By John Reichard, CQ HealthBeat Editor

Switching the poorest Medicare beneficiaries from Medicaid drug coverage to the Medicare prescription drug program that began in 2006 has added $2 billion a year to drug industry revenues, a "windfall" that Congress should end, California Democrat Henry A. Waxman said Thursday.

Waxman, chairman of the House Oversight and Government Reform Committee, released a report from majority staff examining outlays for 6 million "dual eligibles"—Medicare beneficiaries whose incomes are so low that they also qualify for Medicaid benefits.

In 2006, the Medicare prescription drug program, called Part D, paid drugmakers $1.7 billion more for the 100 drugs prescribed most often for the "duals" than would have been the case had they remained in Medicaid, the analysis said. "The higher prices produced an even larger windfall of $2 billion for the drug manufacturers in 2007," the report added.

On average, Medicaid gets discounts of about 30 percent on prescription drugs while the plans that offer drug coverage through Part D get discounts averaging 8 percent, according to testimony at a committee hearing. Waxman said he will soon introduce a bill that "will guarantee that federal taxpayers cannot be charged higher prices for the dual eligible beneficiaries under Medicare Part D than under Medicaid."

The legislation "could save the taxpayer almost $90 billion over the next 10 years," said Waxman. The staff report estimated that duals are expected to use $432 billion worth of drugs over the next decade. "If drug manufacturers provided the Medicare Part D program with the same prices that Medicaid receives, these drug costs could be reduced by as much as $86 billion," the report said.

"Johnson & Johnson received the largest windfall: $615 million in 2006 and 2007, including over $500 million in additional revenue from sales of just one drug, the anti-psychotic Risperidal. Bristol-Myers Squibb received a windfall of $400 million, including over $200 million in additional revenue from sales of its heart attack and stroke medication Plavix," the report said.

The hearing was a fresh reminder that the 2003 Medicare overhaul law (PL 108-173), championed by the Bush White House for bringing more private plans into Medicare as well as prescription drug security to seniors, may face revisions if Democrats make big gains in the November elections.

Democrats have chipped away at the law in recent days. Congress overrode a veto of legislation (HR 6331) that is expected to trim increased spending for private fee-for-service plans in Medicare Advantage, the private plan side of Medicare. A House vote Thursday effectively blocks a vote in that chamber on a spending control plan proposed by the White House in response the 2003 law's "trigger" provision—requiring consideration of such a plan if projected Medicare spending exceeded a certain threshold.

But the change proposed by Waxman would strike at the heart of the 2003 law, which relies on competition between private plans rather than government-mandated discounts, the tool used to keep Medicaid prices down, to control prescription drug spending in Medicare.

Republicans at the hearing warned that Democrats in effect want price controls that would gut innovation by slashing industry spending on research and development of new drugs.

"I'm not convinced there's much constructive to be learned simply by comparing controlled prices under Medicaid and market prices under Part D, and labeling the entire difference a 'windfall,' " said the panel's ranking Republican, Thomas M. Davis III of Virginia.

Davis said Waxman's proposal of requiring that prices for the duals be no higher than that in Medicaid would be a "short-lived and painful" way to capture savings. "It would come at a far higher cost as other segments of the health care delivery system—employer and union plans, payments for the uninsured—absorbed the cost shifts inevitably generated by price controls."

The committee's minority staff countered Democrats with its own analysis, saying that providing duals with drug coverage through Part D gives them a better benefit.

The analysis noted that moving the duals back to Medicaid drug coverage "would likely be opposed by advocates of low-income seniors, dual-eligible seniors, and states. While the Medicaid program is required to cover a broad array of drugs, states have responded to budgetary concerns by using a number of tools that effectively limit access to certain prescription drugs or quantities of drugs."

Waxman replied to GOP warnings about the impact on research and development by saying the industry had plenty of money to innovate when the duals were getting big discounts on Medicaid.

A panel of academics at the hearing basically agreed when Rep. John F. Tierney, D-Mass, dismissed the idea that Medicaid level prices for the duals would undermine innovation.

The nation "could certainly go back to the Medicaid prices and not affect R&D dramatically," added University of Minnesota professor Stephen Schondelmeyer. Fiona M. Scott Morton, an economics professor at the Yale School of Management, said "I more or less agree" but suggested that a shift back for the duals would send a signal to venture capital firms that investing in pharmaceutical innovation might not be as inviting.

Morton also alluded to larger Democratic ambitions to lower prices in Medicare beyond the duals by having Medicaid prices for everyone in the Medicare program. That, she indicated, would have too big an impact on innovation. The question is "are we making a small shift for duals or are we making a big shift for everybody who's eligible for Medicare?"

Kerry Weems, acting chief the Centers for Medicare and Medicaid Services, responded to Democratic arguments about overspending on Part D by noting that it is spending almost 40 percent less than was originally projected when Congress debated the creation of the prescription drug benefit.

Weems added that the duals face fewer restrictions on quantities of drugs and have the "dignity" of having a choice of plans under Part D. Waxman countered that spending isn't as high as projected because enrollment in Part D isn't as high as projected.