Democrats blast costly Medicare benefit

November 1, 2007

Washington, D.C.-In the latest salvo against private health plans, Congressional leaders claim that the Medicare Part D drug benefit raised costs for taxpayers and seniors some $15 billion this year due to higher administrative and sales costs and lower rebates from drug companies.

"Privatizing the delivery of the drug benefit has enriched the drug companies and insurance industry at the expense of seniors and taxpayers," said Rep. Henry Waxman (D-Calif.), chair of the House Oversight & Government Reform Committee, which issued an report analyzing Part D costs and pricing methods.

Republicans shot back that the critics lack credibility, that Part D is working better than expected, and that plans have higher expenses because it's a lot of work to set up formularies and negotiate lower rates for beneficiaries. Other analysts said that the report mixes apples and oranges and presents faulty and biased data.

Waxman's investigators found that Part D plans tallied administrative expenses and sales costs of approximately $4.6 billion in 2007, including $1 billion in profits. This amount, they claim, is six times higher than the administrative costs of the traditional Medicare fee-for-service program. If Part D expenses were reduced to levels spent by other state and federal programs, Medicare would have saved $3.9 billion this past year.

Another charge is that Part D plans spend too much on drugs because they fail to negotiate rebates from drug companies anywhere near the levels obtained by Medicaid and other government health programs. Part D rebates cut drug expenses by only 8%, according to the analysts, while Medicaid rebates run around 26%, and public health and military programs negotiate discounts over 50%.

The bottom line: Part D spending could have been $10.7 billion less if plans obtained rebates comparable to Medicaid programs. Instead, drug companies are profiting because they now can give lower rebates on the drugs provided to dual-eligibles, who previously obtained higher discounts from state Medicaid programs.

One tricky issue raised by the investigators is whether Part D plans pass along rebates to beneficiaries, as required by the law. This is particularly important to seniors who fall into the coverage gap and have to pay the full cost of drugs out-of-pocket.

They are supposed to have access to negotiated prices, including all rebates and discounts, but the investigators claim that most insurers do not explicitly pass along rebates in the form of the lower prices at the pharmacy counter. The result is that the plans get rebates on the nearly $13 billion paid by seniors in the donut hole, which amounts to a $1-billion bonus. Insurers claim that they use such savings to lower premiums and costs for all beneficiaries, but the investigators believe that much of the money merely pads profits.

One accomplishment of Part D plans is to promote the use of generic drugs. Medicare drug plans achieved 59% generic prescribing this past year, compared to 54% for Medicaid. But even here, the report describes this success as "mixed."

The analysis (available at http://www.oversight.house.gov/) is based on data provided by all the top Part D insurers: Aetna, Caremark, Coventry, Highmark, Humana, Kaiser, Medco, Memberhealth, United Universal American, Wellcare and Wellpoint.