Nevertheless, several other factors will increase the pressure on manufacturers to offer bigger discounts to Medicare plans.
For example, plans now have at least one year of data about PDP enrollees' drug use to support their claims that they can
shift market share of specific drugs. Furthermore, continued consolidation among Part D plans is likely to give a few major
insurers considerable clout in negotiating lower drug prices. Although about 70 insurers sponsor PDPs, the top two—UnitedHealth
and Humana—control more than half the market, and the top eight plans represent more than two-thirds of enrolled beneficiaries.
As smaller contenders sell out, the big players will get even bigger, giving them more clout at the negotiating table.
The need to control costs without government interference is also encouraging plan sponsors to manage PDP formularies more
aggressively. For the first two years of the Medicare drug-benefit program (2006 and 2007), PDPs have offered fairly robust
formularies to be sure to meet all the new CMS guidelines and formulary rules. On average, PDPs listed more than 2400 products
on Part D formularies (half brands and half generics) in 2003, 11% more than 2006 lists, according to analysis by Avalere
Health (Washington, DC). In many cases, the PDPs' formularies were larger than the model formulary developed by the US Pharmacopeia,
offering multiple products in important drug classes and categories.
Now that the program is more established, plans are focusing more closely on formulary design and price negotiations as they
determine which products merit preferred status. Three-fourths of Part D plans have formularies with four or more tiers that
set higher copays and restrictions on use for more costly brand products. Most of the expensive specialty drugs are in the
top tier, a strategy that raises concerns among biotechnology manufacturers about limiting patient access to their therapies.
CMS also requires formularies to cover "all or substantially all" drugs in six categories: antipsychotics, antidepressants,
antiretrovirals, immunosuppressants, anticonvulsants, and antineoplastics. But to give PDPs more flexibility in formulary
design, CMS allows plans to shift costly products to high-tier formulary positions that may require prior authorization.
In addition, CMS is paying less attention to the USP "key drug type" coverage policy, another move that may scale back coverage
lists. CMS wants all PDPs to cover the 200 top drugs used by the elderly, but plans can use various formulary tools to negotiate
favorable discounts on these products that will save money for Medicare and patients alike.
At the same time, PDPs have incentives to maintain stable formularies and avoid multiple deletions and changes during the
program year. Insurance companies don't want a lot of complaints from beneficiaries about prescription cutoffs. And CMS is
questioning formulary deletions that do not result from switches to newly approved generics or safety reasons.
Encouraging physicians and patients to use cheaper nonbrand products is a key PDP strategy for limiting Part D expenditures.
CMS reports that nearly 60% of Part D prescriptions are for unbranded generic drugs. Generic drug use among Medicare beneficiaries
is slightly higher than in the total retail market, according to IMS, which estimates that 58% of Part D prescriptions are
for generics, compared to 57% overall. Branded generics made up 6% of Part D prescriptions, compared with 10% in the broader
retail market. Branded drugs accounted for 36% of Part D prescriptions, compared with 33% for all retail prescriptions. PDPs
promote generics by eliminating deductibles, reducing copays and requiring pharmacists to notify patients if a low-cost generic
Generic drug use should rise even more as important treatments lose patent protection. The first generic statins appeared
in 2006, as patents expired for Bristol-Myers Squibb's pravastatin (Pravachol) and Merck's simvastatin (Zocor). Not only did
this change provide access to cheaper generic statins, but the added competition allowed plans to curb prescriptions for the
remaining brands in the class.
These strategies for managing Part D costs have allowed PDPs to maintain relatively low plan premiums for the 2008 open-enrollment
period, which runs from mid-November to the end of this year. CMS announced in August that the average Part D premium in 2008
will be about $25, only slightly more than this year and well below original estimates of $40 or more. Premiums for MA drug
plans are even lower, averaging $11 less.