Medicare Part D: D for Doomed? - Pharmaceutical Executive

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Medicare Part D: D for Doomed?
New drug coverage plans cost more money and serve fewer patients than the government expected. What if things get worse? Two scenarios for disaster.


Pharmaceutical Executive


How realistic is such a scenario? Here are a few facts that point to such an outcome:

Voluntary beneficiary enrollment has been far below expectations to date. More troubling, government estimates of the number of eligible and enrolled patients changes with the assumptions used. For example, the Boston Globe points out that the government includes the following groups as Medicare enrollees even though their enrollment is not directly voluntary:

  • 3.1 million military and federal government retirees who received comprehensive drug benefits before the start of the Medicare plan
  • 6.4 million retirees who received drug benefits from their former companies or unions
  • 4.5 million people who already had drug coverage through Medicare Advantage plans
  • 6.2 million dual eligibles.

Implementation issues have led to frustrated beneficiaries and public constituents, and may further dampen future enrollment. In many instances, enrolled beneficiaries were not earmarked with the correct level of co-payment, deductible, or benefit coverage. Some paid substantially more than their plan dictates. Plan systems are not up-to-date on the approved drug list, and pharmacists are having difficulties approving enrolled beneficiaries with private plans. And as the Kaiser study documents, states have to pick up the financial slack when the federal payment program fails.

Medicare is losing its potential negotiating power by allowing private insurers to negotiate with drug companies directly. According to a study conducted by Families USA, the Veterans Administration (VA) offers better drug prices than private plans for 19 of the 20 medicines examined. In addition, the VA discounts were two to three times greater than the private plans.

Highly publicized failures of the private sector in recent years have led the public to support a wider government role in the marketplace. Private companies have failed to provide crucial elements of the "social safety net," including affordable health coverage and pension benefits—leading many to support a broader public role in these areas. When the private sector failed to safeguard airports, the federal government took over.

A similar situation is developing with the Medicare drug benefit. As the MMA implementation limps forward, and beneficiaries become frustrated with the benefit structure and access, constituents may demand more federal involvement. So the federal government may have to take a proactive oversight role, even as it collaborates with the private sector.

Strong beneficiary enrollment is necessary for the current approach to Medicare Part D to succeed. Failure of the market-oriented approach could strengthen the hand of those who have been opposed to that approach from the beginning. In the current political climate, with the Republicans weakened and the 2006 midterm elections approaching, advocates for a centralized government program may gain the upper hand.

If this were to happen, the impact on the pharmaceutical industry could be severe. For example, if the government were to implement one national formulary, pharmaceutical companies would face enormous pressure to achieve a favorable position on that formulary. A vicious cycle of discounting and rebating to ensure formulary placement might lead to a downward spiral in pharmaceutical prices. This has been the end result of other government-run health programs, such as Women, Infants and Children (WIC).

In "Out of the Mouths of Babes" (Pharm Exec, September 2004), Mason Tenaglia recounts the effect of WIC on companies that started out with healthy market share and a profitable business. He describes the slippery slope from what began in the early 1990s as an innocent increase in baby-formula rebates to an all-out price war, in which major manufacturers—Abbott, Wyeth, and Bristol-Myers Squibb—cut their profit margins to the bone in an effort to win government contracts. Depending on how strong the government role in pricing becomes, a similar scenario could play out in the Medicare drug benefit.

Scenario #2

Costs far exceed original projections, even though enrollment is strong. Enrollment meets or exceeds expectations, but costs per beneficiary skyrocket under lax cost control by private plans (which increase benefits to attract enough beneficiaries to remain in business). Cost overruns affect federal priorities, and the government becomes unwilling or unable to fund this program. Commitments to war and disaster relief place strong pressures on an administration that prizes tax cuts for individuals.


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