Medicare Part D Pays Needlessly High Brand-Name Drug Prices

By

Marc-André Gagnon, PhD.

Associate Professor, School of Public Policy and Administration, Carleton University

Sidney Wolfe, MD.

Founder, Senior Adviser for the Health Research Group, Public Citizen

Policy Brief

July 23 2015

Medicare Part D Pays Needlessly High Brand-Name Drug Prices – Highlights

  1. After including rebates, brand-name drugs cost Medicare Part D 198% of the median costs for the same brand-name drugs in the 31 OECD countries.
  2. Medicare Part D pays on average 73% more than Medicaid and 80% more than the Veterans Benefits Administration (VBA) for brand-name drugs.
  3. Medicare Part D would save from $15.2 billion to $16 billion a year if it could secure the same prices that Medicaid or VBA, respectively, receives on the same brand-name drugs.
  4. While Medicaid and VBA often are used as benchmarks because of the rebates or discounts they secure, even these organizations pay higher prices than many OECD countries.
  5. Under current Medicare Part D pricing, non-innovative “me-too” drugs are priced as much or more than older, equally effective versions. By currently paying inflated prices for drugs that do not provide value for money, Medicare Part D artificially increases the returns and incentives for non-innovative “me-too” drugs to the detriment of new innovative medicines for unmet needs.
  6. Reducing brand-name drug prices would reduce the high level of cost-related non-adherence (people not filling their prescription for financial reasons) found in Part D, by reducing beneficiaries’ premiums and co-pays. In addition, since the government pays for the majority of Medicare Part D, taxpayers’ contribution would decrease by at least $11 billion every year.

The study concludes with specific recommendations for legislation, including suggestions from current Medicaid and VBA policies, to lower Medicare Part D prices. This would thereby alleviate the current de facto rationing that occurs because so many Medicare recipients cannot afford these inordinately high prices and suffer the health consequences of cost-related non-adherence to drugs prescribed for them.

Background

Medicare Part D was implemented in 2006 to improve drug coverage for seniors (65+) and for people with disabilities. Medicare Part D is the largest federal drug program (Figure 1), and covered 39.1 million people in the fiscal year 2013.[1]

With $69.3 billion in prescription drug spending in 2013,[1] Medicare Part D alone represents approximately 7% of the $993 billion global prescription drug market.i Around 58% of Medicare Part D spending on prescription drugs is paid to brand-name manufacturers.[33]

Despite its size, Medicare Part D is not allowed to “interfere with the negotiations between drug manufacturers and pharmacies and [Part D plan] sponsors” (P.L. 108-73, Section 1860D-11). Plan sponsors can obtain substantial rebates from both drug manufacturers and pharmacies, but the federal program is prohibited from leveraging its purchasing power to realize economies of scale due to this non-interference clause. Numerous reports and scientific papers have demonstrated that, after taking into account the rebates obtained by plan sponsors, prescription drugs covered under Medicare Part D are priced at much higher levels than in other federal programs.[2-15] While the Centers for Medicare and Medicaid Services (CMS) are frequently called upon to reduce drug prices for Medicare Part D, CMS is forbidden from taking steps to secure additional rebates or discounts without action from Congress. As this policy brief will show, by using previously unavailable data comparing U.S. brand-name drug prices with those of all other countries members of the Organization for Economic Co-operation and Development (OECD), Medicare Part D needlessly pays significantly higher prices than any other comparator countries. Moreover, even in comparison to other U.S. government programs such as Medicaid and the Veterans’ Benefits Administration (VBA), significantly higher prices are paid by Medicare Part D.

Advocates for price reductions argue that reductions in Part D prices would produce significant savings for the Medicare program itself and reduce beneficiary premiums, thereby aligning Medicare Part D with these other programs. Advocates for price reductions often argue that Medicare Part D was designed less as a system for social protection for the sick than as a system of corporate welfare for brand-name drug companies.[3,16-17] Price reduction opponents argue that a rebate policy would be compensated by reduced incentives for manufacturers to offer favorable rebates to private payers, that it would undermine the competitive system used in Part D and that it would lead to higher beneficiary premiums. While contending that it would increase costs for payers, opponents also argue that it would reduce revenue available for private investment in research and development for new drugs and thereby harm innovation.[18-20]

This policy brief assesses the price reduction issue by:

  1. Comparing domestic and international prices for patented drugs;
  2. Analyzing price levels for brand-name drugs obtained by different U.S. government programs;
  3. Looking at the correlation between price levels and research and development spending; and
  4. Examining the potential impacts of policy reforms.

Medicare Part D Drug Prices

Medicare Part D Drug Prices

See full PDF below.