Report: Medicare Drug Plan a $15 Billion Rip-Off in 2007

By Lisa Richwine, Reuters. Posted October 18, 2007.

U.S. taxpayers and Medicare patients could have saved almost $15 billion in 2007 if private health insurers had cut expenses for prescription drug coverage and negotiated bigger discounts, a report from Democratic staff of a House of Representatives panel said on Monday.

The Medicare prescription drug benefits offered by private insurers operate with "high administrative costs, sales expenses and profits," the report said.

Staff for Democrats on the House Oversight and Government Reform Committee, chaired by California Rep. Henry Waxman, based their conclusions on proprietary cost and pricing data obtained from 12 insurers that provide drug coverage to more than 18 million Medicare patients.

"Use of private insurers to deliver Medicare drug coverage is driving up costs and producing only limited savings on drug prices," the report said.

Republican staff issued their own report saying Democrats distorted the facts and the program was popular among seniors.

Aetna Inc, UnitedHealth Group, Humana and other companies offer drug plans through Medicare, the federal health coverage for the elderly and disabled.

Karen Ignagni, president of America's Health Insurance Plans, said the drug coverage had cost taxpayers and patients less than originally projected and offered more benefits.

"This program has on every level beat expectations," Ignagni said in an interview.

The report said administrative expenses, sales costs and profits of private insurers offering Medicare drug plans are almost six times higher than the administrative costs of traditional Medicare coverage, costing almost $5 billion or about $180 per beneficiary in 2007. The insurers' profits will account for $1 billion, the report said.

The companies failed to negotiate significant rebates from drug makers, the report also said. Insurers did get discounts in the form of rebates that reduced spending by 8.1 percent in 2007. But that was less than the 26 percent the Medicaid program secured from drug manufacturers. Medicaid is a state and federal insurance program for the poor.

When a Republican-led Congress created the Medicare drug coverage in 2003, backers said using private insurers would promote competition and cost savings. The benefits took effect in 2006.

Democratic critics have questioned if private companies can be as efficient and wield as much negotiating power as traditional Medicare.

"Privatizing the delivery of the drug benefit has enriched the drug companies and insurance industry at the expense of seniors and taxpayers," Waxman said in a statement on Monday. He released the report with 12 Democrats on his committee.

Republican staff, however, said the report was based on insurers' bids and not actual costs, which Medicare has said will be $4 billion less than estimated this year.

Administrative costs were higher, the Republican report said, because insurers had to develop lists of covered drugs, design plans, negotiate rebates and market their offerings, rather than just writing checks as traditional Medicare does.

They also said 10-year cost projections had dropped more than 30 percent in less than two years.

"The program operates smoothly and at significantly less cost than expected. As such, the concerns expressed by the majority (Democrats) are relatively minor in scope and not supported by accurate and meaningful analysis," the Republican staff said.

The report is available at http://oversight.house.gov/documents/20071015093754.pdf

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