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Success of Drug Plan Challenges Democrats

The Medicare drug benefit has enrolled 22.5 million seniors, some of whom had no previous drug coverage.
The Medicare drug benefit has enrolled 22.5 million seniors, some of whom had no previous drug coverage. (By Stephen J. Carrera -- Ap)

"Black voters, poor voters -- people who generally vote Democratic -- they got the biggest benefit in 40 years and nobody told them that," Scully said.

According to those involved in the 2003 negotiations, even some Democratic bills to create a Medicare drug benefit included a ban on direct government negotiations. The reason: Seniors purchase half of all prescription drugs. The drug industry argued that a government program representing seniors would not negotiate prices, it would set them.

If government price controls were effective, the theory goes, they could significantly lower drug-company profits and discourage medical innovation. If price controls were not effective, they could drive prices higher. If companies were required to sell to Medicare at 15 percent off the average wholesale price, for example, they might just raise the wholesale price.

"At the extreme, if everybody gets a discount, then nobody does," said Mark B. McClellan, who took over from Scully in running Medicare and recently left the job.

Proponents say the program, as it now operates, avoids that problem by relying on dozens of private insurers, which bid to offer coverage to Medicare recipients. Some offer low premiums and lots of generic drugs, while others have high premiums but offer brand-name drugs and full doughnut-hole coverage. Medicare averages the bids and sets a per-person subsidy. Pressure falls on the insurers to negotiate the best drug prices.

Consumer advocates contend that if Medicare were permitted to negotiate prices, its purchasing power would produce drug discounts similar to those obtained by the Veterans Affairs Department, which covers 4.4 million people. As it is, Medicare prices are significantly higher than VA prices, according to Families USA, a nonprofit association of health-care consumers that analyzed 20 drugs commonly prescribed to seniors.

Even Medicaid, the federal health program for the poor, appears to employ better negotiators than the private Medicare plans. On Jan. 1, 6 million elderly and disabled people were switched from Medicaid pharmacy plans to the new Medicare program. Overnight, many drugmakers began selling the same drugs at higher prices. Pfizer, for example, reported saving $325 million in Medicaid discounts during the first six months of this year "due primarily to the impact of" the Medicare drug benefit, according to a company report to the Securities and Exchange Commission.

"At some point, someone has to stand up to these industries that are doing so well in this program," said Robert M. Hayes, president of the Medicare Rights Center, a New York advocacy group. "It only makes sense that if the industries do less well, the taxpayers and the consumers will do better."

Medicare officials say it's not fair to compare their prices with those of Medicaid and Veterans Affairs, which do not reflect certain overhead costs in their drug prices and offer a limited number of drugs. Limiting choice would be unacceptable to many Medicare beneficiaries, said Sen. Charles E. Grassley (R-Iowa), outgoing chairman of the Senate Finance Committee. "I don't think seniors want the government in their medicine cabinets," he said.

For now, it is not clear how aggressively Democrats are willing to push price negotiation. Ideas range from simply repealing the ban on negotiations -- which would accomplish little if the Bush administration refuses to negotiate -- to creating a separate, government-run Medicare drug program with strong negotiating power.

Rep. Fortney "Pete" Stark (D-Calif.), who is in line to become chairman of a key health subcommittee, said he prefers a middle path, with Medicare setting ceilings from which private insurers could negotiate downward.

But Sen. Max Baucus (D-Mont.), the incoming Senate Finance chairman, is cool to the idea of government negotiation, and has committed only to holding hearings to "determine what the result would be of eliminating" the no-negotiation clause.

W.J. "Billy" Tauzin, president of the Pharmaceutical Research and Manufacturers of America, said the drug lobby will "aggressively defend" the current plan. But John C. Rother, policy director for AARP, the powerful lobby for elderly Americans, said he has no doubt that the next Congress will give government some role in negotiating Medicare drug prices.

"This is an idea that's favored by 90 percent of the American public," Rother said. "It's not like you have to convince the American public that this is a good idea."

Staff writer Amy Goldstein contributed to this report.

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