Be careful what you wish for

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Success! When Congress was debating the new Medicare drug benefit, the pharmaceutical industry's top priority was to make sure the government could not negotiate prescription drug prices. The effort paid off and the final bill included this prohibition.

Insurers also had a lobbying objective: to make sure the new Part D benefit, unlike the basic Medicare program, would be administered not by any government agency but by private contractors. They, too, succeeded.

A major plank in the Bush administration's agenda, meanwhile, was to keep the new benefit from becoming a budget buster. The solution: to offer low initial premiums to make sure enough people signed up, as well as a provision to cover catastrophic costs.

In between these two periods, however, there was to be a money-saving coverage limit which became affectionately known as the doughnut hole.

As one journal article jokingly commented, “If a camel is a horse designed by a committee, then the camel that is Part D must surely be a bactrian—the one with two humps and a gap in the middle.” 

So the major players got what they wanted, but wait.

First, it appears that while insurance plans have not pushed for price reductions, they did succeed in negotiating substantial rebates. Second, according to a recent AARP survey, 74% of over-65 respondents said they always or usually ask for a generic when available. Only 11% of seniors opt for brand name drugs.

What's more, according to Verispan, the switch to generics is happening much faster under Part D than among patients covered by other insurance plans. In other words, it looks like the pharmaceutical industry scored a hollow victory.

To see why, put yourself in the patient's place. Once total drug expenditures (the patient's plus the plan's) hit $2,510, the patient has to pay for every penny of his or her prescriptions. Coverage doesn't resume until the total hits $5,726. That potential $3,216 outlay gives participating seniors a strong incentive either to go off the medication, to buy over-the-counter products or to accept a generic substitute.

In addition to reining in costs, the Bush administration is said to have pushed the coverage gap in a further attempt to privatize Medicare.

They thought that the doughnut hole would persuade beneficiaries to switch to the insurance-run Medicare Advantage plans. While premiums may be twice as much as basic Medicare, there are no ceilings for drug payments, and over the years some one out of three Medicare members switched to MA plans.

But the other two-thirds haven't rushed to join them. They still prefer shopping at Costco, Wal-Mart or CVS for a flat fee of $4 or $5 per generic prescription.

Understandably, the political tsunami in favor of a drug benefit having been what it was, pharma did not want to oppose it.

There was even the possibility that it would boost profits. Instead industry successfully fought for the “don't negotiate” provision. Sometimes, however, it pays not to wish too hard for what seems like an obvious immediate advantage, but instead to think ahead to the end game.

Warren Ross is editor at large of MM&M

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