's debilitating diseases and improving the quality of life for senior citizens.
~James Frogue, Heritage Foundation Backgrounder, June 16, 1999.


Recent advances in medical care have resulted in the development of many new pharmaceutical therapies for a variety of health conditions. Many of these newly introduced drug therapies, though, are relatively expensive due to the high costs associated with developing and testing these drugs. Elderly individuals are more likely to experience chronic medical conditions that may be treated by these drugs. They are also likely to rely upon Medicare to cover their medical expenses. Until recently, Medicare did not provide prescription drug coverage. Instead, retired individuals either had no prescription drug coverage, or purchase relatively expensive "Medigap" insurance coverage to cover the medical expenses not covered by Medicare.

In response to concerns about the rising cost of prescription drug coverage for the nation's elderly, Medicare prescription drug coverage became available in January 2006. Proponents of this coverage argue that this provides more equitable access to medical care. Opponents argue that this expanded coverage results in a substantial increase in the cost of the Medicare program at a time when the ratio of workers to Medicare recipients will be at a record low level. (The online debate on the future of social security addresses the impact of this demographic trend on the social security system.) The wide variety of prescription drug coverage offered to Medicare recipients has caused many critics to complain about the complexity of the plan.

One of the concerns with any type of insurance program is the existence of a moral hazard problem. Individuals with prescription drug insurance coverage will use more medication than individuals without prescription drug coverage. In some cases, they may rely on relatively expensive prescription drugs to control health problems that could be as effectively controlled by changes in diet or exercise. Individuals who face the full cost of their medical coverage have more incentive to consider other effective alternatives to expensive prescription medications. Physicians often prescribe more expensive antibiotics and other medications for those who have prescription drug coverage even if these treatments are only slightly more effective than lower cost medications since they know that the additional cost is not borne by the individual patient.

Proponents of Medicare prescription drug coverage argue that prescription drug therapy often offers relatively low-cost alternatives to expensive surgical treatments. If Medicare covers the cost of surgery, but does not cover the cost of prescription drug coverage, individuals may elect more expensive treatment options since they result in lower out-of-pocket expenses.

Another concern associated with Medicare prescription drug coverage is that the high rate of cost inflation in this industry may result in pressure for price controls for prescription drugs. There is concern that such controls, if enacted, would result in shortages and a reduction in the level of research and development in the pharmaceutical industry.

Medicare coverage of prescription drugs is not an entirely new phenomenon. Congress passed the Medicare Catastrophic Coverage Act in 1988. This Act included coverage for prescription drugs (as well as other expansions in Medicare benefits). In 1989, this Act was repealed, primarily in response to concerns over its costs.

Critics of Medicare prescription drug coverage argue that many senior citizens already had carried some form of private insurance plan that provides prescription drug coverage. Supporters of Medicare prescription drug coverage counter this by arguing that a reliance on voluntary participation in Medigap insurance programs results in more costly prescription drug coverage as a result of the adverse selection problem. This problem occurs because the retired individuals most likely to purchase prescription drug coverage are those who, on average, have the highest levels of utilization of prescription drugs. This results in private insurance plans that are more expensive than the costs that society would face in providing this insurance coverage to all senior citizens.


Primary Resources and Data

  • Medicare
    The official U.S. Government Medicare web site provides detailed information on the Medicare program. Among other information, this website provides information on the new prescription drug plan.

  •, "Senior Health" provides a collection of information and links to resources related to Medicare and medical needs of the elderly.

  • American Association of Retired Persons (AARP)
    The AARP web site contains information concerning a variety of issues affecting the elderly. The AARP has been actively and effectively lobbying in support of expanded Medicare prescription drug coverage.

  • FamiliesUSA, "MedicareCentral"
    The FamiliesUSA website contains an extensive collection of articles, studies, and press releases dealing with Medicare issues. This organization supports the introduction of a medicare prescription drug program.

  • FamiliesUSA, "Cost Overdose: Growth in Drug Spending for The Elderly -- 1992-2010"
    This July 2000 study contains a detailed analysis of recent and projected future changes in the cost of prescription drugs for the elderly. It is noted that the cost of prescription drugs has risen faster than all other components of health care costs. This study also observes that senior citizens, who comprise only 13% of the population, account for 42% of the dollar value of prescription drug sales. The Adobe Acrobat viewer plugin is required to view this document. You may download this viewer by clicking here.

  • John R. Graham and Beverly A. Robson, "Prescription Drug Prices in Canada and the United States -- Part 1: A Comparative Survey",
    John R. Graham, "Prescription Drug Prices in Canada and the United States -- Part 2: Why the Difference?, and
    John R. Graham and Tanya Tabler, "Prescription Drug Prices in Canada and the United States -- Part 3: Retail Price Distribution
    These studies, by John R. Graham, Beverly A. Robson, and Tanya Tabler examine the differences between Canadian and U.S. prescription drug prices. They also analyze the reasons behind these differences. It is found that differences in income and in tort law account for substantial portions of the difference. U.S. companies charge higher prices, in part, because of higher costs associated with lawsuits. The Adobe Acrobat viewer plugin is required to view these documents. You may download this viewer by clicking here.

  • Henry J. Kaiser Family Foundation, "Medicare: The Basics - Key Data"
    This website, provided by the Henry J. Kaiser Family Foundation contains links to many of studies sources of statistics and data related to the Medicare system.

  • Bruce Stuart, Dennis Shea, and Becky Briesacher, "Prescription Drug Costs for Medicare Beneficiaries: Coverage and Health Status Matter"
    This January 2000 online article by Bruce Stuart, Dennis Shea, and Becky Briesacher examines statistics on prescription drug coverage among Medicare beneficiaries. They note that in 1996, data suggests that:
    • 52.7% of noninstitutionalized Medicare beneficiaries had prescription drug coverage throughout the year,
    • 28.4% had no prescription drug coverage, and
    • nearly 19% had prescription coverage for only part of the year.
    They find, not surprisingly, that those with prescription drug coverage used more medications that those without such coverage. A somewhat more surprising result is that the total cost to the patient of prescriptions is higher among those with prescription drug coverage. The Adobe Acrobat viewer plugin is required to view these documents. You may download this viewer by clicking here.

  • Congressional Budget Office, "Updated Estimates of Spending for the Medicare Prescription Drug Program"
    This March 4, 2005 CBO letter contains estimates of the projected cost of the Medicare prescription drug program. It is estimated that the net Medicare spending for this plan will be $593 billion for the years 2006-2015.


Different Perspectives in the Debate
  • John E. Calfee, "Pharmaceutical Price Controls Are a Prescription for Disaster",filter./pub_detail.asp
    In this July 22, 1999 article, John E. Calfee examines the effect of prescription drug costs on the elderly. He notes that the increase in the cost of prescription drugs is primarily the result of the increased use of existing drugs and the introduction of many new (and more expensive) drugs. Calfee voices concern that a medicare drug benefit plan would result in the introduction of price controls that would stifle innovation.

  • James Frogue, "How to Provide Prescription Drug Coverage Under Medicare"
    In this June 16, 1999 Heritage Foundation Backgrounder, James Frogue examines alternative methods of providing prescription drug coverage to Medicare recipients. He argues that providing Medicare coverage of prescription drugs would be too expensive and suggests a more limited system of providing prescription drug coverage to those elderly individuals who need assistance. Frogue cites Bureau of Labor Statistics data that indicate that a typical elderly individual spent only $637 annually on both prescription and non-prescription drugs.

  • James Frogue, "Why Price Controls on Prescription Drugs Would Harm Seniors"
    James Frogue argues against price controls on prescription drugs in this May 4, 1999 Heritage Foundation study. He argues that Congress should develop a sound Medicare prescription drug program that does not include price controls.

  • Lawrence W. Reed, "Counting the Cost of Prescription Drug Price Controls"
    Lawrence W. Reed, in this May 31, 2000 online article, argues that the U.S. is a leader in the development of innovative pharmaceutical products because it does not face widespread price controls on prescription drugs. He argues that Medicare prescription drug coverage would ultimately result in price controls on the cost of prescription drugs. Reed argues that such price controls would reduce the incentive for firms to engage in research and development of new pharmaceutical products. He cites a study that indicates that "every dollar spent on medical drugs translates into a decline of four dollars in spending on care in hospitals."

  • Anna Cook, "Why Different Purchasers Pay Different Prices for Prescription Drugs"
    In this August 2000 online study, Anna Cook notes that there is substantial price dispersion across customers in the market for prescription drugs. She notes that large purchasers receive substantial discounts. Cook notes that this results in the largest costs being borne by uninsured individuals.

  • Esther "Tess" Canja, "Statement Before the Senate Finance Committee on the Future of Medicine"
    Esther "Tess" Canja, AARP President-Elect, discusses some of the problems facing Medicare in this May 27, 1999 testimony. One of the major problems is the retirement of the baby-boom generation at a time when lifespans have become longer as a result of improved medical coverage. Canja argues that prescription drugs have become an increasingly important component of modern health care. She argues that prescription drug coverage should be a part of the basic Medicare package. Canja argues that the adverse selection problem raises the cost and significantly limits the benefits associated with private Medigap programs that provide subscription drug coverage.

  • Patricia Barry, "Chasing Drugs: Many Readers Take Drastic Steps to Get Prescription Medicine"
    In this October 2003 online article, Patricia Barry discusses the responses submitted by AARP members to an AARP Bulletin "Sound Off" questionnaire concerning prescription drug use and expenditures. She notes that 40% of the respondents reported that they had either reduced or skipped doses of presecribed medications due to high costs.

  • Patricia Barry, "More Americans Go North for Drugs"
    Patricia Barry examines the growing volume of prescription drug purchases from Canada by retirees in this online April 2003 AARP Bulletin article. She states that approximately 1 million U.S. citizens have been purchasing drugs from Canada. Barry suggests that the internet has played a major role in the volume of cross-border drug purchases. While such purchases are illegal, there has been little attempts to enforce restrictions on the importation of drugs from Canada.

  • Patricia Barry, "Why Drugs Cost Less Up North"
    In this June 2003 online article, Patricia Barry examines the reasons for lower prescription drug prices in Canada. She observes that most of the prescription drugs that are imported from Canada to the U.S. were originally produced in the U.S. Barry suggests that a major reason for the difference in prices is the effect of government policies. She describes the regulatory process that helps keep drug prices lower in Canada. Under the Canadian system, firms are faced with guidelines designed to prevent excessively high prices. Barry argues that this environment encourages firms to charge low prices, with government intervention on pricing decisions being used only in very rare cases. She suggests that the uniform pricing system used for drugs in Canada is superior to the system of price discrimination in the U.S. in which non-insured individuals pay higher prices than those who have prescription drug insurance coverage.

  • William C. Weller, "Estimated Impact on Medigap Premiums of Potential Changes Suggested as Part of Medicare Reform"
    This May 1999 study, conducted by William C. Weller of the Health Insurance Association of America, investigates the effects of several proposals to reform Medicare. He notes that the cost of prescription drug coverage is rising faster than other medical care costs. Weller voices concern that several proposals for reforming Medicare would result in either substantially higher Medigap insurance costs or the elimination of the Medigap plans offered by some insurers.

  • Thomas R. Saving, "Answering the Myths about Social Security"
    Thomas R. Saving provides information about the financial status of the Social Security and Medicare programs in this March 22, 2005 online policy brief. He argues that the funding crisis for these programs should be dealt with immediately to prevent the cost of dealing with the shortfalls from being more severe in the future. He recommends a shift to private retirement accounts.

  • Sue A. Blevins, "How a Medicare Prescription Drug Program Will Affect Taxpayers and Seniors: A Historical Perspective"
    Sue A. Blevins argues that the actual cost of Medicare programs have historically exceeded their projected costs. She argues that the Medicare program has actually raised Medicare costs for the elderly. She suggests that a safety net for low-income elderly individuals is preferable to a mandated Medicare prescription drug plan.

  • America's Senior Care Pharmacists (ASCP), "ASCP's Prescription for Quality Care: Preventing Medication-Related Programs Among Older Americans"
    In this online article, ASCP argues that many senior citizens have conditions that remain untreated because of the high cost of prescription drug care coverage. They also note that inappropriate drug therapy and interaction effects are common problems in the elderly population. ASCP argues that a well designed Medicare prescription drug plan would provide substantial benefits.

  • Robert Kuttner, "The Right is Wrong on Prescription Drugs"
    Robert Kuttner argues that a Medicare prescription drug coverage program is desirable in this online article. He notes that the proportion of elderly individuals with prescription drug coverage is declining while the cost of prescription drugs is rising rapidly. Kuttner indicates that approximately half of all prescriptions are unfilled because elderly individuals cannot afford the medications that are prescribed for them.

  • Alan B. Krueger, "Economic Scene: The model doesn't quite fit Medicare drug insurance"
    In this October 12, 2000 New York Times article, Alan B. Krueger critically examined the Medicare prescription drug plans proposed by the Bush and Gore campaigns during the 2000 Presidential elections. He argued that existing Medigap plans are effectively equivalent to prepaid prescription drug plans (due to their caps on expenditures). Krueger argues that the Bush plan of subsidized insurance was not sufficiently generous to encourage many people to join. While the Gore plan would reduce adverse selection problems by encouraging more people to join, Krueger argues that it would result in high costs.

  • Merrill Matthews, "Drug Company Profits Aren't a Problem, They're the Solution"
    In this July 7, 2001 online article, Merrill Matthews argues that concern over drug company profits is misdirected. He notes that large profits in the industry provide incentives for research and development expenditures that can result in substantial health benefits.

  • Doug Bandow, "Manufacturing a Pharmaceutical Crisis"
    Doug Bandow argues, in this October 2, 2000 article, that there is no pharmaceutical crisis. He suggests that price controls in other countries have resulted in a substantial reduction in innovation and in the quality of medical care.

  • Harvard Medical School Office of Public Affairs, "Who Will Manage the Proposed Medicare Prescription Drug Benefit?"
    This May 6, 2000 press release summarizes a study by Harvard researchers who argue that a Medicare drug plan should be overseen by multiple pharmacy benefit managers. They suggest that such a plan should encourage competition to keep costs relatively low.

  • Jadadeesh Gokhale, "An Evaluation of Medicare's Prescription Drug Policy"
    Jadadeesh Gokhale raises several objections to the Medicare prescription drug program in this September 22, 2005 Congressional testimony. He argues that this program:
    • is unnecessary since most retirees already had prescription drug coverage,
    • replaces a functioning private market system with a system that he believes will benefit low-income retirees at the expense of higher income retirees,
    • will result in a higher rate of inflation for prescription drugs, leading to higher prices and reduced insurance coverage for those who are younger and working,
    • dramatically increases the rising shortfall in the Medicare program, and
    • reduce the incentive for younger individuals to save.

  • Joseph Antos and Jagadeesh Gokhale, "Medicare Prescription Drugs: Medical Necessity Meets Fiscal Insanity"
    Joseph Antos and Jagadeesh Gokhale argue against the Medicare prescription drug program in this February 9, 2005 Cato Institute Briefing Paper. They note that the projected funding shortfall for Medicare is six times as large as the more widely known projected shortfall for Social Security. They suggest that workers born before 1965 will benefit from this plan, but younger workers (and future generations) will suffer net losses as a result of this plan. Antos and Gokhale suggest replacing this plan with a set of market-based reforms. The Adobe Acrobat viewer plugin is required to view these documents. You may download this viewer by clicking here.

  • George Reisman, "Kill The Prescription Drug Benefit"
    George Reisman argues against the Medicare prescription drug program, in this March 1, 2005 online article. He notes that the projected cost over the first 10 years is now $300 billion more than its original estimate. Reisman suggests that the tax cost of this program is too high and that it will result in pressure to regulate prescription drug prices. He argues that such interference with the market mechanism will have adverse long-term effects on the pharmaceutical industry.

  • AARP, "Medicare Prescription Drug Coverage"
    The AARP Medicare Prescription Drug Coverage website provides links to studies examining the effectiveness of the prescription drug benefit program. It also provides links to an extensive collection of speeches, studies and reports that support the case for prescription druge coverage for Medicare recipients.

  • Robert E. Moffitt and Brian M. Riedl, "Medicare's Deepening Financial Crisis: The High Price of Fiscal Irresponsibility"
    Robert E. Moffitt and Brian M. Riedl raise concerns over the rising cost of the Medicare program in this March 25, 2004 Heritage Foundation article. They summarize a study that reports that the Medicare program will account for 24% of all federal income tax revenue in 2019 and over half of all federal income tax revenue by 2042. They argue that the prescription drug coverage plan will crowd out the private insurance prescription drug coverage plans that most retirees now have.

  • Dean Baker, "The Savings from an Efficient Medicare Prescription Drug Plan"
    In this January 2006 Center for Economic and Policy Research online article, Dean Baker argues that the current Medicare Prescription Drug Plan should be replaced by one in which the government negotiates with pharmaceutical companies to lower the cost of medications. He notes that the prices of prescription drugs are lower in foreign countries in which the government negotiates lower prices. The U.S. Veteran's Administration also buys prescription drugs at negotiated prices that are substantially lower than those paid under the Medicare prescription drug plan. The Adobe Acrobat viewer plugin is required to view these documents. You may download this viewer by clicking here.

©2006  South-Western.  All Rights Reserved  |   DISCLAIMER