Private Medicare Drug Plans: Seniors and Taxpayers Hurt by High Expenses, Low Rebates

Source: U.S. House of Representatives, Committee on Oversight and Government Reform

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.

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