Medicare Plan Benefits Industry, Not Seniors

By Erin Cassin, The NewStandard. Posted February 15, 2006.

Recent research into the new Medicare Part D prescription-drug benefit program shows the pharmaceutical industry poised to reap billions in taxpayer funds under the new plan. The data lends new fuel to the fight led by seniors and their advocates to overhaul the program, which took effect January 1.

Under the design of the current scheme, private insurers -- not the Medicare administration -- provide coverage to enrollees, some of who previously received coverage under Medicaid and others who never had government-subsidized prescription drug coverage.

According to a January report by the progressive think tank Center for Economic Policy Research, the program's cost to state and federal taxpayers -- estimated at $776 billion for the next eight years -- and its notorious complexity are predictable symptoms of the legislation.

"Congress deliberately designed the bill in a way that would ensure that private insurance companies would provide the benefit instead of the Medicare administration or a single designated provider," wrote the report's author, Dean Baker. "This design both substantially increased the cost of drugs and administrative costs in addition to making the drug program much more complicated for beneficiaries," the report states.

A large portion of the 14.3 million enrollees in the program are people who qualify for Medicare and Medicaid. These 6.2 million seniors and people with disabilities used to receive prescription-drug coverage through Medicaid, but were automatically switched to the Medicare drug benefit when it went into effect.

When providing drugs through Medicaid, pharmaceutical companies were required to guarantee the government discounts of 15 percent or more on drugs. But under the new plan, the Medicare administration is prohibited from negotiating with the pharmaceutical industry for lower drug prices.

Instead, the multitude of private insurance companies that are providing coverage to Part D enrollees are tasked with negotiating prices with private drug companies.

According to the CEPR report, Medicare could secure substantial discounts from the drug manufacturers because of the massive amount of business the organization would bring to the pharmaceutical industry. There are currently 42 million Medicare beneficiaries eligible for Part D.

"In principle, as long as drug companies can cover their production costs and earn a normal profit on their sales, they would profit by selling their drugs to Medicare rather than being excluded from this huge market," Baker wrote.

According to Baker's calculations, which are based on prices other countries and other US government agencies are able to negotiate, giving the Medicare administration collective bargaining power could result in total projected savings of between $370 billion and $785 billion over eight years, depending on the scenario.

Baker suggests in his report that the savings could go to lowering drug prices further for beneficiaries and to relieving states and the federal government of a portion of the projected costs of the program.

The CEPR report follows an October 2003 analysis of Part D by the Health Reform Program (HRP) at Boston University School of Public Health. Using Congressional Budget Office estimates, the HRP researchers concluded that "an estimated 61 percent of the Medicare dollars that will be spent to buy prescriptions will remain in the hands of drug makers as added profit. This windfall means an estimated $139 billion in increased profits over eight years and a 38 percent rise in drug-maker profit.

"Federal payments are clearly rising. How much of that ends up on drug-makers' bottom line remains difficult to tell for sure," said Health Reform Program Co-director Alan Sager, who co-authored the 2003 report, in a NewStandard interview earlier this month. "What we do know is that this law is a bad deal for patients and taxpayers."

Erin Cassin is a contributor to The NewStandard, an independent, non-profit daily news site.

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