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Costs High in Medicare Drug Program, Democrats Say

By Mary Agnes Carey and Martha Angle, CQ Staff

October 15, 2007 -- Delivering the Medicare drug benefit through the private sector has done more to enrich the profits of insurers and pharmaceutical companies than to save seniors and taxpayers money, according to a report released Monday by the Democratic staff of the House Oversight and Government Reform Committee.

Among its findings, the report concludes that administrative costs of the Medicare drug benefit, which is run by private insurers, are almost six times higher than the administrative costs of the traditional Medicare program, adding up to about $180 per person—or almost $5 billion—in 2007. Of that, about $1 billion is profit for the insurers, the report said. It also found that administrative and sales expenses, plus profits for the insurers offering Medicare drug plans, account for 9.8 percent of overall Part D spending.

The report, commissioned by Chairman Henry A. Waxman, D-Calif., was based on an analysis of proprietary cost and pricing data obtained from 12 insurers providing drug coverage to more than 18 million Medicare patients, or about 75 percent of those enrolled in Medicare Part D.

The drug benefit, enacted in 2003, took effect in 2006. "The cost and pricing data obtained by the committee reveal that use of private insurers to deliver Medicare drug coverage is driving up costs and producing only limited savings on drug prices," the report said.

While the Centers for Medicare and Medicaid Services (CMS) had no immediate comment on Waxman's report, agency officials have said repeatedly that the Medicare drug benefit has been a success. Last month, CMS announced that Medicare beneficiaries in every state will have a choice next year of at least five prescription drug–only plans with monthly premiums below $25, and that 90 percent of beneficiaries will be able to pick a plan charging lower premiums than they will pay this year.

Karen Ignagni, president and CEO of America's Health Insurance Plans, said the industry's "track record speaks for itself" with premiums 40 percent less than originally projected, Medicare actuaries twice reducing the cost of the program, and policies that offer beneficiaries more benefits and lower cost-sharing. "On all of those measures we have beaten expectations," she said.

Medicare drug insurers have negotiated discounts in the form of rebates from pharmaceutical companies that will reduce spending by 8.1 percent in 2007, the figure is far less than the 26 percent the Medicaid program secured from drug manufacturers. Medicaid is a state and federal insurance program for the poor. In addition, Part D insurers receive no rebates or other manufacturer discounts for three-quarters of the drugs used by seniors, according to the analysis.

The Pharmaceutical Care Management Association, a trade group representing pharmacy benefit managers (PBMs), said its work with Medicare Part D plans has reduced costs 30 percent below government projections for the drug benefit, which, in turn, has reduced monthly premiums. PBMs also have helped to increase the use of generics and PBMs "aggressively negotiate discounts with brand manufacturers."

If the Medicare drug benefit's administrative expenses were lowered to those of traditional Medicare and drug prices were lowered to those found in the Medicaid program, taxpayers and Medicare beneficiaries enrolled in the drug benefit would have saved $15 billion in 2007, the report concludes.

Committee staff said Medicare drug plans are filling 59 percent of prescriptions with generic drugs, which are cheaper than brand-name pharmaceuticals. That is better than Medicaid, which fills only 54 percent of prescriptions with generic drugs, but falls well short of the 68 percent achieved by the Department of Veterans Affairs, the report said.

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