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A Detailed Description
of CBO's Cost Estimate for the
Medicare Prescription Drug Benefit
  July 2004  


Cover Graphic


Note

Numbers in the text and tables of this report may not sum to totals because of rounding.





                
Preface

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 was signed into law by the President on December 8, 2003. The Congressional Budget Office (CBO) provided analysis to the Congress during its deliberations over the addition of an outpatient prescription drug benefit to Medicare and issued in July 2003 federal cost estimates for H.R. 1 and S.1 as passed by the House and Senate as well as an estimate of the conference agreement on H.R. 1 in November 2003.

This paper provides details of the reasoning behind CBO's cost estimate of the prescription drug provisions contained in the Medicare Modernization Act. In accordance with CBO's mandate to provide impartial analysis, this report makes no recommendations. Philip Ellis prepared the report in conjunction with Jeanne De Sa and Eric Rollins, with additional contributions from Niall Brennan, Robert Nguyen, Margaret Nowak, and Shinobu Suzuki. Arlene Holen, Allison Percy, and Tom Bradley, all of CBO, provided thoughtful comments on earlier drafts, as did Len Nichols of the Center for Studying Health System Change and Rachel Schmidt of the Medicare Payment Advisory Commission. (The assistance of external reviewers implies no responsibility for the final product, which rests solely with CBO.)

Over the past several years, numerous people at CBO have contributed to the agency's analysis of the issues related to a Medicare drug benefit. Those analysts are Joseph Antos, David Auerbach, James Baumgardner, Shawn Bishop, Kate Bloniarz, Jennifer Bowman, Tom Bradley, Niall Brennan, Hayley Buchbinder, Kathleen Buto, Julia Christensen, Sandra Christensen, Anna Cook, Jeanne De Sa, Philip Ellis, Peter Fontaine, Carol Frost, Samuel Kina, Mara Krause, Steven Lieberman, Deborah Lucas, Mark Miller, Robert Nguyen, Margaret Nowak, Karuna Patel, Eric Rollins, Rachel Schmidt, Emily Shelton, Robert Sunshine, Shinobu Suzuki, Sarah Thomas, Bruce Vavrichek, Judith Wagner, and Daniel Wilmoth.

Christine Bogusz edited the paper, and Leah Mazade proofread it. Maureen Costantino prepared the report for publication as well as designed and took the photograph for the cover; Lenny Skutnik printed the copies of the report; and Annette Kalicki produced the electronic versions for CBO's Web site.

Douglas Holtz-Eakin
Director
July 2004




CONTENTS


Summary
 
Introduction
 
Factors in Estimating the Cost of the Basic Medicare Drug Benefit
      Eligibility and Enrollment
      Gross Costs of Providing the Basic Drug Benefit
      Beneficiaries' Premiums
      The Employer Subsidy System
      Summary of Basic Benefit Costs
 
Costs of the Low-Income Drug Subsidies and Effects on Medicaid and Other Direct Spending
      Transitional Drug Assistance
      Low-Income Drug Subsidies
      Interactions with Medicaid
      Other Effects on Direct Spending
 
Uncertainty and Conclusions
 
Appendix: The Drug Benefit's Risk Corridor System

Tables
   
S-1.  CBO's Estimate of the Total Cost of the Medicare Prescription Drug Benefit, Fiscal Years 2004 to 2013
1.  CBO's Cost Estimate for the Medicare Prescription Drug Benefit, Fiscal Years 2004 to 2013
2.  Key Features of the Standard Drug Benefit Under the Medicare Modernization Act, Calendar Years 2006 to 2013
3.  Key Factors Used in CBO's Estimate of Gross Drug Costs per Drug Benefit Participant, Calendar Years 2006 and 2013
4.  Estimated Costs for Drug Benefit Participants, Calendar Years 2006 and 2013
5.  Total Costs, Federal Subsidies, and Beneficiaries' Premiums for Calendar Year 2006 Under Three Illustrative Plans
6.  Employers' Options for Providing Drug Coverage Under the MMA and Resulting Net Medicare Subsidies per Enrollee, Calendar Years 2006 and 2013
7.  Estimated Spending by and Costs for Drug Benefit Participants, Calendar Years 2006 and 2013
8.  Number of Enrollees in Medicare Part B Who Are Eligible for Low-Income Drug Subsidies in Calendar Year 2006
9.  Impact of the Medicare Prescription Drug Benefit on States' Medicaid Outlays, Fiscal Years 2004 to 2013
A-1.  Example of How the Drug Benefit's Risk Corridors Would Operate in 2006
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