Impact of an Annual Dollar Limit or "Cap" on Prescription Drug Benefits for Medicare Patients FREE

Since the enactment of Medicare in 1965 to provide health insurance for elderly and disabled persons in the United States, both the cost of and health benefits from prescription drugs have increased remarkably.¹ Despite this, traditional fee-for-service Medicare does not include an outpatient prescription drug benefit. In 1999, 1 in 4 of all Medicare beneficiaries lacked any drug coverage and many others likely had coverage for only part of the year.^2- 3

To overcome political barriers to providing a national Medicare drug benefit, a benefit design that provides adequate coverage at reasonable costs is required. One design feature, an annual dollar limit, or "cap," on drug benefits, has been considered.⁴ Such caps on drug benefits are common in Medicare managed care (Medicare + Choice) plans and are a part of all private supplemental Medigap drug benefit plans. The value of caps is that health plans can provide some benefits to many people at a predictable level of total expenditures for the plan in a market in which medication costs are increasing rapidly.

Medicare + Choice plans provide a natural setting for studying the effects of drug benefit caps. In 2002, 94% of Medicare + Choice drug benefits covering brand-name medications had annual dollar caps. Some 73% of these caps were set at $1000 or less and 46% were set at $750 or less.⁵ Although drug benefits in these plans have eroded, Medicare + Choice plans remain an important source of pharmacy coverage and also cover other essential services, such as vision and preventive care, that are not covered in traditional fee-for-service settings. A contributing factor to this erosion is that reimbursement has not kept pace with increasing medication costs. Approximately 15% or nearly 6 million Medicare beneficiaries are enrolled in Medicare + Choice plans, and in 1999, 1 in 5 Medicare beneficiaries who had drug coverage obtained their benefits through Medicare + Choice.² In addition, many beneficiaries choose to remain in or join Medicare + Choice to limit their financial risk.

In this study, we determined how cap levels affect the percentage of Medicare + Choice patients who exceed their benefit cap. In addition, for patients who exceeded their cap, we examined their out-of-pocket drug expenditures before and after exceeding the cap and the top medications contributing to their total drug expenditures.

We analyzed all 2001 prescription claims for patients enrolled in a large Medicare + Choice plan in a single state with a mature managed care market. We included all patients who filled at least one prescription in that year (n = 438 802).

In this plan, caps ranged from $750 to $2000 per year. Benefit cap levels are determined by geographical location, in part because of local market competitiveness and because Medicare-capitated payments to Medicare + Choice plans vary by region. Medicare capitation rates are based on a formula that takes into account the average spending by Medicare fee-for-service members in a given region.² Thus, a health plan may offer more generous benefit caps in a county with a greater number of competing Medicare + Choice plans and higher Medicare capitation payments. In this study, a patient's benefit cap was determined solely by where he/she lived, and patients could not purchase higher or lower caps by paying different premiums. Therefore, selection bias within the plan was unlikely. However, patients could choose to enroll in another plan, buy Medigap supplemental insurance, or go without prescription coverage.

Only the plan's share of prescription costs was applied to the cap. For example, if a 30-day prescription cost $75 and the patient paid a $25 co-payment, the plan paid the remaining $50 if the patient had not yet exceeded the cap. The $50 paid by the plan would be applied to the cap (ie, subtracted from the patient's annual benefit). Once the patient exceeded the benefit cap, he/she paid the entire cost of prescriptions for the remainder of the year. Patients had access to discounted prices negotiated by the health plan before exceeding the cap and by mail order after exceeding the cap. Pharmacies could give discounted prices to patients who exceeded the cap but were not required to do so. The plan had a 2-tier (brand-name/generic) co-payment system, with co-payments ranging from $7 to $30. All patients in the study population had a single formulary.

We identified the plan's Medicare patients who exceeded their caps in 2001 and calculated the percentage of patients exceeding each cap level. Because patients qualify for Medicare based on age (≥65 years) or on disability alone (≤64 years), we also calculated the rates of exceeding the cap for these subgroups. To take into account patients with dual coverage with Medicaid, which may pay for some medications, we did sensitivity analyses in which all Medicaid-Medicare patients were designated as having not exceeded their cap.

We calculated patients' out-of-pocket prescription costs before exceeding the cap by summing their prescription co-payments directly from pharmacy claims. After patients exceeded their cap, we estimated what their potential out-of-pocket costs would be if they chose to continue using the same prescriptions as they had used before exceeding the cap. We based these estimates on total prescription expenditures before exceeding the cap, which included costs previously paid by the plan plus co-payments paid by the patient, since patients would have to pay the entire prescription cost after exceeding the cap. This assumed that patients were able to obtain the same discounted prices as the plan. Potential out-of-pocket drug costs had to be estimated after patients exceeded the cap because prescription claims were incomplete afterward.

To understand which medications contributed the most to the prescription expenditures of patients who exceeded their cap, we identified all drugs used by these patients in 2001. For each drug, we summed all expenditures before exceeding the cap for that drug by patients who exceeded the cap or by the plan on behalf of these patients. These total expenditures were based on actual prices paid. For drugs with generic equivalents, expenditures for generic and brand-name prescriptions were added together. Drugs were then ranked from highest to lowest total expenditures, and the top 20 drugs were studied.

To provide insight into the retail prices of these top 20 drugs, we obtained prices from a popular online pharmacy for a 30-pill or 1-inhaler prescription at the lowest dosage.⁶ The lowest rather than the most common dosage was used because, for many medications, there may not be a single common dosage. This decision results in a conservative estimate of cost for each medication. Drugs were characterized as being generally used to treat a chronic or a nonchronic condition. To determine whether potential cost savings were available by switching to generic drugs, we identified drugs available in generic form or with a generic drug available in the same treatment class in 2001. The study protocol was reviewed and approved by the University of California, Los Angeles, Institutional Review Board.

Our sample represented 438 802 Medicare + Choice patients in the plan who filled at least 1 prescription in 2001. The study population had a mean of 75.4 years of age, 60% were women, 94% were aged 65 years or older, and 7% had dual coverage with Medicaid. Compared with a national sample of Medicare + Choice beneficiaries from the Medicare Current Beneficiaries Survey,⁷ our study sample was more likely to be female, older, and less likely to have dual Medicaid coverage (Table 1). We found that demographic characteristics and estimated total annual prescription costs did not vary substantially by cap level (Table 2).

A total of 22%, 14%, and 4% of patients exceeded benefit caps of $750, $1000, and $2000, respectively (Figure 1). On average, patients who exceeded the cap did so 3 months before the end of the year. Patients who exceeded their cap had a mean (SD) age of 73.7 (10.1) years, 60% were women, and 88% were aged 65 years or older.

In a subgroup analysis by age, patients aged 65 years or older comprised 94% of the study population, and their rates of exceeding the cap were similar to overall rates for the study population. Patients aged 64 years or younger were much more likely to exceed the cap than older patients. A total of 31%, 22%, and 9% of these younger patients exceeded caps of $750, $1000, and $2000, respectively.

Among patients who exceeded the cap, those with dual Medicaid coverage comprised 10% of patients overall, 8% of those aged 65 years or older, and 25% of those aged 64 years or younger. A sensitivity analysis in which patients with dual Medicaid coverage were designated as having not exceeded their cap did not substantially change the overall rates at which the study population exceeded the cap (20%, 13%, and 3% for caps of $750, $1000, and $2000, respectively). The effect was more pronounced in patients aged 64 years or younger, among whom the rates exceeding the cap were 23%, 19%, and 7% for caps of $750, $1000, and $2000, respectively, once patients with dual Medicaid coverage were counted as having not exceeded the cap.

Patients who exceeded their cap had median out-of-pocket drug costs of $79 to $100 per month before exceeding the cap (across the different cap levels). Once patients exceeded their cap, they faced estimated median out-of-pocket costs of $179 to $305 per month to continue using the same prescriptions as they had used before exceeding the cap (Table 2). This represents a potential 2- to 3-fold increase in out-of-pocket costs to maintain the same prescription use as before. Total out-of-pocket drug costs for patients who exceeded the $750 cap ranged from $564 per year at the 5th percentile to as high as $4201 per year at the 95th percentile. Median total out-of-pocket drug costs for patients who exceeded the cap ranged from $1391 to $1712 across the different cap levels (Table 2).

A total of 781 unique drugs were represented in the pharmacy claims for patients who exceeded their cap in 2001. Because the top 20 drugs ranked by highest expenditures comprised 43% of all total prescription expenditures among patients who exceeded the cap, we further characterized the use, cost, and generic alternative availability for these medications (Table 3). Among these top 20 drugs, 15 were for management of chronic conditions, such as hypercholesterolemia, diabetes, cardiovascular disease, dementia, osteoporosis, stroke prevention, and asthma/emphysema. The remaining 5 were for treating conditions that were potentially chronic but not necessarily so, such as esophageal reflux/gastric ulcer disease, pain/inflammation, and depression.

Online retail prices for these top 20 drugs ranged from $3 to $144 for a 30-pill or 1-inhaler supply.⁶ Half of these drugs had retail prices of $50 or more for the lowest dosage levels. Three (metformin, diltiazem, and nifedipine) of the 20 top drugs had lower-cost generic equivalents. For an additional 4 drugs (pravastatin, atorvastatin, paroxetine, and cerivastatin), generic medications were available in the same treatment class. For example, paroxetine, an antidepressant medication ranking fifth in total expenditures, had no generic equivalents in 2001. However, generic fluoxetine is available in the same antidepression treatment class of selective serotonin reuptake inhibitors.

This study examined the impact of an annual dollar cap on drug benefits for Medicare beneficiaries. At lower cap levels, up to 1 in 5 of the plan's patients exceeded their cap and faced potentially high increases in out-of-pocket costs to maintain the same prescription use as before. The majority of medications comprising their drug expenditures were for treating chronic conditions, and lower-cost generic drugs were available for only some of these medicines.

The implication is that many Medicare patients with drug benefits through Medicare + Choice may have coverage for only part of the year because of low benefit caps. In 2002, more than 73% of beneficiaries who were enrolled in a Medicare + Choice plan with a drug benefit had drug coverage of $1000 or less.⁵ At higher cap levels, the majority of patients in this study had coverage throughout the year; however, as caps decreased to $1000 or lower, the number of patients who exceeded their cap increased to more than 1 in 8. Although a capped drug benefit is better than none, health plans and policymakers who wish to provide a Medicare prescription drug benefit need to consider carefully how generously to set cap levels. Given limited resources to finance drug benefits, lower cap levels can allow insurers to offer some drug benefits to a greater number of people. However, if benefit caps are set too low, such coverage may be inadequate for many beneficiaries with chronic illnesses who are poor and require many expensive and necessary medications. Patients who are covered by the Medicaid program have an additional drug benefit that potentially could be used once a beneficiary passes the cap. However, only 8% of the elderly beneficiaries in our sample who exceeded the cap had coverage through Medicaid. This safety net provides access to medications for few of those who exceed the cap.

We could not determine the impact of higher out-of-pocket costs on actual medication use because pharmacy claims were incomplete after patients exceeded the cap and we did not have data on prescription use outside of the plan. However, these beneficiaries may be at increased risk of decreasing their use of medications because of cost. In a study of Medicare + Choice patients with benefit caps, 1 in 6 patients reported stopping a medication because of cost.⁸ In addition, several studies show that higher cost sharing for Medicare beneficiaries generally leads to decreased medication use.^9- 14 Appropriate levels of cost sharing for specific medications can decrease use without harming health¹⁵; cost sharing for older persons may also lead to higher rates of adverse events.^16- 17 Actual out-of-pocket costs after exceeding the cap may have been lower than the estimates reported herein because some patients may have discontinued use of their medications. However, because the majority of medications used by these patients were for management of chronic conditions, there could be downstream health implications if medications were suddenly discontinued. Also, Medicare patients who exceed their caps are more likely to disenroll from their plans, perhaps in part to obtain drug coverage elsewhere, and healthcare can be disrupted.¹⁸

To encourage cost-effective medication use, drug benefit designs need to include some form of patient-level cost sharing, eg, co-payments, deductibles, or caps. It is likely that decisions about the level and type of cost sharing and the ultimate generosity of the benefit will need to be made without full knowledge of the influence on health outcomes. For instance, it is not known whether higher cost sharing in the form of co-payments that are constant throughout the year is preferable to a benefit with lower initial co-payments and an annual cap that may be exhausted by a proportion of beneficiaries before the end of the year.¹⁹ An advantage of a capped benefit design is that health plans can offer drug benefits to more members than if benefits were uncapped, since total prescription expenditures for the plan become more predictable.

In this study, benefit caps were applied to costs paid by the plan. Thus, the likelihood of patients exceeding a cap depends on insurance features, such as co-payments and deductibles, that affect the distribution of cost between patients and the plan.²⁰ Paradoxically, a benefit design with lower co-payments can lead to patients exceeding the cap quicker because a larger share of drug costs is paid by the plan and applied to the cap.

Although caps proposed for a national Medicare drug benefit are set at higher levels (eg, $2000), these caps are applied to total prescription expenditures.⁴ In this study, the 1 in 10 beneficiaries who exceeded a $1200 cap on drug benefits paid by the plan paid an average of $845 in out-of-pocket costs. These patients had average total prescription expenditures of $2045 and would likely have exceeded a $2000 cap on total expenditures. Ultimately, the impact of benefit caps in a national Medicare prescription benefit will also depend on whether other benefit features, such as subsidies for low-income beneficiaries and catastrophic drug coverage, are included. Patients in this study also benefited from discount prescription prices negotiated by the plan, while Medicare beneficiaries covered under a national Medicare drug benefit may have to pay retail prices.

There are several important limitations to this study. It was limited to Medicare + Choice beneficiaries in a single plan and state and may not be representative of all Medicare beneficiaries. We were not able to measure medication use and health outcomes of patients who exceeded the cap; thus, the actual impact on beneficiaries' health remains unknown. However, the top medications comprising the drug expenditures of patients exceeding caps were mainly used for treating chronic conditions such as heart disease, diabetes, and stroke prevention. The role of prescription drugs in preventing morbidity and mortality in many chronic diseases is well accepted and generally nondiscretionary. Thus, if treatment is stopped even for a short period after patients exceed their cap, there may be negative health consequences. Our study was also limited to drug benefits with a single formulary. However, although a different formulary may change specific drugs, it is unlikely to change substantially whether an entire treatment class (eg, 3-hydroxy-3-methylglutary coenzyme A reductase inhibitor drugs for treating hypercholesterolemia) appears in the rankings of drugs by highest total expenditures.

It is also important to consider how more cost-effective prescribing would have affected the likelihood of beneficiaries exhausting their drug benefits. In our study, 7 of 20 top drugs ranked by expenditures had a lower-cost generic equivalent or a generic medication available in the same treatment class. Although we did not measure how often generic drugs were used in this study, an increase in use of generic equivalents, where available and appropriate, could decrease drug costs for both patients and health plans. Other medications, such as proton-pump inhibitors and cyclooxygenase 2 inhibitors, accounted for 3 of the 20 top drugs and could potentially be replaced by less expensive over-the-counter drugs. We also indicated the availability of generic equivalents for 2001, and further cost savings are now available for medications whose patents have expired since then, such as metformin, omeprazole, and lovastatin.⁶ If wisely used, prescription drugs can maintain health and decrease total health care costs.¹

Even Medicare patients with drug coverage may have limited coverage because of caps on benefits. Since exceeding the cap could negatively affect medication use and health, patients and clinicians alike need to take active roles in balancing medication use and cost to make the most of these limited drug benefits. As we look toward expanding prescription coverage, it is imperative that health care professionals, government officials, and the public work together to develop a drug benefit for elderly and disabled patients that protects their health but at the same time promotes cost-effective and appropriate use of medications.