Asclepios
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The Widening Gap
June 22, 2006 • Volume 6, Issue 25
Drug prices are rising steeply and those price increases are being passed straight through to people with Medicare stuck in the Part D doughnut hole, the period when people continue to pay monthly premiums but receive no assistance in paying for their medicine. That is the news from separate studies released this week by AARP and Families USA.
AARP found that manufacturers hiked prices on the top 193 drugs used by older Americans an average of 3.9 percent over the first three months of 2006, more than triple the rate of inflation and the largest quarterly increase for at least five years.
Families USA, looking at the top 20 Part D drugs, reported a 3.8 percent average manufacturer price hike from November 2005 to April 2006. The prices listed by Part D plans rose 3.7 percent during that period. The tiny discrepancy is due only to two popular generic drugs with stable prices that saw modest price decreases. Overwhelmingly, the Part D plans passed on the higher prices for brand-name drugs to their customers. People in the doughnut hole, the $2,850 gap in coverage built into Part D, will pay 100 percent of those inflated drug costs.
The defense from Part D plans is that the listed prices do not account for the rebates they negotiate with drug manufacturers. Those rebates, the insurance companies claim, are passed on to customers in lower premiums and copayments. There are two big doughnut holes in that argument.
First, who knows if it’s true? Part D plans are required to pass on a “portion” of the rebates to their customers. There is no mandate to pass on half, a quarter or even 10 percent of what they receive. And the rebates are secret. There is no oversight of the closed-door deals between drug manufacturers and the Part D plans that are receiving billions in subsidies from Medicare.
Second, it makes the sick, the people with high drug bills, shoulder the burden of keeping premiums down. Here is how it works:
Ms. A hits the doughnut hole in May and starts paying $500 out of pocket for her medicines, at the price her Part D plan sets. The Part D plan has negotiated rebates that average 10 percent; it collects $50 every month from the drug manufacturer. In June, Ms. A’s drug bill goes up 5 percent, to $525. The drug manufacturers make more money and so does the drug plan, with higher monthly rebates of $52.50.
Multiply Ms. A by a few million enrollees, and the rebates generate major revenue for the plan. That revenue funds the company’s priorities, such as outrageous salaries for top executives. Part of the rebate income may also be used to lower premiums, benefiting Ms. A somewhat, but not as much as lowering her drug prices would. However, the Part D plan could also use the revenue to lower premiums for another plan option, one that does not cover Ms. A’s drugs, but that the company is using to entice healthier, lower- cost enrollees.
The permutations are endless, but the dynamic is the same. The rebate model is a regressive one. Instead of healthier individuals helping to offset the costs of those who fall ill, the sick bear the brunt of high drug costs and receive little, if any, benefit from price negotiations.
There is an alternative: the Department of Veterans Affairs (VA). The VA negotiates lower prices with manufacturers and charges those lower prices to the veterans it serves. That is why prices for the 13 drugs on the VA formulary ranged from 30 percent to 900 percent lower than the lowest Part D prices. Half the remaining drugs not included on the VA formulary were still 42 percent cheaper than Part D because of VA price negotiations. If their doctor prescribes them, veterans can receive off-formulary drugs through routine prior authorization. Part D plans, by contrast, generally covered 18 of the 20 drugs but imposed restrictions like prior authorization on average on 11 of them, more than the number the VA lists as off-formulary.
If the pharmaceutical industry and its congressional puppets would allow it, Medicare could negotiate the same low prices, and much broader coverage, for people with Medicare. No drug manufacturer could risk losing the market of 43 million people with Medicare by holding out for inflated prices.
Part D is not curbing drug inflation like its boosters claim. It is time for a Medicare drug benefit. Ask the VA how to run it.
Medical Record
“On average, manufacturer prices for widely used brand name prescription drugs increased 3.9 percent during the first quarter of 2006 (i.e., December 31, 2005 through March 31, 2006),or over three times the general inflation rate during the same three-month period (1.1 percent). This increase in manufacturer price for brand name drugs exceeded the average increases for the first quarter of all previous years studied in these reports” (“Trends in Manufacturer Prices of Brand Name Prescription Drugs Used by Older Americans—First Quarter 2006 Update,” AARP, June 2006).
“The VA has a National Formulary that, in May 2006, listed 13 of the 20 drugs studied in this report. For nearly all of these drugs, there were no restrictions limiting use. Those receiving care in the VA system who need drugs not on the VA formulary do have access to those drugs through a prior-authorization process.
The Part D plans also have formularies. On average, those plans listed 18 of the 20 drugs we studied. However, for a large number of those drugs, most plans place some type of restriction on use. On average, Part D plans covered only 11 of the 20 drugs without any restrictions” (“Big Dollars, Little Sense: Rising Medicare Prescription Drug Prices,” Families USA, June 2006).
“Our members are really benefiting from the lower net costs that come into play because we’re negotiating directly with drug manufacturers and pharmacies in our network. All the savings realized are passed on to our enrollees” (Spokesman for UnitedHealth Group Ovations, “Drug Prices Up in First Months of Medicare Plans,” MarketWatch, June 20, 2006).
“[UnitedHealth Group CEO William McGuire] has made lots of news with cash-and-stock paydays that have topped $100 million in recent years—and he’s still sitting atop stock options valued at $1.6 billion…McGuire and his executive crew have set new standards for wealth that have drawn envy as well as ire from country clubs and executive suites nationally” (“McGuire’s Payday Is a Shame, If Not a Crime,” Star Tribune, April 21, 2006).
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