Supplementary Medical Insurance Improvements Act of 1986 - Amends part B (Supplementary Medical Insurance) of title XVIII (Medicare) of the Social Security Act to provide the following insurance options to an enrollee automatically, unless the enrollee specifically declines to be covered under this Act: (1) the elimination of the limitation on the number of days of inpatient hospital services provided under part A (Hospital Insurance) of title XVIII; (2) the elimination of coinsurance imposed for inpatient hospital services over 60 days under part A; and (3) payment for 100 percent, instead of 80 percent, of the reasonable charges for part B benefits. Directs the Secretary of Health and Human Services to annually determine the monthly actuarial rate for enrollees under the above provisions and sets the premium for the above benefits at that rate.

Provides part B enrollees with automatic coverage, unless specifically denied, of medical expenses for prescription drugs for the treatment of chronic illness. Directs the Secretary to: (1) annually establish a prospective payment schedule which establishes the payment to be made for such expenses; (2) establish, by therapeutic category, a formulary of the drugs and biologicals necessary for treatment of a chronic disease; and (3) annually determine the monthly actuarial rate for the coverage of such expenses. Sets the premium at such actuarial rate.

Directs the Secretary to report to the Congress on alternatives for reducing the cost-sharing burdens placed by Medicare on individuals entitled to its benefits.