Executive Summary: Prescription Drug Security Plan (PDS)

Published November 1, 2002

The program has two parts:

1. An up-front subsidy for routine drug expenses

2. Coverage for high-end and catastrophic drug costs

The PDS plan provides a generous up-front subsidy of $600 a year to help low- to moderate-income Medicare beneficiaries with their routine drug purchases. Those at 200 percent of poverty and below would receive the full $600, deposited to their personal PDS card account. In addition, they would receive fully subsidized private insurance coverage for larger drug expenses.

The private catastrophic coverage would pay 80 percent of beneficiaries’ drug costs between $2,000 and $6,000 a year, with full coverage above $6,000. Deposits to the PDS card and premium subsidies are gradually reduced for those between 200 percent and 350 percent of poverty. Medicare beneficiaries with higher incomes would get a tax deduction for making their own card deposits and paying their catastrophic insurance premiums. Everyone is eligible for competitively negotiated drug discounts.

Structure of the Benefit

Medicare beneficiaries would receive prescription drug coverage for both routine drug purchases and catastrophic expenses, organized through private, competing plans.

The coverage would include a PDS card with subsidies of up to $600 a year for the purchase of routine medicines. Any unspent balances could be rolled over to the next year to encourage seniors to make wise purchasing decisions.

Catastrophic coverage is provided in two parts: Beneficiaries pay 20 percent and the plan pays 80 percent for drug spending from $2,000 to $6,000 a year. Full coverage triggers at $6,000.

Subsidies to the card account and premium subsidies are gradually reduced as beneficiaries’ incomes increase, ending at 350 percent of poverty. Those with incomes above the subsidy thresholds could participate in the program by creating their own PDS card account and receiving a tax deduction for their $600 contribution and for the cost of their catastrophic insurance premium.

All participants in this voluntary program would be eligible for discounts negotiated by their plans and could select plans that offer them the best prices on the drugs they need, without the limits on choices that would be likely in government-run plans.

poverty level
Annual PDS
card deposit
Federal premium
monthly premium
Under 200% $600 $100% $0
200-250% $450 75% $28
250-300% $300 75% $28
300-350% $150 Phases out $28 – $111
Above 350% Tax deductible to $600 Fully tax-deductible $111

Cost to the Federal Government

PricewaterhouseCoopers estimates the PDS plan would cost $302 billion over 10 years.

Advantages of the PDS Plan

  • The biggest subsidies are targeted to low- and moderate-income seniors.
  • The program minimizes adverse selection in the catastrophic plan by encouraging healthy beneficiaries as well as those who are sicker to participate in order to get the PDS card deposit, catastrophic coverage, and drug discounts.
  • The PDS plan would set in place an infrastructure for overall Medicare reform by establishing an office much like the Office of Personnel Management that oversees the Federal Employees Health Benefits Program. This office would, among other things, qualify the competing private drug plans and provide information to seniors about choices.
  • Drug discounts would be privately negotiated, and the government would not set price controls or decide which drugs would or would not be available to plan participants.
  • Participation in the program is voluntary and open to all Medicare beneficiaries.
  • Because the plan targets the greatest assistance to lower-income seniors, it would be less likely to crowd-out the existing private coverage that millions of seniors already have.

For more information …

Contact Joseph Antos, American Enterprise Institute, at 202/862-5938, email [email protected]; or Grace-Marie Turner, Galen Institute, 703/299-8900, email [email protected]