Analytic dimensions of a prescription-medication benefit in medicare

Background: Many analysts believe that the lack of coverage for outpatient prescription medications represents a conspicuous deficiency in the Medicar e benefits package. Objective: This paper uses insurance theory to design and estimate the cost s of a Medicare catastrophic-medication outpatient benefit. Results: For efficiency and equity purposes, and to accommodate the tradeof f between the cost to the federal government and the insurance value of suc h a benefit to Medicare enrollees, we favor a benefit that would be means-t ested by employing deductibles, coinsurance rates, and catastrophic limits, all of which would be progressively graduated for 7 household income class es. For equity reasons, we propose that the government's share of the medic ation 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, was te, and abuse. Conclusions: Because our proposal addresses both the efficiency and equity dimensions of a Medicare outpatient medication benefit, we believe it is wo rthy of serious consideration by both policymakers and Congress.