Medicare spends 50% less on Part D drugs than initially estimated

But Democratic lawmakers say the program must be allowed to negotiate lower prices because of the high costs some seniors face.

By Charles Fiegl — Posted Aug. 1, 2011

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The use of generic medications and competition among drug plans have kept annual Medicare spending on prescription medicine at nearly 50% below initial estimates, according to the most recent Medicare trustees report. Based in part on the report, Republicans on Capitol Hill are touting Medicare Part D as a success story in health care and arguing that other federal health programs should emulate it.

The competitive market forces in the system providing coverage to 35 million seniors are working as intended, said Scott Gottlieb, MD, a resident fellow with the conservative American Enterprise Institute in Washington, during a Senate Special Committee on Aging hearing on July 21.

Part D spending is far lower than estimates actuaries made before the coverage began in 2006. Trustees for the Medicare program had projected that Part D federal and beneficiary payments would total $115.7 billion in 2010, according to the 2005 trustees report. Actual spending in 2010 was $61.7 billion, or 47% less than the 2005 projection, according to the report released this year.

"Any discussion of policies that have worked to bring more price competition to the prescription drug market, and lower overall spending, has to begin with Medicare's Part D prescription drug program," Dr. Gottlieb said.

He pointed to competition among the more than 1,000 drug plans seniors can choose from as a reason premiums have stayed down. The widespread use of generic drugs during the last decade also has saved money for seniors and taxpayers.

But Democrats on the panel argued that drug prices still are going up. Policy experts predict that costs will double during the next 10 years, said Sen. Herb Kohl (D, Wis.), the panel's chair. Kohl discussed bills that would allow for more federal regulation of the industry, such as allowing the Dept. of Health and Human Services to negotiate Medicare drug prices directly instead of deferring that responsibility to private pharmacy benefit managers.

The addition of the Part D benefit itself has been beneficial for Medicare, said Jack Hoadley, a health policy analyst at Georgetown University in Washington. Before Part D, patients who needed outpatient prescription drug coverage got it only through previous employer coverage or Medigap plans. Now, most Medicare beneficiaries have coverage. (See correction)

However, the coverage itself is not as robust as coverage through private plans, Hoadley said. On average, patient fees for drugs are 25% of the cost for prescriptions. Patients also are disadvantaged when they hit a gap in federal coverage, known as the "doughnut hole," and must pay out of pocket for medicine until catastrophic coverage kicks in. The health system reform law will phase in the closing of the doughnut hole, a process that will be complete in 2020.

Also, elderly patients encounter difficulty searching for plans and determining which insurer is the best choice, Hoadley said. "Many beneficiaries report that it's confusing."

Centers for Medicare & Medicaid Services Deputy Administrator Jonathan Blum told the committee he agreed that robust competition and increased use of generics have led to savings in Part D. But he noted that Medicare also purchases drugs under its fee-for-service system, Part B. In 2010, $12.5 billion was spent on 800 drugs under Part B. Thirteen drugs, including some expensive cancer drugs, accounted for about 50% of the spending.

Sen. Bob Corker (R, Tenn.) asked Blum if drugs purchased under Part B should move to a Part D-like system.

"To get competition, you have to pick winners and losers," Blum responded. "In the case where there aren't alternatives or there [isn't] competition for products and suppliers, it's difficult to get lower prices through competition."

Kohl discussed a series of legislative plans to lower drug costs and patient premiums.

They include:

  • Enacting the Preserve Access to Affordable Generic Drugs Act, co-sponsored by Sen. Charles Grassley (R, Iowa), to limit the use of settlements that keep lower-cost generic drugs from hitting the market.
  • Enacting the Prescription Drug Price Negotiating Act, which would give the HHS secretary the power to negotiate drug prices under Part D.
  • Enacting the Medicare Drug Savings Act, which would increase the discounts Medicare gets on prescription drugs for low-income patients.
  • Giving the Medicare program the authority to negotiate prices for Part B drugs when Medicare is a majority purchaser.
  • Allowing CMS to pay the same price for drugs that are similar.
  • Reducing incentives for physicians to prescribe high-cost drugs under Part B by creating an equitable payment structure for the drugs.

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Beating expectations

Medicare spending on outpatient prescription drugs last year was about half of the 2010 projection. Spending figures for 2011 are estimates.

Year Beneficiaries Part D spending
2006 27.6 million $47.1 billion
2007 31.2 million $48.8 billion
2008 32.4 million $49.0 billion
2009 33.5 million $60.5 billion
2010 34.5 million $61.7 billion
2011 35.4 million $66.8 billion

Source: 2011 Medicare trustees report (link)

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This story originally misstated an affiliation for Hoadley. He is a health policy analyst at Georgetown University in Washington. American Medical News regrets the error. An earlier version of this story also included a reference to the Urban Institute. The Urban Institute describes itself as an independent, nonpartisan research organization.

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