Is Medicare controlling drug costs?

August 1, 2006

WASHINGTON, D.C.-Private plans can't negotiate the same low prices on prescription drugs that government agencies can, according to patient advocates; they want the federal government to take over the task of setting prices for Medicare prescription drug programs, just as it does for hospitals and doctors.

WASHINGTON, D.C.-Private plans can't negotiate the same low prices on prescription drugs that government agencies can, according to patient advocates; they want the federal government to take over the task of setting prices for Medicare prescription drug programs, just as it does for hospitals and doctors.

The Centers for Medicare and Medicaid Services (CMS) counters that its market-based program is achieving substantial discounts on prescription drugs and saving money by encouraging more generic drug use.

The debate heated up in June when Families USA unveiled a study documenting how the Department of Veterans Affairs (VA) negotiates prices much lower than Part D Medicare prescription drug plans (PDPs). Its analysis of prices for 20 drugs most often prescribed to seniors found almost a 50% difference between some VA and PDP drug prices. The advocacy group claimed that Part D plans were "simply passing manufacturer price increases along to Medicare" patients and not doing enough to ratchet down costs.

Analysts at CMS countered that PDPs are doing a good job negotiating significant discounts and achieving stable prices for beneficiaries. Its study found that Medicare drug prices rose 3.6% from December 2005 to June 2006, slower than the 4% rise in AWP (average wholesale price) for drugs. CMS attributes the hefty discounts to "strong competition among Medicare prescription drug plans," which has produced very low premiums as well as low prices and copays at many plans.

Moreover, CMS says that seniors can save even more by switching to lower-cost branded and generic drugs. And to critics raising fears that some beneficiaries will be hard hit by the looming coverage gap, CMS cites a PricewaterhouseCoopers study estimating that only 8% of seniors with drug coverage will be affected by this problem.

Separately, a report from AARP found that drug prices rose much faster than inflation during the first three months of the Medicare drug benefit. AARP is monitoring almost 200 commonly prescribed drugs to assess the impact of the new benefit program on manufacturer prices.

One problem in comparing these reports is they track different products over varying periods of time. The CMS report assessed prices over six months on drugs to treat common chronic conditions, while Families USA tracked almost 200 medicines over a longer period.