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Success of Drug Plan Challenges Democrats
Medicare Benefit's Cost Beat Estimates

By Lori Montgomery and Christopher Lee
Washington Post Staff Writers
Sunday, November 26, 2006

It sounded simple enough on the campaign trail: Free the government to negotiate lower drug prices and use the savings to plug a big gap in Medicare's new prescription-drug benefit. But as Democrats prepare to take control of Congress, they are struggling to keep that promise without wrecking a program that has proven cheaper and more popular than anyone imagined.

House Democrats have vowed to act quickly after taking power in January to lift a ban on Medicare negotiations with drugmakers, which they hope will save as much as $190 billion over a decade. But House leaders have yet to settle on a strategy and acknowledge that negotiation is, in any case, unlikely to generate sufficient savings to fill the "doughnut hole," the much-criticized gap in coverage that forces millions of seniors to pay 100 percent of drug costs for a few weeks or months each year.

Drug-company lobbyists, Bush administration officials and many congressional Republicans are preparing to block any effort to increase federal control over drug prices, saying the Medicare benefit is working well. They contend that instead of saving money, government negotiations could raise drug prices for all consumers while limiting choices for people on Medicare.

"This is going to be much more of a morass than people think," said Marilyn Moon, director of the health program at the American Institutes for Research and a former trustee of the Social Security and Medicare trust funds. Negotiating drug prices is "a feel-good kind of answer, but it's not one that is easy to imagine how you put into practice."

The Medicare drug benefit, one of the Bush administration's signature domestic programs, was created in 2003 and took effect in January. It has enrolled 22.5 million seniors, some of whom had no previous drug coverage.

Polls indicate that more than 80 percent of enrollees are satisfied, even though nearly half chose plans with no coverage in the doughnut hole, a gap that opens when a senior's drug costs reach $2,250 and closes when out-of-pocket expenses reach $3,600. By the latest estimates, 3 million to 4 million seniors will hit the doughnut hole this year and pay full price for drugs while also paying drug-plan premiums.

The cost of the program has been lower than expected, about $26 billion in 2006, according to the nonpartisan Congressional Budget Office. The cost was projected to rise to $45 billion next year, but Medicare has received new bids indicating that its average per-person subsidy could drop by 15 percent in 2007, to $79.90 a month.

Urban Institute President Robert D. Reischauer, a former director of the Congressional Budget Office, called that a remarkable record for a new federal program.

Initially, he said, people were worried no private plans would participate. "Then too many plans came forward," Reischauer said. "Then people said it's going to cost a fortune. And the price came in lower than anybody thought. Then people like me said they're low-balling the prices the first year and they'll jack up the rates down the line. And, lo and behold, the prices fell again. And the reaction was, 'We've got to have the government negotiate lower prices.' At some point you have to ask: What are we looking for here?"

Republicans contend that Democrats were looking for a campaign issue.

In the Nov. 7 elections, public anger over the doughnut hole helped many Democratic candidates, who pointed to the ban on government negotiations and accused Republicans of selling out to the pharmaceutical industry.

Republicans, by and large, did a poor job of defending the program, said Thomas A. Scully, a Republican and the former head of the federal unit that runs Medicare. He played a key role in creating the drug benefit.

"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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