Analytic dimensions of a prescription-medication benefit in medicare

Many analysts believe that the lack of coverage for outpatient prescription medications represents a conspicuous deficiency in the Medicare benefits package.

This paper uses insurance theory to design and estimate the costs of a Medicare catastrophic-medication outpatient benefit.

For efficiency and equity purposes, and to accommodate the tradeoff between the cost to the federal government and the insurance value of such a benefit to Medicare enrollees, we favor a benefit that would be means-tested by employing deductibles, coinsurance rates, and catastrophic limits, all of which would be progressively graduated for 7 household income classes. For equity reasons, we propose that the government's share of the medication benefit be financed from the general tax fund, using the progressive income tax. Another source of potential savings within the Medicare program that could pay for a medication benefit would be elimination of fraud, waste, and abuse.

Because our proposal addresses both the efficiency and equity dimensions of a Medicare outpatient medication benefit, we believe it is worthy of serious consideration by both policymakers and Congress.