Choosy Seniors Can Save on Prescriptions

Jeffrey R. Kling
Jeffrey R. Kling Former Brookings Expert, Associate Director for Economic Analysis - Congressional Budget Office

November 18, 2008

The six-week annual open season for choosing health care options is under way. If you, or someone that you know, has prescription drug insurance from Medicare Part D, here’s an idea that could save a bundle over the next year: consider switching plans.

Medicare Part D was first offered to seniors in 2006 to subsidize the costs of prescription drugs. In the last three years, the average monthly prescription drug premium has risen 44 percent. Increases in premiums have caused some people to start thinking about shopping around – and they’re on to something.

A typical senior with between four and six prescriptions could save about $500 by changing from their existing plan to the most cost-effective plan currently available for someone taking those same drugs. If the lowest-cost plan isn’t appealing, there are more than 20 other plans offering some savings relative to the current plan.

A key reason there is so much potential savings is that costs depend on the match between the drugs people take and the plan they are in. Most seniors do not look at the costs for their specific drugs, since most information is derived from mailings and other sources that do not tailor the data to fit individual needs.

Premiums – what you pay just to have the insurance – are only the most obvious part of the cost. The cost of filling each prescription is actually much more important. For every $1 paid in premiums, the average senior pays another $4 in other costs for each drug purchased. These other costs differ depending on the insurance provider and plan, even for exactly the same medications. And the differences between plans are big.

In my work with a research team from Harvard, Princeton and the University of Wisconsin, we found that many people didn’t know that costs for the same drugs differed between insurers. People severely underestimated what they could save by switching plans. Most people did not even look at personalized comparisons of prices between plans, so they had no idea how much they could save.

Working with a hospital in Wisconsin, we determined patients’ prescription drug plan costs based on drugs taken. Letters were sent to some Wisconsin patients about varying plan costs and how much they could save by switching. After one year, those individuals who switched saved at least $150, or about 9 percent of total cost on average, and were just as satisfied with their new, cheaper plans. Our approach changed the “choice architecture,” so choices could be based on personalized information structured to fit the insurance plan holder.

If a million people were to switch to cheaper plans, the total savings would really start to add up. It would pay off on a large scale to bring this cost information directly to people’s attention. Medicare already has information on the drugs that people take and could calculate personalized cost estimates, just like we did, and at very low cost.

Making information on the total costs of various plans more easily available would help seniors save money immediately and would enhance competition in the marketplace to help keep overall drug plan costs down. The amount the Medicare program spends for outreach will be well invested as general costs decline in the future both for seniors and possibly for the taxpayers supporting Medicare itself. Meanwhile, government can continue to develop better ways to communicate about the quality of service, accessibility and restrictions of different plans, so that seniors and other consumers have the information to choose plans that will save them money and get them the medicines they need.

But you don’t need to wait for someone to reach out to you. Do the research for yourself, or someone else, through the information being provided this open season. It only takes about 15 minutes to learn how much could be saved.