V I E W P O I N T

Seniors Deserve a Medicare-Operated Prescription Drug Plan

The Medicare Modernization Act (MMA) privatized the prescription drug program by allowing only private companies to participate in Medicare Part D. The law expressly prohibits Medicare from directly insuring seniors and providing a government-administered prescription drug plan. In addition, a "noninterference" provision in the law prohibits the Secretary of Health and Human Services from directly negotiating drug prices with pharmaceutical manufacturers. The resulting privatization of the prescription drug benefit has set up an administratively inefficient, unnecessarily expensive, and overly complex program which fails to meet the needs of many seniors.

National Committee Position

A government Part D plan would ease confusion among seniors and deliver peace of mind about their health care choices.

Since its inception in 1965, seniors have come to trust and rely upon the Medicare program to receive vital medical benefits. The new Medicare Part D program differs dramatically from Medicare Part B. Under Part B, the government acts as the primary insurer and seniors pay a uniform national premium, deductible and coinsurance for covered services such as doctor visits. However, under Part D, seniors must comparison shop among dozens of unfamiliar private plans that have varying formularies, deductibles, premiums, co-pays, and coverage gaps. After seniors have diligently done their homework and selected a plan, they are locked into that plan for a year. During that year, plans may increase their prices or drop coverage of drugs needed by the senior.

Seniors should have the option of participating in the traditional Medicare program rather than having to sort through countless private prescription drug plans in order to receive prescription drug coverage. A government-operated prescription drug benefit could provide a more comprehensive formulary at uniform prices. Furthermore, unlike private companies, a government plan would have no need to increase prices and change formularies throughout the year to maximize profits.

A government Part D plan would be more administratively efficient to operate.  

The current structure of the prescription drug benefit has high administrative costs because over 3,000 private plans are competing to attract Medicare's 43 million beneficiaries. Attracting and retaining these beneficiaries involves a significant amount of money in marketing-related activities. A recent study examining Congressional Budget Office (CBO) data found that marketing costs and insurance industry profits add $38 billion to the cost of the drug benefit over the first eight years of the program. ¹Another study that appeared in the New England Journal of Medicine attributed private health insurance plans with higher administrative costs than Medicare largely due to the underwriting and marketing activities of private plans. This study found that private insurance companies in the United States spend 11.7 cents of every health care dollar on administrative costs, compared with 3.6 cents for Medicare. ² These studies clearly demonstrate that a government-administered Part D plan could be operated at a lower administrative cost than plans administered through private companies whose overriding concerns are garnering market share and profits.

A government Part D plan would result in lower prescription drug prices through direct negotiations with drug manufacturers.

The federal government has a history of negotiating significant price discounts on prescription drugs for veterans and Medicaid beneficiaries. The Department of Veterans Affairs (VA) achieves significant discounts on generic and brand-name prescription drugs by negotiating directly with pharmaceutical manufacturers on behalf of its five million beneficiaries. One study by the Congressional Budget Office found that, on average, the VA pays only about 42 percent of the Average Wholesale Price (AWP) - or the suggested list price - for brand-name drugs. ³Similarly, the Medicaid program received concessions on prescription drug prices through a federal rebate program which required manufacturers to sell drugs to the Medicaid program at discounted rates. CBO has stated that the Medicaid Rebate Program pays only about 51 percent of the AWP for brand-name drugs. ⁴

Several studies have shown that private Part D plans cannot deliver the same low prices found in other federally-negotiated programs. One study by Families USA found that the VA negotiated substantially lower prices for 19 of the top 20 drugs prescribed to seniors, compared with private Part D plans. ⁵Another study by the minority staff at the House Government Reform Committee found that the average drug prices offered by the ten leading Part D plans were 84% higher than federally negotiated prices (Federal Supply Schedule). ⁶A third study by the Prudential Equity Group forecasted that drug companies could receive up to $2 billion in extra profits in 2006 because private Part D plans cannot match the low prices that the Medicaid program paid for prescription drugs. Based on this study, a pharmaceutical economics professor at the University of Minnesota stated that drug companies could stand to gain $40 billion in extra profits over the next decade. ⁷

A government Part D plan would restore the social insurance nature of Medicare.

The Medicare Modernization Act (MMA) privatized prescription drug coverage for America's seniors and eroded the social insurance nature of the Medicare program. Congress could have created a Part D benefit that established Medicare as the collective buyer of prescription drugs for its 43 million beneficiaries. Many studies have shown that a collective buyer could negotiate significantly greater discounts on prescription drugs compared to multiple insurers. ⁸Medicare's successful risk pool has been fractured by the overwhelming number of private Part D plans. The private plans that offer the most comprehensive drug benefits often come at a cost that many of our oldest and frailest seniors cannot afford. The health and well-being of our nation's seniors should not be dependent upon the profit-margin of private companies. A Part D benefit operated by the traditional Medicare program would better harness the purchasing power of millions of Medicare beneficiaries to deliver substantially lower prescription drug prices.

Baker, Dean. Center for Economic and Policy Research, The Savings from an Efficient Medicare Prescription Drug Plan ( Washington , D.C. : January 2006).

Woolhandler, Steffie; Campbell, Terry; and Himmelstein, David U. The New England Journal of Medicine, Costs of Health Care Administration in the United States and Canada . Volume 349: 768-775, August 21, 2003.

Congress of the United States , Congressional Budget Office, Prices for Brand-Name Drugs Under Selected Federal Programs ( Washington , D.C. : June 2005).

Ibid.

Note: Families USA examined Medicare prescription drug plan prices for the top 20 drugs prescribed to seniors in 2004 for two regions of the country and compared them to the prices negotiated by the federal government through the Department of Veterans Affairs.

Source: Families USA , Falling Short: Medicare Prescription Drug Plans Offer Meager Savings , Special Report ( Washington , D.C. : December 2005).

Note: The report examined prices for a monthly supply of the ten drugs with the highest sales to beneficiaries in 2004 under the ten leading Medicare private Part D plans.

Source: United States House of Representatives, Committee on Government Reform—Minority Staff, Special Investigations Division, New Medicare Drug Plans Fail to Provide Meaningful Drug Price Discounts , Prepared for Rep. Henry A. Waxman ( Washington , D.C. : November 2005).

Pugh, Tony. MSNC News Article, Part D Could be Profit Boon for Drug Makers: Eliminating Rebates May Net Industry $2B , March 22, 2006.

See Woolhandler, Steffie; Campbell, Terry; and Himmelstein, David U. The New England Journal of Medicine, Costs of Health Care Administration in the United States and Canada . Volume 349: 768-775, August 21, 2003 & Baker, Dean. Center for Economic and Policy Research, The Savings from an Efficient Medicare Prescription Drug Plan ( Washington , D.C. : January 2006).

NCPSSM Policy & Research, April 2006

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