Committee Hearing On Medicare Part D
The Committee on Oversight and Government Reform held a hearing titled, “The Medicare Drug Benefit: Are Private Insurers Getting Good Discounts for the Taxpayer?” on Thursday, July 24, 2008, in 2154 Rayburn House Office Building.
The Medicare Part D program provides prescription drug coverage to almost 30 million enrollees, and will cost federal taxpayers almost $1 trillion in the next decade. The hearing examined whether the private insurers that receive government subsidies to provide the Part D benefit are able to effectively obtain prescription drug discounts from drug manufacturers. Since the Part D program’s inception in January 2006, observers have questioned whether the private insurers who run the program are effectively negotiating with drug manufacturers for low prices.
This report uses confidential information on drug prices to compare the costs of drugs purchased under the new Medicare Part D program with the costs of drugs purchased under traditional Medicaid. It finds that Medicare Part D pays on average 30% more for drugs than does Medicaid and that this discrepancy in pricing produced a windfall worth over $3.7 billion for drug manufacturers in the first two years of the Medicare Part D program.
Unlike traditional Medicare, which is administered by the federal government, the new Medicare Part D prescription drug program depends on private insurers to provide drug coverage. This reliance on private insurers has sparked a debate about the consequences of privatizing the delivery of Medicare services. A staff report released by Rep. Henry A. Waxman and other members in October 2007 compared the administrative expenses incurred by the private Part D insurers with the administrative expenses incurred under traditional Medicare. That report found that the administrative expenses and profits of the private insurers accounted for nearly 10% of the costs of Medicare Part D, nearly six times as much as the administrative expenses of traditional Medicare.
This new report compares the drug prices negotiated by the private Part D insurers with the drug prices paid by Medicaid, a federal-state program that provides health care to over 60 million low-income Americans. In particular, the report focuses on the cost to the taxpayer of providing drug coverage through Medicare Part D to six million “dual eligible” beneficiaries. These are elderly and disabled individuals who qualify for both Medicare and Medicaid. Prior to enactment of Medicare Part D, dual eligible beneficiaries received prescription drugs through Medicaid. The Medicare Part D law transferred their drug coverage to Medicare starting on January 1, 2006. The drugs used by dual eligible beneficiaries now account for more than half of total prescription drug plan (PDP) drug costs under the Part D program. These costs are paid almost entirely by federal taxpayers.
To compare Medicare Part D and Medicaid drug prices, the Committee obtained confidential information on drug expenditures for dual eligible beneficiaries from the ten largest Part D insurers. The Committee also obtained confidential information on Medicaid drug prices directly from the drug manufacturers. The Committee asked both the Part D insurers and the drug manufacturers to provide pricing information for the 100 prescription drugs used most often by dual eligible beneficiaries. Both the insurers and the drug manufacturers provided this information to the Committee voluntarily.
This report finds that the prices paid for the drugs used by the dual eligible beneficiaries under Medicare Part D are significantly higher than the prices paid by Medicaid for the same drugs. The higher prices for the top 100 drugs produced a windfall of $1.7 billion for drug manufacturers in 2006, the first year of Medicare Part D. The higher prices produced an even larger windfall of $2 billion for the drug manufacturers in 2007.
Comparison of Medicare Part D and Medicaid Drug Prices
In 2006 and 2007, the private Medicare Part D insurers paid $18.7 billion to purchase the top 100 drugs for dual eligible beneficiaries. They received $2.6 billion in rebates and discounts from the drug manufacturers, reducing their total drug costs by 14% to $16.2 billion.
These price reductions were substantially smaller than the Part D insurers would have obtained had they received the same rebates that the Medicaid program receives. If the Part D insurers had been able to obtain the Medicaid discounts for the top 100 drugs, the Part D insurers would have reduced their total drug costs for the dual eligible beneficiaries by over twice as much, $6.3 billion. Figure 1. This would have cut their total drug costs to $12.4 billion. The higher prices paid by the private Medicare Part D insurers increased the cost to the taxpayer for these drugs by 30%.
Drug Manufacturer Windfalls
The higher prices under the Medicare Part D program have created a windfall for drug manufacturers. If the legislation creating the Medicare Part D program had not transferred the dual eligible beneficiaries from Medicaid to the new Medicare Part D program, the manufacturers would have continued to receive the lower Medicaid prices for the drugs used by the six million dual eligible beneficiaries. In 2006 and 2007, the amount of this taxpayer-funded windfall was $3.7 billion for the manufacturers of the top 100 drugs used by dual eligible beneficiaries.
Estimates of Potential Cost Savings
Over the next ten years, dual eligible beneficiaries will use an estimated $432 billion worth of drugs under the Medicare Part D program.26 In 2006 and 2007, the costs of providing the top 100 drugs to these beneficiaries was 30% higher under Medicare Part D than it would have been if the Medicare Part D insurers had paid Medicaid prices for the drugs. Assuming this cost differential remains constant, the Medicare Part D program would save $86 billion over the next decade if the Part D insurers had access to Medicaid drug prices.