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Reduce Prescription Drug Costs for Seniors


Medicare beneficiaries rely heavily on prescription drugs, but more than a third of them have no prescription drug insurance coverage, and many more have insufficient coverage. In Texas, an estimated 748,000 Medicare recipients lack prescription drug coverage. Drug prices continue to increase at rates that far exceed inflation, making affordability a major concern for seniors. Texas Medicare recipients should be allowed to purchase pharmaceutical drugs at the lower Medicaid price.


Medicaid, a joint federal-state program that purchases health services for the poor, provides coverage for outpatient prescription drugs. The federal Medicare program, which provides similar services for Americans aged 65 years and older, does not. Some Medicare beneficiaries can purchase supplemental prescription drug coverage, but these plans generally are expensive and limited in scope.

Some retirees have employer-sponsored prescription drug coverage, of course, but such coverage is becoming increasingly rare. Between 1999 and 2001, the share of firms with 200 or more employees offering retiree health benefits declined from 41 percent to 34 percent.[1] As a result, a growing number of older Americans are paying a larger share of prescription drug costs out of their own pockets.

Older Americans with prescription drug insurance coverage pay lower prices largely because governments and private insurers can use volume purchasing to obtain better prices. On average, insurers, health maintenance organizations (HMOs) and Medicaid purchase brand-name prescription drugs for 20 percent to 40 percent below the average wholesale price (AWP).[2] The retail price at the pharmacy generally is AWP plus 4 percent.[3]

Prescription drug price increases have a greater impact on seniors because they rely more heavily on prescription drugs and often live on a fixed income. A 1998 survey, for instance, found that people aged 65 and older made up 13 percent of the U.S. population but accounted for 34 percent of all prescription drugs dispensed. Seniors, moreover, accounted for 42 percent of all prescription drug spending because they tend to need more costly medications.[4]

Over the past few years all Medicare beneficiaries’ out-of-pocket prescription drug costs have increased. Their average annual prescription drug spending rose from $813 in 2000 to $1,051 in 2002.[5] Medicare beneficiaries without supplemental drug insurance coverage, however, pay even more.

Medicare beneficiaries without drug coverage fill fewer prescriptions. Medicare beneficiaries with more than three chronic conditions and without drug coverage filled an average of 26 prescriptions per year, compared to 33 for those with drug coverage.[6] Seniors on limited incomes often face difficult decisions, which can include cutting back on prescription drugs to pay for food, rent or utility bills. Such persons often reduce their drug spending by taking their medications every other day or reducing their daily dosage.

Between January 1997 and January 2002, the prices of the 50 prescription drugs most frequently used by seniors rose by an average of 27.6 percent, more than twice the rate of inflation.[7] During 2001 alone, the prices of these top 50 drugs rose by 7.8 percent, nearly three times the general rate of inflation (excluding energy) of 2.7 percent.

The prices for a number of common drugs are rising even more quickly. Drugs whose prices rose by three or more times the rate of inflation include Prilosec and Prevacid, gastrointestinal medicine; Lipitor and Pravachol, cholesterol-lowering drugs; Celebrex, an anti-inflammatory; Premarin, estrogen replacement; Claritin, an antihistamine; K-Dur 20, a potassium replacement; Glucophage, a diabetes treatment; and Detrol, a drug for overactive bladders.[8]

Manufacturers’ discounts

Congressional debate over Medicare prescription drug coverage has led several drug manufacturers to introduce their own discounts to assist low-income senior persons. For example, starting on March 1, 2002, Pfizer Inc. began issuing discount cards offering eligible low-income Medicare patients 30-day supplies of its drugs for just $15. The discount cards are available to Medicare patients who are not covered by other insurance plans and have annual gross incomes of less than $18,000 based on individual income tax returns or $24,000 for couples filing joint returns.[9]

Similarly, Eli Lilly and Co. is offering low-income Medicare patients a discount card allowing them to purchase many of its medicines at a cost of $12 for a 30-day supply. GlaxoSmithKline and Novartis also provide discount cards to the low-income senior that offer 25 to 40 percent off retail prices.[10]

Many advocates for seniors, however, see the discount cards as a limited, interim measure. Others call them a marketing ploy; they note that some of the cards have monthly fees, do not cover all the drugs patients require and can be confusing to seniors. Several drug companies recently joined forces to address some of these concerns by creating a “Together Rx Card” program for Medicare beneficiaries. Each participating company will set its own discount rates; discounts will range from 20 to 40 percent on more than 150 drugs.[11]

Federal efforts

Congress has repeatedly debated various proposals to add a prescription drug benefit to Medicare, without any success to date. On July 24, 2002, two Medicare drug benefit bills before the Senate were rejected when senators again failed to reach a compromise. President George W. Bush considers a Medicare prescription drug benefit a top priority, however, and has proposed several initiatives aimed at helping seniors obtain prescription drugs at a discount.[12]

The president has proposed that the federal government authorize states to use Medicaid money to provide drug coverage; this plan would allocate $77 billion over 10 years to help states cover medication for low-income seniors. Medicare beneficiaries with annual incomes between 100 percent and 150 percent of the federal poverty level (between $11,600 and $17,415 for a couple) would be eligible. The federal government would cover 90 percent of the cost of the program while the states would cover the remaining 10 percent. The states would administer the assistance and determine eligibility.[13]

In addition, the Bush administration has proposed a Medicare-sponsored prescription drug card that would allow all Medicare-eligible beneficiaries to purchase prescription drugs at a discount. In September 2001, a federal judge determined that the administration lacked the legal authority to implement the drug discount card program without first publishing their proposal in the Federal Register and submitting it for public comment. On August 30, 2002, the Bush administration issued a final regulation for its Medicare drug discount cards. Thomas Scully, head of the Centers for Medicare and Medicaid Services, said that if the courts reject the most recent plan, the administration would ask for Congressional approval.[14]

State efforts

Many states have grown impatient with Congressional inaction and have developed their own prescription drug plans. Since the 1980s, 34 states have established programs using their own funds to provide some pharmaceutical coverage or assistance to low-income seniors and persons with disabilities who are not eligible for Medicaid.[15] Other states have created buyers’ clubs and purchasing cooperatives for low-income seniors.

California and Florida have required pharmacies wishing to participate in Medicaid to offer a prescription drug discount to Medicare recipients.

In February 2000, California began requiring pharmacies to sell pharmaceutical drugs to seniors at the Medicaid price; doing so allows seniors to benefit from the negotiating power of a large purchaser. To receive the discount price, a Medicare recipient must present the pharmacist with a Medicare card and a prescription. The pharmacist looks up the Medicaid price in the state’s computer and charges the patient no more than the Medicaid reimbursement level plus a 15-cent transaction fee to cover the cost of accessing the state’s price list. On average, the California Medicaid prescription drug price discount is about 25 percent.[16]

In July 2000, Florida implemented a program allowing Florida residents with a Medicare card to purchase their prescription drugs at a price no greater than the cost of the average wholesale price minus 9 percent, plus a dispensing fee of $4.50.[17]

Mail and Internet purchasing

Mail-order and Internet purchases of prescription drugs can generate substantial savings. One Arizona prescription drug survey found the lowest drug prices were in Mexico and on the Internet.[18]

The American Association of Retired Persons (AARP) Web site ( provides seniors with information on two pharmacy discount programs available to its members. AARP offers pharmacy services through participating neighborhood pharmacies and also through mail order for an annual enrollment fee of $15. Savings can range up to 47 percent.[19] Some drug manufacturers also provide AARP members with additional discounts on certain drugs.

AARP has a pharmacy Web site ( that allows consumers to search for prescription drug prices by drug name, strength and quantity. AARP members enrolled in the pharmacy program can purchase their prescription drugs at the AARP quoted prices. Some AARP mail order drug prices are lower than Texas or California Medicaid reimbursement prices (includes dispensing fee) and the AWP. In addition, many pharmacies provide mail-order services that can be accessed on the Internet, allowing seniors to shop for the best price.

As better drug pricing information becomes available to seniors from government and private sources, competition for their business will escalate. The marketplace for prescription drugs has become increasingly competitive and will force more local pharmacies to compete for seniors’ business.

Thousands of seniors already are taking advantage of lower prescription drug prices available through the Internet and abroad. Publicly listed Mexican pharmacies are expanding their border-store networks and targeting U.S. consumers. One of Mexico’s largest pharmacy chains, Farmacias Benavides, now derives 20 percent of its $100 million annual operating income from its pharmacies along the U.S.-Mexico border.

According to the head of the AARP Tucson office, about half of the city’s 50,000 retirees enter Mexico once a month to buy medicine. A Tucson company, Prescription RX-Express, runs a weekly bus service to a pharmacy in Mexico and also operates a mail-order service with the same pharmacy.[20]

Yet many consumers still prefer to shop at their local pharmacies, and are likely to continue doing so if they can obtain prices comparable to those offered elsewhere. Competitive drug prices also help local pharmacies; many persons who visit a pharmacy to purchase a prescription also make other purchases.


A. State law should be amended to allow Texas Medicare recipients to purchase pharmaceutical drugs at the Medicaid price.

This would extend prescription drug discounts, generally available only to large purchasers of health care, to Medicare recipients who lack drug insurance coverage. Recipients would be eligible to purchase prescription drugs at the Medicaid reimbursement amount, which includes the price of the drug plus a $5.27 dispensing fee and a 2 percent inventory management fee paid to the pharmacist. In addition, the Medicare recipient would pay the pharmacist a 15-cent transaction fee to cover the cost of accessing the state’s price list. Senior Texans with drug coverage through their employer-sponsored health insurance or supplemental insurance would have no incentive to participate in this program because they pay even lower prices for their prescription drugs.

B. State law should be amended to require the Texas Health and Human Services Commission (HHSC) to publish Medicaid drug prices on its web site. HHSC and the new Texas Department on Aging also should provide links to other web sites that sell prescription drugs to seniors at a discount.

The Texas Medicaid Program should add a drug pricing inquiry list to its web site. California’s Medi-Cal Web site ( currently lists the prices of 200 brand-name drugs most frequently used by seniors. HHSC and the new Texas Department on Aging also should provide links to other sources offering information on prescription drugs.

Fiscal Impact

An estimated 748,000 Texas Medicare recipients have no prescription drug coverage. If Texas allows these seniors to purchase prescription drugs at the Medicaid price they would save an average of 25 percent off retail. These savings would quickly add up for seniors with several chronic conditions. In 2001, average annual out-of-pocket drug costs among the Medicare population were $928, but this amount rises significantly when the person has several chronic conditions.[21]

This estimate assumes that Texas Medicare recipients would save about $257 million in the 2004-05 biennium. This represents net savings after the 15-cent transaction fee is deducted. The estimate also assumes that the program would not be fully implemented in 2004, but that thereafter, all eligible Medicare recipients would choose to participate in the program. Based on California’s experience, it would take some time to educate Medicare recipients about the program and its requirements.

These recommendations would have no effect on state finances.

Fiscal Year Gross Savings to Medicare Beneficiaries Transaction Costs (15 cents) Net Savings to Medicare Beneficiaries
2004 $ 86,768,000 $ 897,000 $ 85,871,000
2005 $173,536,000 $1,794,000 $171,742,000
2006 $176,868,000 $1,829,000 $175,039,000
2007 $180,264,000 $1,864,000 $178,400,000
2008 $183,725,000 $1,899,000 $181,826,000


[1]The Henry J. Kaiser Family Foundation, Medicare and Prescription Drugs (Washington, D.C., June 2002), p. 3.

[2]U.S. Department of Health and Human Services, Report to the President: Prescription Drug Coverage, Spending, Utilization, and Prices (Washington, D.C., April 2000), p. 98.

[3] U.S. Department of Health and Human Services, Report to the President: Prescription Drug Coverage, Spending, Utilization, and Prices, p. 102.

[4]Families USA, Bitter Pill: The Rising Prices of Prescription Drugs for Older Americans (Washington, D.C., June 2002), p. 14.

[5]The Henry J. Kaiser Family Foundation, Medicare and Prescription Drugs, p. 6.

[6]The Henry J. Kaiser Family Foundation, Medicare and Prescription Drugs, p. 5.

[7]Families USA, Bitter Pill: The Rising Prices of Prescription Drugs for Older Americans, p. 3.

[8]Families USA, Bitter Pill: The Rising Prices of Prescription Drugs for Older Americans, p. 3.

[9]AgeVenture News Service, “Pfizer Offers Prescription Help to Low-Income Seniors,” (Last visited September 19, 2002.)

[10]Julie Appleby, “New Drug Card Offers Discounts to Seniors,” USA Today (April 9, 2002), (Last visited September 19, 2002.); and Reuters, “Pfizer Offers Low-Income Seniors Discount,” January 15, 2002.

[11]Panacea, “Critics Call Drug Companies’ Discount Cards a ‘Marketing Ploy’,” May 20, 2002, (Last visited September 19, 2002.)

[12]The Henry J. Kaiser Family Foundation, “Two Medicare Drug Benefit Bills Fail in Senate,” July 22, 2002, (Last visited October 2, 2002.)

[13]The Henry J. Kaiser Family Foundation, “States React to Bush’s Proposals to Expand Prescription Drug Coverage to More Low-Income Seniors,” February 5, 2002, (Last visited September 19, 2002.)

[14]Marc Kaufman, “Final Rule Is Issued For Seniors’ Drug Cards,” Washington Post (August 31, 2002), p. A-4.

[15]National Conference of State Legislatures, “State Pharmaceutical Assistance Programs,” September 13, 2002, (Last visited September 19, 2002.)

[16]E-mail communication from J. Kevin Gorospe, chief of Pharmaceutical Unit, Medi-Cal Policy Division, California Department of Health Services, Sacramento, California, August 13, 2002.

[17]S.B. 940, 2000 Leg. (Florida 2000).

[18]Office of the Arizona Attorney General, Antitrust Unit, Update on Prescription Drug Prices (Phoenix, Arizona, February 2002), p. 3.

[19]American Association of Retired Persons, “MembeRX Choice Program,” (Last visited September 19, 2002.)

[20] The Henry J. Kaiser Foundation, “Some U.S. Residents Seek Cheaper Medicines in Mexico, Rather than Canada,” October 24, 2002.

[21]The Henry J. Kaiser Foundation, Medicare and Prescription Drugs: Prospects for Coverage, by Kristina W. Hanson (Washington, D.C., July 25, 2002), Figure 11.