Allow Medicare to collect greater rebates for drug purchases

Saturday, Aug. 20, 2011 | 2 a.m.

The prescription drug plan for Medicare recipients has turned into a sweetheart deal for pharmaceutical manufacturers that is costing taxpayers billions of dollars. The 2003 law that created the optional Part D Medicare program for elderly and disabled recipients is causing this problem. That’s because congressional Republicans required private insurers that participate in the program to negotiate for drug manufacturer rebates to reduce costs paid by the federal government.

A report issued Monday by the Health and Human Services Department inspector general concluded, though, that the law signed by President George W. Bush hasn’t produced anywhere near the cost savings the government enjoys for the same drugs purchased for low-income Medicaid recipients. The difference is that under Medicaid, a joint federal-state program, drug manufacturer rebates are calculated by federal law in a way that accounts for average prices charged for outpatient drugs. If an average price rises faster than inflation, the manufacturer is required to increase its rebate to the government. This is one example where price controls used by Medicaid clearly have benefited taxpayers more than the market-based approach used for Medicare.

As a result, the inspector general found in a study of the top 100 brand-name drugs and the top 100 generic drugs purchased in 2009 that Medicaid recouped 45 percent of its drug spending through rebates, whereas Part D insurers recouped just 19 percent of their drug costs. Translated to dollars, Medicaid recouped $2.9 billion in rebates from $6.4 billion in expenditures, and Medicare got back $4.5 billion in rebates from $24 billion in costs.

The simple solution, and one that could help the nation reduce its deficit, would be to apply the Medicaid rebate formula to Part D drug purchases. Democrats in Congress are thinking along those lines, having submitted companion bills in the Senate and House called the Medicare Drug Savings Act of 2011. They estimate that the legislation could save taxpayers as much as $120 billion over the next 10 years.

As Sen. Jay Rockefeller, D-W.Va., told the Senate Committee on Aging last month: “All this legislation does is say that drug manufacturers have to give the same discounts to Part D that they give to Medicaid for low-income populations.”

In combination with another bill he is sponsoring that would give consumers greater access to lower-cost generic drugs, Rockefeller also said: “These proposals are responsible steps to get our growing deficit under control. Rather than dismantling Medicare and Medicaid, or placing an ever-increasing burden on seniors, we should be supporting fair and sensible proposals to reduce health care costs, not allowing special interests to take advantage of loopholes.”

Support for the Medicare Drug Savings Act is growing, led by the likes of AARP. Another advocate is professor Gerard Anderson, director of the Johns Hopkins University Center for Hospital Finance and Management in Baltimore, who has said that there is no reason why the government should get smaller rebates from Medicare than Medicaid. Having made deficit reduction one of its top priorities, Congress should act as soon as possible to approve the Medicare Drug Savings Act to close the loophole that benefits only drug manufacturers.