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Making Sense of the New Medicare Drug Plan

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November 21, 2005 | by Stephen Anzaldi

Now that older Americans can sign up for the new Medicare drug plan, media reports have revealed beneficiaries' confusion over their vast array of choices.

While President Bush hails the program as the greatest advance in health care for seniors in Medicare's 40-year history, some are concerned about how to make the right picks among the several dozen prescription drug plans, premiums, deductibles and co-payments available from state to state.

David Dranove, Walter J. McNerney Distinguished Professor of Health Industry Management at the Kellogg School of Management, says that most of the plans will look fairly similar. "The two things to make sure of are that you can use a pharmacy that’s convenient to you and that the drugs you prefer are available at low cost," he adds.

The new drug plans, while subsidized by Medicare, are marketed and administered by private insurers. Lawmakers point to this competitive arrangement as a key to holding down costs. The federal government estimates the new benefits program, which takes effect Jan. 1, 2006, will cost $724 billion over 10 years.

"One of the things I’m really encouraged by is there are a lot of companies that seniors are familiar with -- like Wal-Mart -- that are partnering with established insurance benefit companies in order to give seniors choices they may be comfortable with," Dranove says.

The prescription drug coverage is insurance that covers both brand-name and generic prescription drugs at local participating pharmacies. According to the Department of Health and Human Services, anyone with Medicare is eligible for this coverage, regardless of income and resources, health status or current prescription expenses. Enrollment began Nov. 15 and continues through May 15, 2006.

To ease the decision-making process, experts around the country are hosting information workshops. Dranove, who is trying to help his own mother choose a plan in Florida, stresses that seniors should look for names they trust. "Whether they’re names of insurance companies or names of other retailers in this business, those companies are going to stand behind their products, and they're all going to have to abide by Medicare rules."

Is the Medicare plan just another way for pharmaceutical companies to make big profits? Dranove says “yes” and “no.”

"Companies will actually be making less money for each drug they sell because the plans buy drugs at a discount and pass that discount on to the consumer," he explains. "On the other hand, the companies are hoping to sell a lot more drugs now that seniors can better afford them."