Drug Benefit Revisions Might Limit Industry Profit

The Medicare prescription drug benefit has provided a large "financial windfall" for pharmaceutical companies, but "those gains may come back to haunt" them in the event that Democrats take control of Congress after the midterm elections, the New York Times reports. Democrats plan to introduce legislation that would allow Medicare to negotiate directly with pharmaceutical companies for discounts on medications.

According to the Democrats, such legislation would save Medicare as much as $190 billion over the next 10 years.

Brendan Daly, a spokesperson for House Minority Leader Nancy Pelosi (D-Calif.), said that Democrats would use the savings to address the so-called "doughnut hole" coverage gap in the Medicare prescription drug benefit.

However, Republicans have questioned the savings estimate and have said that Medicare has reduced the cost estimate for the prescription drug benefit by $117 billion over the next 10 years to $516 billion.

The Medicare prescription drug benefit in 2007 will cost almost $50 billion and will account for almost 20% of total U.S. prescription drug spending.

Tony Butler, an analyst at Lehman Brothers, said that he does not expect significant revisions to the Medicare prescription drug benefit in the event that Democrats take control of Congress.

President Bush likely would not sign legislation that would significantly revise the Medicare prescription drug benefit, he said.

According to analysts, the Medicare prescription drug benefit has led to increased profits for pharmaceutical companies "both by increasing the prices they receive and by encouraging beneficiaries to fill prescriptions they might otherwise have been unable to afford," the Times reports. Pharmaceutical companies that market medications used by many Medicaid beneficiaries benefited the most from the Medicare prescription drug benefit.

Under the Medicare prescription drug benefit, medication coverage for "dual eligibles" -- beneficiaries who qualify for both Medicare and Medicaid -- transferred from Medicaid to private prescription drug plans. Pharmaceutical companies must provide Medicaid with discounts of at least a 15% on medications, but Medicare does not require such discounts.

As a result, under the Medicare prescription drug benefit, pharmaceutical companies have received as much as 20% more for medications provided to dual eligibles than they did under Medicaid. In addition, pharmaceutical companies this year have increased prices for many commonly used medications by 6% or more, about twice the inflation rate.

Les Funtleyder, an analyst at Miller Tabak, said that some pharmaceutical companies have downplayed the increased profits they have received because of the Medicare prescription drug benefit. "Part D was a good thing for almost everybody," Funtleyder said, adding, "You don't want to draw too much attention to how good it's been" (Berenson, New York Times, 11/6).