Medicare Part D - Drugs Are No Cheaper Under part D

PRESCRIPTION DRUGS COST MORE
UNDER MEDICARE PART D THAN UNDER MEDICAID

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The Centers for Medicare & Medicaid Services reports that “lower drug costs and strong competition have reduced the price tag for Medicare’s new drug coverage.” CMS, “Lower Costs of Medicare Drug Coverage to Help States Save $700 Million in 2006,” (News Release, Feb. 9, 2006). To the contrary, shifting the costs of prescription drugs from Medicaid to Medicare for dually-eligible beneficiaries has raised the costs of prescription drugs for government payers.

Stephen W. Schondelmeyer, Professor of Pharmaceutical Management & Economics at the University of Minnesota, testifying at the House Committee on Government Reform’s Minority Briefing on Implementation of the New Medicare Drug Benefit (January 20, 2006), reported that state Medicaid drug rebate programs provided “minimum rebates of 15 percent or more and additional rebate payments for best price and inflation adjustment over time,” leading to total rebates for states of 20-30% of drug costs. These Medicaid rebates were lost when payment for prescription drugs shifted to Medicare. Although prescription drug plans (PDPs) may negotiate rebates with pharmaceutical companies, the government will not benefit from these rebates unless the PDPs pass their savings on to consumers. So far, that has not happened.

Professor Schondelmeyer examined the prices for the 25 top prescribed brand name drugs that were offered by all 41 PDPs in one Minnesota zip code during the first two weeks of 2006. He found that Medicare prices were 14% -50% above prices that Medicaid would have paid and that most of the Medicare prescriptions were 20%-30% above Medicaid prices. Medicare prices were generally within plus or minus 4% of the typical retail price.

Professor Schondelmeyer described additional design features that are policy failures, rather than implementation problems that will be cured over time. He testified, for example, that multiple PDPs will be unlikely to negotiate lower prices than the single Medicaid program in each state. “This smaller volume and diminished market power for the many PDPs is not likely to generate discounts and rebates from manufacturers that approach the historical rebate levels specified under the Medicaid program.”

Although, in theory, consumer choice “could create competition and pressure on prescription prices,” Professor Schondelmeyer concluded that “effective competitive pressure is not likely to occur.” Beneficiaries typically focus on one or two factors, such as premiums or out-of-pockets costs, not on the full array of factors that actually determine which plan would be best for them. Moreover, since plans can change formularies, drug prices, and co-pays during the year, a decision made by a beneficiary at the beginning of the year might not yield the best choice of plan for that beneficiary by the end of the year.

Professor Schondelmeyer also found that the “bad or incomplete information” that was posted on the Centers for Medicare & Medicaid Services’ website at the time when beneficiaries were selecting plans also reduced the benefits of the market. When one party has incomplete or imperfect information, “asymmetric markets” result, justifying government intervention. Professor Schondelmeyer concluded his testimony by suggesting various types of government intervention that could correct for imperfect information, such as “increased transparency and disclosures, establishment of one or more standardized drug benefit designs, provision of additional tools to assure efficient purchasing and distribution of pharmaceuticals.”

Congressman Henry A. Waxman (D, CA), Ranking Minority Member of the Committee on Government Reform, has asked the Government Accountability Office to investigate drug prices under Part D and whether (and by how much) they are higher than “best prices” paid by Medicaid. In his request to the GAO, Congressman Waxman referred to Professor Schondelmeyer’s testimony. He described the testimony and additional evidence about the multi-billion dollar windfall to drug manufacturers as a result of the transfer of prescription drug coverage from Medicaid to Part D plans.

For additional information, please see the links below, or contact attorney Vicki Gottlich (vgottlich@medicareadvocacy.org) or attorney Toby Edelman (tedelman@medicareadvocacy.org) in the Center for Medicare Advocacy’s Washington, DC office at (202) 293-5760.

CMS’ press release: http://www.hhs.gov/news/press/2006pres/20060209.html

rofessor Schondelmeyer’s testimony: http://www.democrats.reform.house.gov/Documents/20060120130023-10578.pdf

Congressman Waxman’s letter to the GAO: http://www.democrats.reform.house.gov/Documents/20060127173544-29024.pdf