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Private Medicare Drug Plans: Seniors and Taxpayers Hurt by High Expenses, Low Rebates
Today Chairman Henry A. Waxman and 12 members of the Oversight and Government Reform Committee released a new report: Private Medicare Drug Plans: High Expenses and Low Rebates Increase the Costs of Medicare Drug Coverage.
"Privatizing the delivery of the drug benefit has enriched the drug companies and insurance industry at the expense of seniors and taxpayers," said Rep. Waxman. "The program's inflated administrative costs and meager drug rebates will cost taxpayers and seniors $15 billion this year alone."
The investigation by the staff of the House Oversight Committee is the first independent analysis to have access to proprietary data about drug plan costs and drug prices. Key findings include:
* High administrative expenses. The private Part D insurers report administrative expenses, sales costs, and profits of almost $5 billion in 2007 - including $1 billion in profits alone. The administrative costs of the privatized Part D program are almost six times higher than the administrative costs of the traditional Medicare program.
* Small drug rebates. The drug price rebates negotiated by the Part D insurers reduce Medicare drug spending by just 8.1%. In contrast, rebates in the Medicaid program reduce drug spending by 26%, over three times as much. Because of the difference in the size of the rebates, the transfer of low-income seniors from Medicaid drug coverage to Medicare drug coverage will result in a $2.8 billion windfall for drug manufacturers in 2007. The Part D insurers receive no rebates or other manufacturer discounts for three-quarters of the drugs used by seniors.
* Failure to pass through rebates to seniors. When the insurers do obtain drug price rebates, they do not use the rebates to reduce pharmacy drug prices. This year alone, the private insurers will receive $1 billion in rebates on purchases that seniors in coverage gaps, such as the donut hole, pay for out of their own pockets.
Executive Summary
Unlike traditional Medicare, which is run directly by the government, the new Medicare Part D prescription drug program depends on private insurers to provide drug coverage to Medicare beneficiaries. This reliance on private insurers has sparked a debate about the consequences of privatizing the delivery of Medicare services. Proponents, including President Bush, have argued that competition among private insurers will lead to "better coverage at more affordable prices." Opponents have questioned whether private companies can match the efficiency and negotiating power of traditional Medicare.
This debate over the design of Medicare Part D has been largely theoretical. The actual costs incurred by the private drug insurers and the drug prices they negotiate are proprietary and closely guarded. This has left Congress and the public without access to the information needed to assess the performance of private insurers and to compare their performance with traditional Medicare.
At the request of Chairman Waxman and Reps. Braley, Cooper, Cummings, Higgins, Hodes, Kanjorski, Kucinich, McCollum, Murphy, Towns, Van Hollen, and Welch, this report breaks new ground by analyzing proprietary cost and pricing data from the private insurers that operate the Medicare Part D program. The Committee obtained information on administrative expenses, sales costs, profits, and drug rebates from the 12 leading insurers offering Medicare prescription drug plans and Medicare Advantage drug plans. These 12 insurers provide Medicare drug benefits to over 18 million Medicare beneficiaries, almost 75% of the enrollees in Part D. The report is the first independent analysis to have access to this proprietary data about plan costs and drug prices.
The cost and pricing data obtained by the Committee reveal that use of private insurers to deliver Medicare drug coverage is driving up costs and producing only limited savings on drug prices. The report estimates that taxpayers and Medicare Part D beneficiaries could have saved almost $15 billion in 2007 if administrative expenses in the program were reduced to the level achieved by traditional Medicare and drug prices were lowered to Medicaid levels.
The report has five principal findings:
- The Part D insurers have high administrative expenses. The administrative expenses, sales costs, and profits of the private insurers offering Medicare Part D coverage will cost taxpayers and beneficiaries $180 per beneficiary in 2007. Taking into account the costs to the government of monitoring the private insurers, total administrative expenses, sales costs, and profits will reach $4.6 billion in 2007, with the profits of the Part D insurers alone accounting for $1 billion. The administrative expenses, sales costs, and profits of the privatized Part D program are almost six times higher than the administrative expenses of traditional Medicare. These high expenses do not appear to be due to one-time "start-up" costs because the total expenses increased from 2006 to 2007.
- The Part D insurers have not negotiated significant drug manufacturer rebates. The rebates negotiated from drug manufacturers by the private Part D insurers will reduce Medicare drug spending by 8.1% in 2007. In contrast, the Medicaid program receives rebates from drug manufacturers that reduce drug spending by 26%, over three times as much. The small size of the Medicare rebates and the transfer of low-income dual-eligible beneficiaries from Medicaid drug coverage to Medicare drug coverage will provide a $2.8 billion windfall to pharmaceutical manufacturers in 2007.
- The Part D insurers receive rebates on drug purchases made by beneficiaries in coverage gaps. The Medicare Modernization Act requires that private insurers give Medicare beneficiaries "access to their negotiated prices," including "all discounts, … rebates, [or] other price concessions." When the Part D insurers obtain rebates, however, they do not pass them through to beneficiaries by reducing drug prices in coverage gaps like the "donut hole." Instead, the dollars flow in the opposite direction: the private insurers receive rebates from the drug manufacturers on purchases paid out-of-pocket by beneficiaries. In 2007, the Part D insurers are expected to receive $1.0 billion in drug rebates from transactions in which beneficiaries in coverage gaps pay 100% of the drug costs.
- The Part D insurers have established drug pricing formulas that leave beneficiaries and taxpayers vulnerable to price increases. In almost all cases, the private insurers use pricing formulas that pay pharmacies the drug manufacturers' full list prices minus a fixed percentage and a small dispensing fee. These formulas have resulted in drug prices that are generally no lower than those already available through discount pharmacies and on-line drugstores, while leaving beneficiaries and taxpayers vulnerable to repeated increases in list prices by the drug manufacturers.
- The Part D insurers have a mixed record in promoting the use of generic drugs. In 2007, 59% of prescriptions filled by Medicare Part D will be filled with generic drugs. This level of use of generic drugs compares favorably with Medicaid, which fills 54% of prescriptions with generic drugs. It does not compare favorably with the experience of the Department of Veterans Affairs, which fills 68% of prescriptions with generic drugs.
High Administrative Costs, Sales Expenses, and Profits
The administrative costs, sales expenses, and profits of the private Part D insurers result in significant costs to taxpayers and Medicare beneficiaries. In 2007, the Part D insurers will incur $4.3 billion in administrative costs, sales expenses, and profits, an average of $180 per beneficiary enrolled in Medicare Part D. One Part D insurer reported administrative costs, sales expenses, and profits of $325 per beneficiary for one of its plans in 2007. Many reported administrative costs, sales expenses, and profits in excess of $200 per beneficiary.
In addition to the insurers' administrative costs, sales expenses, and profits of $4.3 billion, the Centers for Medicare and Medicaid Services (CMS) spends an additional $300 million administering the Part D program. Taking these added costs into account, the total administrative costs, sales expenses, and profits of the program will be $4.6 billion in 2007. These administrative costs, sales expenses, and profits account for 9.8% of the total costs of Medicare Part D.
These administrative expenses, sales costs, and profits are well above the administrative expenses for other parts of the Medicare program. Traditional Medicare administrative expenses under Part A (hospital care) and Part B (outpatient care) account for 1.7% of total Part D costs. The administrative expenses, sales costs, and profits of the privatized Medicare Part D program are almost six times higher than administrative expenses of the traditional Medicare program. Reducing the administrative expenses, sales costs, and profits of the Part D program to the level of traditional Medicare would save taxpayers and beneficiaries $3.9 billion in 2007.
The Medicare Part D administrative expenses, sales costs, and profits are also over three times higher than the administrative expenses of a large state provider of prescription drugs to seniors and almost twice as high as the expenses incurred by large private pharmacy benefit managers in delivering drug benefits to private sector clients.
The high administrative expenses, sales costs, and profits of the Part D insurers do not appear to be attributable to one-time "start-up" expenses incurred during 2006, the first year of Part D coverage. The average administrative expenses, sales costs, and profits of the insurers increased by 15% in 2007, rising from $156 per beneficiary in 2006 to $180 per beneficiary in 2007.
Low Drug Rebates
In total, the manufacturer rebates negotiated by the Part D insurers will reduce drug spending by 8.1% in 2007. These rebates are smaller than those received by other government programs. Manufacturer rebates reduce Medicaid drug spending by 26%, over three times as much. Although not directly comparable, the Department of Veterans Affairs (VA) negotiates average manufacturer drug discounts of 50%. If the Part D program obtained drug manufacturer rebates that were as large as the Medicaid rebates, drug costs for taxpayers and beneficiaries would be reduced by $10.7 billion in 2007.
Both Medicaid and the VA obtain rebates or discounts from both manufacturers of brand-name drugs and manufacturers of generic drugs. The Part D insurers have, in almost all cases, been able to obtain these rebates only from manufacturers of brand-name drugs. In total, the Part D insurers examined in this report received rebates on only 637 different drugs, 27% of the 2,370 drugs used by Medicare Part D beneficiaries. The average Part D insurer received rebates on only 210 drugs, just 8.6% of the 2,370 different drug products used by beneficiaries. Of the 100 drugs with the highest expenditures under Medicare Part D, there were 18 drugs for which none of the insurers negotiated any rebates, including several brand-name drugs.
The small size of the rebates has resulted in a significant windfall for pharmaceutical manufacturers, particularly for drugs that are sold to dual eligible beneficiaries: individuals who are enrolled in both Medicaid and Medicare. Prior to January 1, 2006, there were 6.2 million Medicare beneficiaries who received their drug coverage through the Medicaid program. For the drugs purchased by these beneficiaries, the manufacturers provided significant rebates. After January 1, 2006, these dual eligible beneficiaries were switched to Medicare Part D coverage. Because they are now providing much smaller rebates on the drugs used by these Part D beneficiaries, drug manufacturers are receiving a windfall in reduced rebates worth an estimated $2.8 billion in 2007.
Drug Rebates in Coverage Gaps
The Medicare Modernization Act requires that Medicare beneficiaries have "access to negotiated prices," including "all discounts, direct or indirect subsidies, rebates, other price concessions, or direct or indirect remunerations." This provision is intended to ensure that even when beneficiaries are in coverage gaps, they are able to benefit from pricing discounts or rebates negotiated by the Part D insurers.
Despite the statutory mandate, the private insurers are not using the rebates they receive to reduce drug prices for Part D beneficiaries at the pharmacy. Instead, the insurers are retaining these rebates even when the beneficiaries are in coverage gaps and are paying the full cost of the drugs themselves. The total value of the rebates that the Part D insurers receive on purchases made by beneficiaries in coverage gaps is large. In 2007, the Part D insurers are expected to receive $1.0 billion in rebates on drug purchases paid for out-of-pocket by beneficiaries.
The Part D insurers claim that they use these excess rebates received from drug manufacturers to reduce drug plan premiums, providing an actuarially equivalent reduction in premiums. Premium reductions, however, provide no savings at the pharmacy counter and result in an indirect subsidy from beneficiaries with high out-of-pocket drug expenditures to beneficiaries with no or low out-of-pocket expenditures. Several of the Part D insurers conceded in interviews that they retain a portion of these rebate payments as profits.
Increases in Drug Manufacturer List Prices
With only two exceptions, the Part D insurers have established drug pricing formulas that pay pharmacies the manufacturers' published "Average Wholesale Prices," which are the manufacturers' list prices, minus a fixed percentage (on average 15%), plus a small dispensing fee (on average $2.10 per prescription). These pricing formulas result in pharmacy prices that are about the same as the prices charged by discount pharmacies like Costco, Wal-Mart, or Drugstore.com.
One effect of these pricing formulas is that they leave beneficiaries and taxpayers vulnerable to increases in drug manufacturer list prices, which are passed on as price increases at the pharmacy counter. Since the Part D program went into effect in January 2006, the average list price for the 25 most popular drugs used by Part D beneficiaries has increased by 8.9%, almost twice as fast as the overall inflation rate. Under the pricing formulas negotiated by the Part D insurers, beneficiaries in coverage gaps pay these price increases out-of-pocket. Beneficiaries enrolled in plans that set copay levels as a percentage of the pharmacy price also pay higher copays. Taxpayers are vulnerable to the increases in list prices because the Medicare program pays the full cost of drugs used by low-income Part D beneficiaries and 80% of the costs of drugs used by beneficiaries who receive catastrophic coverage.
Use of Generic Drugs
In 2007, 59% of prescriptions for Medicare Part D beneficiaries will be filled with generic drugs. The level of generic drug use in Medicare Part D is higher than the level of generic drug use in Medicaid, which fills 54% of prescriptions with generic drugs. The level of generic drug use in Medicare Part D is significantly lower than the level of generic drug use achieved by the VA, which fills 68% of prescriptions with generic drugs.
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