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The Benefits of Changing Medicare’s Drug Benefit

The health reform barely passed Congress. Legislators split along party lines. Critics called it an unfunded entitlement.

Yes — the now-beloved Medicare prescription drug program has come a long way from its fraught beginnings in 2003.

For the Affordable Care Act’s defenders, Medicare Part D has become Exhibit A for how a health reform can evolve and win support. Today, few see the program as a controversial, partisan reform, but instead as a treasured part of the nation’s safety net.

It offers a template for ACA advocates, too: As more Americans reap Part D’s benefits, the harder it’s become to make changes.

But the drug benefit still has critics like Health Strategy Associates’ Joe Paduda, many of whom charge Part D as a key driver of the nation’s deficit. And it seems increasingly likely that Part D will be subject to some change, given that legislators are eying across-the-board cuts to government health spending.

Deficit Dealings Spur Another Look

Even in the current deficit conversation, Part D’s popularity has made it difficult for politicians to call for a sweeping overhaul to the fast-growing program, which represented $52.5 billion in 2009 federal spending and is growing at a rapid rate compared with Medicare Part A or Part B.

President Obama and other legislators instead are targeting safer reforms.

Most significantly, the president has repeatedly urged Congress to align Medicare drug payments with Medicaid’s policies. Obama’s statement to the deficit reduction “super committee” specifically calls for extending certain Medicaid rebates to Medicare, for an estimated savings of $135 billion over 10 years.

Hank Lacayo, state president and CEO of the Congress of California Seniors, told California Healthline that his organization generally supports Obama’s proposal, as it will lead to lower costs for Medicare beneficiaries. Elaine Wong Eakin of California Health Advocates concurred, calling the proposal a “step in the right direction.”

“Many low-income, subsidy-eligible beneficiaries are also dually eligible for Medicare and Medicaid,” Wong Eakin added. “And data shows that they need more health care services and drugs than beneficiaries who have only Medicare.”

Keying In on Fraud and Abuse

Congress also is seeking savings by targeting the traditional stalking horse: waste, fraud and abuse.

A Government Accountability Office investigation released this week found that about 170,000 Medicare beneficiaries in 2008 exploited Part D to obtain large quantities of painkillers like oxycodone. At a hearing on Tuesday, senators urged CMS officials to crack down on these individuals and root out other unnecessary care.

However, the upside may be limited: The thousands of offenders identified in GAO’s investigation represent just 2% of program beneficiaries, and the cost of their additional prescriptions was $148 million, or only 0.3% of total Part D spending that year.

Transforming Program by Adopting VA Model

Some advocates say that finding real drug benefit savings will require program changes that go even further.

Writing in a working paper that will appear in Health Economics, scholars Austin Frakt, Steve Pizer and Roger Feldman explore an intriguing possibility: Should Medicare Part D adopt the Veterans Health Administration formulary?

The authors note that VA significantly constricts its formulary in contrast to Medicare. For example, the VA’s national formulary covers just 59% of the nation’s 200 most popular drugs, whereas the average Medicare Part D plan covers about 85% of those drugs. The VA also negotiates directly with drug manufacturers, whereas Medicare is not allowed under Part D to take advantage of its full purchasing power to bargain down prices.

“If Medicare drug plans restricted their formularies to the level of generosity offered by the VA and obtained VA-like drug prices by doing so, we estimate that the program would save $510 per beneficiary per year or a total of $14 billion per year,” Frakt wrote on The Incidental Economist blog.

Resistance to Changes

However, some advocacy groups and policy analysts suggest that Part D is working fine in its current form — and legislators should think twice before touching the program to find short-term savings.

A report commissioned by the Pharmaceutical Research and Manufacturers of America noted that in 2008, more than 121,000 Californians were directly employed in the pharmaceutical industry. A subsequent PhRMA report cautioned that if industry revenues were to be cut by even $20 billion — say, because of reforms to Part D — California would take a $3.4 billion economic hit.

Douglas Holtz-Eakin and Michael Ramlet of the American Action Forum also have warned that introducing Medicaid-style rebates into Medicare Part D would actually raise seniors’ premiums by between 20% and 40% per month.

Here’s a look at what else is making news in health reform.

Rolling Out Reform

  • On Oct. 7, the Institute of Medicine is expected to recommend to HHS how it should determine basic coverage standards for the state health insurance exchanges. HHS will use the recommendations for its regulations for the exchanges. IOM spokesperson Christine Stencel said the report will not outline specific benefits standards for the exchanges but will recommend criteria and methods for HHS to use in determining and updating the essential health benefits package (Selyukh, Reuters, 9/29).
  • Catholic organizations across the country are urging HHS to adopt a broader religious exemption to new rules that will require health plans to cover contraceptive services without member cost-sharing. The new rules are part of a provision in the federal health reform law that will require health plans to cover certain preventive services without copayments, coinsurance or deductibles (Maher, Wall Street Journal, 9/29).

Challenges to Reform

  • Last week, Virginia Attorney General Ken Cuccinelli (R) filed an appeal to the U.S. Supreme Court seeking a review of an appellate court’s decision to reject the state’s challenge to the federal health reform law. In the challenge, Cuccinelli argued that the individual mandate is unconstitutional and conflicts with a state law that protects residents from federal insurance mandates (Reuters, 9/30). In September, judges at the 4th U.S. Circuit Court of Appeals dismissed the lawsuit, ruling that the state lacks legal standing to file it (Haberkorn, Politico, 9/30).
  • The Obama administration and plaintiffs in the multistate lawsuit against the federal health reform law continue to differ on the legality of the overhaul, but the two sides share “a surprising amount of common ground” on the issues. In their recent petitions to the U.S. Supreme Court to review the case, the administration and plaintiffs indicated their desire for a quick resolution to the dispute and urged the high court to review the case in its new term, which began on Monday. In addition, both sides agreed that the dispute about the individual mandate is “about means rather than ends,” as there are alternative solutions to ensuring universal coverage (Liptak, New York Times, 9/29).

In the States

  • Last week, Montana Gov. Brian Schweitzer (D) said he plans to apply for a waiver from the federal health reform law’s mandate for state-based health insurance exchanges in order to create a single-payer health insurance system for the state. The plan would create just one public insurer for more than half of Montana’s population of Medicare and Medicaid beneficiaries and workers with employer-sponsored health insurance. Other residents would have the option of paying into the system if they prefer it to their private insurance (Sanger-Katz, National Journal, 9/29).

On the Hill

  • During a speech at the Hoover Institution at Stanford University last week, House Budget Committee Chair Paul Ryan (R-Wis.) unveiled a proposal he described as a “replacement” to the federal health reform law (Reuters, 9/27). Ryan suggested that the proposal — which he modeled after a similar plan in his fiscal year 2012 budget blueprint — would provide “structural reforms and real solutions” to the current health care problems (Haberkorn, Politico, 9/27). However, the proposal is unlikely to advance in Congress prior to the 2012 elections (Reuters, 9/27).

On the Campaign Trail

  • Last week, Republican presidential candidate and former House Speaker Newt Gingrich (Ga.) unveiled a new set of legislative proposals — which he named a “Contract With America” — that includes repealing the federal health reform law (Summers, Politico, 9/29). In 1994, Gingrich co-wrote the original “Contract With America” that contained specific legislation Republicans pledged to address if they took control of the House. The new document promises that if Gingrich is elected president he will make 10 specific legislative changes and sign as many as 200 executive orders on his first day in office (Mehta, Los Angeles Times, 9/30).
  • While Republican presidential candidate and Texas Gov. Rick Perry has criticized various pieces of health legislation, critics and observers argue that Perry’s own proposals have been largely ineffective. On the campaign trail, Perry repeatedly has criticized the 2006 Massachusetts health reform law — signed by fellow candidate and former Massachusetts Gov. Mitt Romney (R) — and the federal health reform law, objecting to insurance mandates in both laws. Meanwhile, Texas faces numerous challenges covering its residents, including the highest rate of uninsured individuals in the country and the third-lowest percentage of workers with employer-sponsored health coverage nationwide (Ramshaw, Texas Tribune/New York Times, 9/29).

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