Medicare Drug Benefit Could Increase Use of Generic Drugs

When the Medicare Modernization Act (MMA) passed in 2002, many consumer advocates cried foul. They saw MMA’s restrictions on the reimportation of prescription drugs and its prohibition of government price negotiation as a barefaced handout to the pharmaceutical industry. But they did not notice a countervailing feature written into the Act — the so-called “doughnut hole” financing scheme that might effectively carve away pharmaceutical industry profits by undermining its marketing of blockbuster drugs.

The doughnut hole was created, in part, to mitigate the high cost of providing drug coverage to the nation’s Medicare beneficiaries. But the cost-sharing mechanism also was designed to curb consumer use of expensive, newer drugs when comparably effective cheaper ones are available.

The doughnut hole does this by creating an incentive for beneficiaries to keep their overall drug costs below $2,450. Up until that amount, Part D covers most drug expenses, but between $2,450 and $5,100 seniors must pay for their medications out of pocket until their costs exceed $5,100, at which point coverage kicks in again. This sizable gap is the “hole” in the proverbial doughnut and, according to the Kaiser Family Foundation, 6.9 million Medicare beneficiaries likely will reach the doughnut hole in 2006.

“Really, it’s not just the doughnut hole,” Stacey Swartz, director of management and consumer affairs for the National Community Pharmacists Association, said. “The entire benefit creates incentives to keep drug costs low by having participating plans share financial risk — it’s a real departure from how things are done in the private sector.”

John Rother, director of policy and strategy for AARP, agrees, saying, “Generics will definitely become a bigger share of the total market going forward.”

Towards Price Transparency

Two studies — one conducted by Consumers Union and the other by CMS — found that most seniors can avoid the doughnut hole by switching from a brand name drug to one or more comparable generic alternatives.

The Consumers Union study found that beneficiaries taking five brand-name drugs could save between $2,300 and $5,000 annually if they made the switch. Overall, the Medicare program could save about $8 billion annually if all beneficiaries taking brand-name, cholesterol-lowering statins switched to lower-cost treatments.

Similarly, the CMS study showed that beneficiaries enrolled in mid-priced drug plans could reduce their costs by as much as 59% by switching from higher cost drugs to generics, while beneficiaries in the lowest-priced plans could reduce drug costs by as much as 83% by moving to generics.

All this could spell bad news for pharmaceutical manufacturers that have come to rely increasingly on new blockbuster drugs — pushed through direct-to-consumer advertising — for their windfall profits.

Ian Morrison, a health industry consultant, believes MMA will create a new world of drug price transparency at a time when many of the drug industry’s blockbusters will be going off patent and huge classes of drugs like statins will be going generic.

But Jeff Truitt, spokesperson for the Pharmaceutical Researchers and Manufacturers of America, said the industry is taking the threat in stride. “We have been dealing with the growing use of generics for many years,” Truitt said. “We have faith that the system is going to continue to work well as long as physicians make final decisions.”

Consumer Education

In the past consumers often were oblivious to what their medications cost –doctors wrote their prescriptions and insurers paid the bill — but Part D creates a new motivation for consumers to seek out and compare drug prices.

Unfortunately, prices often are difficult to find. Medicare’s website includes a comprehensive price comparison tool but because most seniors don’t access the internet, they’re unlikely to make use of it.

“Most seniors don’t use the Web, but if you are one of the few seniors that go online, the differences would be most transparent to you,” Tricia Newman, Medicare policy director for the Kaiser Family Foundation, said.

Instead, seniors may rely on television advertisements for their pharmaceutical decisions. Such advertisements are highly effective in generating drug sales — a recent Harvard University study found that, for the 25 largest drug classes, every $1 the drug industry spent on direct-to-consumer advertising yielded an additional $4.20 in drug sales.

“We’re seeing PhRMA advertising drugs that have a generic equivalent,” AARP’s Rother said. “DTC advertising is increasing on those drugs because the industry doesn’t want people switching to the cheaper generic. They’re trying to give consumers the idea that these are better drugs [than the generics] even when they’re not.”

Strategic Maneuvering

Some pharmaceutical industry players — including AstraZeneca, Johnson & Johnson, Novartis and Bristol-Myers Squibb — might be hoping to head off a damaging consumer or regulatory shift with a preemptive move. On February 13, seven drug firms announced a plan to “plug” the doughnut hole by offering low-income beneficiaries a 50% price discount on the companies’ drugs when they reach the $2,450 limit. They called their program “Bridge Rx.”

But according to the Wall Street Journal, officials at the HHS Office of the Inspector General (OIG) saw the potential for the industry to use Bridge Rx to steer seniors to certain drugs — namely their own newer, brand-name varieties. The government warned such a plan could run afoul of anti-kickback laws if it only offers discounts for its own preferred drugs. In an advisory bulletin, OIG stated that the plan would have to involve a large number of companies and a broad range of drugs, including generics, to be compliant with federal regulations.

Bridge Rx, if it passes regulatory muster, could provide a much-needed helping hand to poor seniors caught in the coverage void. But it won’t address the larger market shifts likely to occur as Medicare, the largest single purchaser of health care in the United States, adopts a consumer-driven, cost-containing approach to drug coverage.

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