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."

In a separate study published in November 2005 by the Minority Staff of the United States House of Representatives' Committee on Government Reform, researchers found that the Medicare drug benefit now being offered to seniors has not succeeded in reducing drug prices as much as it could.

According to the report, the average drug prices offered by the ten leading Medicare Part D plans are: "over 80 percent higher than the prices negotiated by the federal government, over 60 percent higher than the prices available to consumers in Canada, over 3 percent higher than the prices available on Drugstore.com and almost 3 percent higher than the prices available at Costco."

Yet, when President Bush discussed the Medicare prescription drug plan in August 2005 at a speech in El Mirage, Arizona, he stated: "Competition works, by the way. If you've got one provider, the federal government, it doesn't give consumers a lot of choice. But when you provide consumers choice, it's amazing what can happen. People start bidding for your service, so to speak. They want to attract your business. And it's going to work in Medicare, too."

Baker responded that "if he's trying to say that the insurance companies will get the savings from the drug companies, that's wrong. He either is misrepresenting the situation or he simply is ignorant."

Aside from tracking the flow of money from federal coffers to private companies, watchdog groups have documented financial flow in the other direction as well. In June 2004, the consumer interest group Public Citizen reported that "to help push through Medicare prescription drug legislation that will safeguard their bottom lines at the expense of America's taxpayers, the pharmaceutical industry, HMOs and related interests spent nearly $141 million on Washington lobbying in 2003."

The data revealed that the pharmaceutical industry spent $108.6 million on federal lobbying activities while managed care companies spent $32.3 million. In addition, a total of 824 individual lobbyists were employed by the former and 222 by the latter.

The influence peddling documented by Public Citizen's researchers was not confined to lobbying. Both industries also gave generous campaign contributions to candidates.

The group found that 21 drug industry and HMO executives or lobbyists ranked among Bush's "Pioneers" and "Rangers" -- honorary titles for those who have raised at least $100,000 or $200,000, respectively, for one of Bush's presidential campaigns.

"They paid a disproportionate share of their campaign contributions to the Republicans, and basically they got a good return on their investment is what it looks like," commented Baker.

Figures released by Medicare in mid-January showed that 14.3 million people out of 42 million eligible Medicare beneficiaries enrolled in Part D during the first 60 days of registration. Of those, only 3.6 million are signed up under the stand-alone prescription drug plans. The rest of the registrants are either Medicare/Medicaid beneficiaries who were automatically enrolled in Part D or are Medicare Advantage beneficiaries whose plans now offer Part D coverage. An additional 10 million Medicare beneficiaries have creditable prescription drug coverage from an employer or union plan.

Edward Coyle, executive director of the Washington, DC-based senior activist group Alliance for Retired Americans (ARA), told TNS the response of those qualified for the program is a key indicator of its success. "I think the very fact that seniors are just walking away from this in substantial numbers and choosing not to sign up for it is an indication of the fact that the program is, number one, too confusing and, number two, just inadequate," Coyle said.

Despite its shortcomings, the program will prove beneficial to some seniors.

"We feel that there is some real value in the Part D program, so it's worth people's time and effort to take a look," noted Steve Hahn, spokesperson for the senior advocacy group AARP, which has been supportive of the program since its inception. "We're hearing many, many stories of people who are using these plans, [and] they're saving money."

One such story is that of 71-year-old Bill Mayer, an AARP volunteer who lives in New Jersey. A Medicare beneficiary, Mayer did not previously have drug coverage. When asked why he decided to sign up for Part D, Mayer told The NewStandard: "First, it was the only game in town. And second, looking into it, I realized that it was going to save me money."

Mayer said he was spending a total of approximately $1,800 a year on his three prescription drugs when he bought them without insurance coverage in the United States. To save money, Mayer began buying the same three drugs overseas and reduced his spending to between $1,200 and $1,300 annually. Under the Medicare prescription drug plan, his cost estimate is now $762 per year. And if he buys the drugs via Part D's mail order option, his cost will be brought down to around $665 annually.

"For me, it's been a fantastic saving and I'm very happy about it," Mayer said. But despite the benefits, he too is wary that Part D is being run by private insurers.

"Would I have liked if it was all under the Medicare umbrella? Would I and millions of seniors feel safer?" he asked. "Yes. I certainly am not happy about the fact that our administration saw fit to give this out to private industry because I don't think private industry will do as good a job as Medicare."

And AARP has signaled that it would like to see some changes in the program as well. In a press briefing held on January 27, AARP Chief Executive Officer William Novelli announced that the organization is asking, among other things, that Congress extend Medicare authority to negotiate lower drug prices.

"[This would] allow the bulk buying power of [millions of] beneficiaries in Medicare to actually affect the cost of prescription drugs," Hahn explained.

A more drastic solution to the drug plan is being sought by the Alliance for Retired Americans, as Coyle explained. "We think that the administration has to go back to square one on this," he said. "I think the program hasn't worked. It should have been kept under Medicare [administration]."

In the meantime, the ARA is asking Congress to enact several temporary solutions such as extending the enrollment deadline past May 15, negotiating lower prices from drug providers, and allowing beneficiaries to re-import drugs from Canada.

But Coyle isn't hopeful. "Now, they're not going to do any of those three," he said, "so ultimately the goal of the Alliance for Retired Americans is to elect a much more senior-friendly Congress and president. I think this is the most anti-senior administration that the country has ever had. [The prescription drug plan] should never have been handed out as a payoff to big pharmaceutical companies and insurance companies. That is money that could have been given back to seniors in the way of reduced costs on their prescription drugs."

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

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