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Higher drug prices feared after 'doughnut hole' plan

By David S. Hilzenrath Washington Post Staff Writer
Tuesday, September 21, 2010; A6

If you've ever seen a sale advertising 50 percent off, you might have wondered if the retail price was ratcheted up to make the discount possible.

Patient advocates are watching to see if a similar tactic undermines one of the most widely publicized benefits of the health-care overhaul that President Obama signed in March.

Beginning next year, at the expense of pharmaceutical companies, millions of senior citizens in the Medicare coverage gap known as the "doughnut hole" will receive 50 percent discounts off the price of brand-name prescription drugs.

The government does not control the underlying prices; the law leaves that to the market.

"There is legitimate concern that some manufacturers will steeply increase the price of drugs in order to offset the cost of the discount to the manufacturers at the expense of both consumers and the Medicare program itself," the Center for Medicare Advocacy and the Medicare Rights Center said in a letter to the agency that oversees the federal health insurance program.

That agency, the Centers for Medicare and Medicaid Services, announced in August that the average monthly premium for Medicare prescription drug plans will rise next year by a dollar, to $30.

Officials at the agency and at the Pharmaceutical Research and Manufacturers of America (PhRMA), an industry group, said the average premium increase indicates that there has been no spike in prescription drug prices.

Competition in the drug market will serve as a restraint, they said.

"I am confident we will continue to see very low price growth" for the Medicare drug program, said Jonathan Blum, deputy administrator of the government's Center for Medicare.

But others are worried about the long-term outlook. UnitedHealth Group, which sells prescription drug insurance, has expressed concern "that Manufacturers have not agreed . . . to protect the underlying pricing of the drugs."

In a June letter to the Department of Health and Human Services, UnitedHealth took the extraordinary step of calling for price controls, saying the government should "require Manufacturers to maintain a ceiling on prices that would preserve the value of the discount for beneficiaries."

"I don't think all savings will be lost. But they can certainly recoup some of those savings by increasing prices," said John M. Coster, senior vice president for government affairs at the National Community Pharmacists Association.

The doughnut hole has been a financial abyss for many senior citizens since Medicare prescription drug coverage was first offered in 2006.

For 2010, beneficiaries enter the coverage gap when their prescription tab hits $2,830, including both their share and the amounts paid by insurance. Once in the gap, they are responsible for 100 percent of the cost and must spend $3,610 of their money before qualifying for catastrophic coverage, which typically pays 95 percent of the cost.

Some people in the doughnut hole forgo their medicine; others take less than the proper dosage.

The health-care law will close the coverage gap by 2020, Obama has said. To do that, it provides a combination of federal rebates and subsidies, and also requires drugmakers to foot the cost of the 50 percent discounts.

According to the consulting firm Avalere Health, the discounts will reduce drugmakers' revenue by $32 billion over 10 years.

Despite that provision, the pharmaceutical lobby served as a key ally to Obama and congressional Democrats in the health-care battle.

For the industry, the outcome could have been worse. The legislation did not include proposals that posed a potentially greater threat to drugmakers - for example, empowering the federal government to negotiate prices.

And, by shrinking the number of uninsured, the legislation will expand the market for prescription drugs.

For drugmakers, offsetting the doughnut-hole discount would not be as simple as raising the price unilaterally.

There are different measures of prices, and the ones that will be discounted by 50 percent are the product of negotiations between retail pharmacies and intermediaries such as insurance plans. However, those negotiated prices are influenced by the ones that manufacturers set higher up the chain.

"I think you can say any price adjustments are independent of the discount," Merck spokesman Ronald Rogers said by e-mail.

"What I can say is that all of the competitive market forces that were in place previously remain in place," said PhRMA Senior Vice President Richard Smith.

But the government is trying to establish much lower prices than market forces alone produced.

As new drugs are introduced, manufacturers will probably factor the doughnut discount into their pricing, said Daniel N. Mendelson, chief executive of Avalere.

Some of the most expensive drugs taken by people in the doughnut hole face minimal competition from generics or brand-name alternatives, making them particularly susceptible to price inflation, said Brit Pim, vice president of government programs development at benefits manager Express Scripts. Those include "specialty medications" for complex diseases, he said.

Express Scripts found that in 2009, the average price for specialty medications rose 13.5 percent.

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