Change in Medicare Drug Pricing Rules Amounts to a Drop in the Doughnut Hole

It’s no secret that the Medicare Part D prescription drug program, the signature health care initiative of the Bush years, was designed and structured to benefit the insurance and pharmaceutical industries, rather than the old and disabled people it is supposed to serve. As a result, it helps patients far less than it could and costs the government far more than it should, while jacking up private profits.

The only way to fix these inherent flaws is to overhaul Medicare Part D completely, reigning in the drug companies and kicking the insurance companies out of the mix altogether, since they are nothing but superfluous and costly middlemen. I’d like to think this has a chance of happening under the new Democratic administration, but I know better. The best we can hope for is some tinkering with the details of the program to minimize some of its most outrageous giveaways to the private sector.

In what I can only guess is a pre-emptive move, one such change was announced on Tuesday by the Center for Medicare and Medicaid Services (CMS). The most concise description of the change comes from the Wall Street Journal, which reports that CMS “finalized a rule meant to curb an industry practice that has inflated drug costs for some patients with Medicare drug coverage”:

The practice involves pharmacy benefit managers, the middlemen that administer drug plans on behalf of insurers. PBMs negotiate drug prices with pharmacies and reimburse them for drugs that patients purchase. Insurers, in turn, pay the PBMs for administering the claims.

The higher drug costs for patients result from a so-called lock-in approach used by some PBMs. Under this practice, insurers pay the PBMs a set amount for drugs, regardless of what the PBMs actually paid the pharmacies.

Often, what the PBMs pay the pharmacies is less than what the insurers pay the PBMs. But the size of that difference is typically secret, and the PBMs keep it.

In other circumstances, these kinds of secret dealings might qualify as fraud. But they’ve been perfectly legal under Medicare Part D. What’s more, the higher price is what’s used to calculate Medicare patients’ overall drug costs. This means we will hit the annual limit (currently $2,700) and fall into the notorious “doughnut hole” coverage gap that much sooner.

The rule change, which goes into effect in 2010, doesn’t eliminate the PBMs’ rip-off, but it does prevent it from being passed on to Medicare patients. According to the WSJ:

Under the new rule, plans can still use the lock-in approach. But the amount paid to the pharmacy–not the higher price paid by the insurer–will have to be what is used to determine patients’ pace to the doughnut hole.

For old folks like me who fall into the doughnut hole partway through each year, every little bit helps. And as Paul Precht of the Medicare Rights Center told Bloomberg News, the rule change “ends a scam, and it adds some much-needed transparency to drug prices under the benefit.” But the savings are unlikely to be really significant.

They are nothing, for example, compared to what might be saved if the government were permitted to negotiate prices directly with the drug companies, instead of leaving that task to the insurance companies and PBMs. In a provision engineered by private industry lobbyists, the law that created Part D expressly forbids such negotation. The government negotiates directly with the pharmaceutical manufacturers for Medicaid, and it received rebates averaging 26 percent in 2007–as compared with 8.1% for Medicare. This single change, then, might lower Medicare drug costs as much as 18%.

The Democrats made one attempt, in early 2007, to pass a bill allowing the government to negotiate Part D drug prices, but they couldn’t pull together the votes needed to move it through the Senate, much less override a Bush veto. They are likely to try again in 2009–and in this bit of tinkering, at least, they just might succeed.

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