Part D Politics: Medicare Drug Rebates or Price Controls?

While health care was barely mentioned in the recent State of the Union address, President Obama generated some interest in his proposal to cut Medicare spending by reducing “taxpayer subsidies to prescription drug companies.” That’s code for requiring pharma marketers to pay rebates on medicines provided by Medicare Part D plans to low income “dual eligibles” who previously received prescription drugs through state Medicaid plans. Savings to Medicare are calculated at about $150 billion over ten years, and many Democrats and consumer advocates think it’s a great idea.  

Pharmaceutical companies struck back, blasting the President’s “radical proposal” for imposing government price controls on Part D. The Pharmaceutical Research and Manufacturers of America (PhRMA) claimed that drug plans save money for Medicare by negotiating lower prices, and that tampering with the program would lead to higher premiums and reduced access to medicines.

Meanwhile, a proposal for real “price controls” came from a coalition of consumer advocates that predict even greater savings by scrapping Part D plans altogether. The Center for Economic and Policy Research (CEPR) calculates that taxpayers would save up to $541 billion by 2022 if the government negotiates all prices for Medicare drug coverage, as it does for hospitals and providers. Canada, Europe and other countries spend much less on prescription drugs than the U.S., says CEPR, because their governments determine what and how health systems pay for medicines.

Although most Republicans back the market-based Part D program, the rebate idea has some traction among health care providers as preferable to continued cuts in Medicare reimbursement for hospitals and doctors. Similarly, advocates for government control of drug prices has strong support from labor unions and consumer groups which, like everyone else, are looking for ways to reduce the federal deficit without curbing health care and other entitlements.

The debate is sure to prompt more analysis of Part D outlays and savings. While the program has proven less costly than initially predicted by the Congressional Budget Office, much of the savings apparently come from lower-than-expected enrollment and higher utilization of generic drugs.

At the same time, Part D supporters gained ammunition from the recent announcement from the Centers for Medicare and Medicaid Services (CMS) that seniors will pay less next year for drug benefits:  the standard deductible for Part D plans will drop almost 5% in 2014, and copayments will be lower. Depending on where you sit, that’s evidence that Part D is working better than expected - or that costs could go down even more with aggressive government intervention.