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Costs Grow for Common Medicare Drugs
Price Increase in Prescription Program Is Twice That Seen in Wholesale Rates

By Jonathan Weisman
Washington Post Staff Writer
Sunday, May 13, 2007

After some initial success containing drug prices, private insurers in the new Medicare prescription drug program may be losing their leverage over drug manufacturers as they try to hold down medicine costs for seniors and the federal government, House investigators have found.

Prices for 10 of the most prescribed brand-name medications have shot up an average of 6.8 percent since December under Medicare private insurance plans, while wholesale prices for the same drugs have risen just 3 percent, House Oversight and Government Reform investigators say. The cost of a month's supply of cholesterol-controlling Lipitor had climbed 9.6 percent, to $84.27 in mid-April, from $76.91 in mid-December. Over the same time, list prices climbed 5 percent.

Premiums for Medicare drug plans have jumped 13 percent over the past year, when the drug plans went into effect, the investigators say.

And the rebates that insurance companies are wringing out of drug manufacturers are expected to total 4.6 percent of total drug costs, down from 5.2 percent last year. A year ago, Medicare actuaries had expected insurers in 2007 to secure manufacturers' rebates of 6 percent, then pass those savings on to seniors and the government.

"Essentially as an economist this is just what I would have predicted," said Marilyn Moon, director of the health program at the American Institutes for Research and a former trustee for Medicare and Social Security. "When you introduce a new program, with all of the fanfare, everyone is anxious to get the best prices, the best look and demonstrate the private sector can handle it. But over time, when you've gotten your customers lined up, prices tend to slip upward."

The data was sharply contested by both drug manufacturers and health insurers, who accused Oversight Committee staff of cherry-picking a few brand-name drugs to exaggerate cost increases. A push toward generic drugs has held overall costs down, and competition has generally kept premium increases to a minimum. Last fall, the Department of Health and Human Services projected that premiums for the drug plans would stay about where they were the first year, $24 a month.

"You have to look at the broader trends," said Karen Ignagni, president of America's Health Insurance Plans, the insurance lobby. "And the news has been nothing but positive, exceeding all expectations."

But committee investigators say brand-name costs are still so much higher than generics that their cost increases will swamp the savings from generics, now that initial cost savings from the push to generics were captured in the program's first year. They chose the 10 drugs they are tracking because they were the top 10 sellers of 2004, and all but one still have no generic alternatives.

Oversight Committee aides said the panel's chairman, Rep. Henry A. Waxman (D-Calif.) will hold hearings in the coming weeks on rising drug prices under Medicare, as he seeks to revive legislation to grant the federal government the power to negotiate drug prices for Medicare. The bill has already passed the House, but it fell to a Republican filibuster in the Senate.

The program's costs overall remain well below initial projections, and many policymakers say six months of data should not spark a broad rethinking of the program.

"It's far too soon to make a definitive judgment," said Robert Reischauer, president of the Urban Institute. But, he added, it may be enough to "raise some red flags."

For seniors, the impact is not completely clear. Most who have enrolled in the program have chosen plans with low deductibles. They would see the full impact of drug price increases when they hit the "doughnut hole," a coverage gap that begins when a senior's drug costs reach $2,250 and ends when out-of-pocket expenses reach $3,600.

Outside the doughnut hole, insurers will have to swallow rising drug prices, because under most of the plans, seniors have a fixed co-payment, Ignagni said. Medicare recipients will see some rising premiums, especially in the lowest-cost plans. But even if some of those low-cost plans double their monthly fees, they will still be charging as little as $12 a month.

"The bottom line is that the Medicare prescription drug program is saving money for seniors and disabled persons, as well as for taxpayers," said Ken Johnson, senior vice president of PhRMA, the drug manufacturers' lobby.

Committee investigators say the insurers and drugmakers are looking backward, at last year's performance, not where the drug benefit is heading. In its first year, the program's biggest cost savings came from lower-than-expected enrollments, especially among lower-income seniors. The other big savings came from insurers pushing seniors to generics where they could.

But with that accomplished, continuing cost-containment will rest on holding down climbing prescription drug prices. And investigators say that does not look promising. Medicare actuaries projected last year that insurance companies would extract rebates from drugmakers totaling 6 percent of drug costs in 2007. Instead, they will be 4.6 percent. In dollar terms, Medicare beneficiaries will spend $1.2 trillion on prescription drugs over the next decade. A reduction in discounts from 6 percent to 4.6 percent over a decade would cost beneficiaries and taxpayers about $17 billion in unanticipated prescription costs, with all of that going toward the drug industry.

Brand-name drug prices were expected to climb 7 percent over all of 2007. They nearly hit that mark in mid-April.

To the extent that those increases are pinching insurance industry profits, the taxpayers must beware, the committee has concluded. To lure private insurers into the Medicare drug program, Congress set up federal funds that would hold protect the companies if unanticipated costs arose.

Ironically, last year's lower-than-expected costs may be contributing to this year's higher-than-expected increases, economists say. Drugmakers can raise prices, knowing that the overall program price tag will still be below initial projections.

"It could be that the lower-cost estimates are giving the manufacturers room to push back," Reischauer said.

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