ABSTRACT Title Dollars to Doughnuts: Predicting Prescription Drug Costs of Beneficiaries and the Medicare Program Under Part D Authors M. Christopher Roebuck, MBA1 Dominick Esposito, PhD2 Meredith Lewis, BS1 1 Caremark, Hunt Valley, MD 2 Mathematica Policy Research, Princeton, NJ Research Objective To examine drug utilization and out-of-pocket costs of Medicare beneficiaries using a Medicare prescription drug discount card, including beneficiaries who qualified for the Transitional Assistance Program (TAP). Study Design Data included eligibility and prescription claims for enrollees in 34 separate Medicare drug discount card programs managed by Caremark. We used claims data to calculate annualized utilization and costs for beneficiaries and, in turn, simulated Medicare beneficiaries’ out-of-pocket costs (excluding premiums) and costs to Medicare under the Part D benefit. We estimated a generalized linear model (GLM; gamma distribution with log link function) for both beneficiary costs and Medicare payments under Part D to identify factors associated with drug expenditures. A probit model for the likelihood of falling into the doughnut hole was also specified. Explanatory variables in the models included demographic characteristics (age, gender, region, and TAP status), the generic dispensing rate, and 62 disease indicators derived using a pharmacy-based classification system. Population Studied Beneficiaries enrolled for a minimum of six months with at least one claim between June 2004 and November 2005 (n=37,425). Participants were largely female (67%), between the ages of 65 and 80 (70%), and had an average of 2.2 medical conditions, with hypertension (52%), hypercholesterolemia (27%), and diabetes (16%) being among the most prevalent. Principal Findings On average, beneficiaries in the sample filled 19 prescriptions at an annual cost of $538. Under the standard Part D benefit, mean total drug expenditures for these seniors would be $849 annually with $412 paid by the beneficiary and $437 paid by Medicare. About 6% of these beneficiaries have annual spending greater than $2,250 (the benefit’s “doughnut hole”). TAP beneficiaries (46%) would have higher out-of-pocket costs under Part D than the drug discount card ($429 versus $256; p<0><0><0><0.001). Conclusions TAP beneficiaries who do not qualify for subsidized coverage under Part D will face higher out-of-pocket costs than under the discount drug card program, assuming fixed drug utilization. Increased use of generic drugs in proportion to brand name drugs would benefit the Medicare program more than beneficiaries, on average, due to the standard benefit’s structure. Implications for Policy, Delivery, and Practice In choosing whether or not to enroll in Medicare Part D, seniors will compare their annual premium with the expected payout of the Medicare program. These results suggest the average, risk-neutral beneficiary would only enroll at monthly premiums below $36 ($437 divided by 12). If faced with higher out-of-pocket costs, low-income beneficiaries who do not qualify for subsidies may reduce their prescription drug utilization potentially resulting in adverse health effects. Finally, to reduce costs to both beneficiaries and taxpayers, Medicare should promote the substitution of generic medications whenever possible. Assuming 29 million Medicare Part D enrollees, the Medicare program could save more than $1.2 billion annually by increasing the generic dispensing rate 10%.

1. Dollars to Doughnuts: Predicting Prescription Drug Costs of Beneficiaries and the Medicare Program under Part D M. Christopher Roebuck 1 Dominick Esposito 2 Meredith Lewis 1 Jan Berger 1 1 Caremark Rx, Inc. 2 Mathematica Policy Research, Inc. Academy Health Annual Research Meeting Seattle, WA June 26, 2006 Received “Best Abstract Award”

5. Sample Characteristics Note: All differences in means across TAP and Non-TAP groups are statistically significant (p<0.01) using Kruskal-Wallis equality of populations test, except High Cholesterol. 11% 10% 13% Depression 12% 10% 14% Allergies 15% 12% 18% Osteoarthritis 15% 13% 17% Hypothyroidism 16% 14% 19% Diabetes 27% 27% 27% High Cholesterol 52% 45% 60% Hypertension 2.2 2.0 2.5 Number of Conditions 76 75 76 Mean Age 33% 38% 26% Male Total (n=37,425) Non-TAP (n=20,108) TAP (n=17,317)

6. Annualized Utilization and Costs under Medicare Drug Discount Card Program Note: All differences in means across TAP and Non-TAP groups are statistically significant (p<0.01) using Kruskal-Wallis equality of populations test. $849 $781 $928 Total $311 $0 $672 Medicare (TAP Subsidy) $538 $781 $256 Enrollee (Out-of-Pocket) Annual Drug Costs 19 15 23 Total 10 7 12 Generic 9 8 11 Brand Annual Number of Rxs Total (n=37,425) Non-TAP (n=20,108) TAP (n=17,317)

7. Standard Medicare Part D Benefit Enrollee Out-of-Pocket Cost Share $250 $2250 $5100 100% coinsurance $0 25% coinsurance $2/$5 copay or 5% coinsurance Doughnut Hole

9. Beneficiaries’ Mean Out-of-Pocket Costs

10. Percent of Beneficiaries in the Doughnut Hole