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Medicare Drug Costs May be Heading for Faster Growth

By John Reichard, CQ HealthBeat Editor

April 24, 2007 – Brightening the gloomy details of this week's Medicare Trustees' report was a bit of good news: Medicare prescription drug spending is well below projections and in-patient hospitalizations dipped sharply in 2006. But leading Medicare analysts at a Tuesday post-mortem on the report forecasted those trends may not endure.

Medicare Actuary Richard Foster told the forum, sponsored by the American Enterprise Institute (AEI), that drug spending appears to be returning to double-digit growth rates. And the reason for the drop in hospitalizations is unclear, Foster said in an interview following the event.

Overall, analysts at the forum voiced little confidence that the warning delivered by the report—that general revenues as a proportion of the overall funding of the program will climb to 45 percent in 2013—swill shock lawmakers into making changes next year to address Medicare's fiscal woes.

Growth rates for prescription drug spending used to project Medicare prescription drug spending dove down into the single digits in 2004–2006, said Foster. He also noted that the value of bids by plans to offer the Medicare drug benefit fell 10 percent between 2006 and 2007, "which is pretty phenomenal," he said.

But Foster predicted that the growth rate for prescription drug spending used to calculate projections of the cost of the Medicare drug benefit will rise to 12.6 percent per year over the next decade. And the downward trend in premiums charged by Medicare drug plans may not endure, he suggested.

Average premiums charged in 2007 fell because many of the drug plans charging monthly premiums above $32 realized they had to charge less to compete with the plans attracting the lion's share of enrollees, Foster said. Plans that charged lower premiums were able to do so through heavy reliance on low-cost generic drugs, but plans may not be able to squeeze even more savings from generics in the future, he added.

Health and Human Services Secretary Michael O. Leavitt suggested in remarks this week that the 5 percent decline in 2006 of in-patient hospital admissions may have resulted from the start of the Medicare prescription drug benefit—that the wider use of drugs kept medical conditions under better control and thereby lessened the need for hospital care.

Foster said Tuesday the decline—680,000 fewer hospital admissions in 2006 compared with 2005—was unusually large. But he expressed skepticism that prescription drug use grew enough in the Medicare population to account for the drop, saying many Medicare beneficiaries already had drug coverage.

Foster also noted that monthly Part B premiums for doctor and other forms of non-inpatient care are going up, projecting an increase from $93.50 this year to $100.50 next year if Congress keeps payments flat in 2008 compared with 2007.

Former Congressional Budget Office Director Robert Reischauer expressed hope Tuesday that Democrats and Republicans would forgo the usual election year partisanship in 2008 with respect to Medicare and agree on changes ranging from spending cuts to tax increases to beginning to tackle the growing fiscal imbalance in the program.

"What we need is an environment in which both parties hold hands and share responsibility," he said. But other speakers, including AEI analyst Joseph Antos, voiced little confidence that Congress would either act on the package of financing revisions the White House must propose early next year under provisions of the Medicare overhaul law (PL 108-173) or that lawmakers would develop a package of their own.

Under that law, the White House must propose a plan and Congress must consider it the second time the Trustees forecast that general revenues will reach the 45 percent threshold within a seven-year forecasting window. That second forecast occurred in the report released Monday.

Former Clinton health policy aide Jeanne Lambrew said she differed with Reischauer, calling it unlikely in an election that a White House controlled by a Republican would agree with a Congress controlled by Democrats on legislation addressing Medicare financing.

Reicschauer offered a wry protest, saying, "No one outdoes me for pessimism, but I was trying to offer some hope here."

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