Push for rebates
The Medicare prescription drug benefit continues to expand as more beneficiaries sign up. Outlays for Part D were $47.6 billion
in 2007, 17.5% higher than the 2006 total of $40.5 billion. Part D expenses are projected to exceed $50 billion in 2009. Despite
the overall rise in Part D spending, cost per enrollee dropped slightly to $1745 in 2007 as prescription drug plans (PDPs)
controlled expenditures by negotiating discounts and rebates with manufacturers and carefully managing drug use. Health-policy
analysts would like to see Medicare costs decline even further, and CBO offered suggestions for achieving this goal, along
with evidence that many policy changes will not save much money in its Budget Options report.
One promising strategy for cutting Medicare outlays is to require manufacturers to pay rebates on medicines purchased under
Part D, an idea championed by Rep. Henry Waxman (D-CA), newly named chairman of the House Energy and Commerce Committee. CBO
says that a mandatory 15% rebate of the average manufacturer's price beginning in 2011 would save the government $33 billion
over five years and $110 billion over 10 years. The estimate assumes that manufacturers would agree to pay rebates to retain
coverage for their products by Medicare Parts B and D, as well as by Medicaid, the Veterans Health Administration, and other
government health programs. That policy builds on the Medicaid drug-rebate program, but drops the "best price" provision to
avoid affecting prices negotiated by private purchasers.
Waxman is expected to push the rebate proposal in this year's Congressional session. He believes that pharmaceutical companies
are raking in big profits under Part D because they no longer have to pay rebates to state Medicaid programs for drugs delivered
to low-income seniors now covered by the Medicare drug benefit. According to a study issued last year by the House Oversight
and Government Reform Committee, which Waxman previously headed, manufacturers benefited from a $3.7-billion windfall in 2006
and 2007 that resulted from higher prices paid for drugs provided to "dual eligible" beneficiaries. Waxman claims that Johnson
& Johnson (New Brunswick, NJ) earned more than $500 million in additional profits on its "Risperdal" antipsychotic medication
and that Bristol-Myers Squibb (New York) gained $400 million on Medicare coverage for its "Plavix" stroke medication.
The downside is that, over time, manufacturers would try to offset the added rebates by charging higher prices for new medicines
and by introducing new strengths and dosage forms for existing drugs that could command higher prices. But Timothy Anderson,
a financial analyst with Sanford Bernstein, calculates that a 20% rebate on all Part D drugs "would be tolerated surprisingly
well" by leading manufacturers and cut their earnings by only 3–10%.
Pressure on biologics
Another effective way to reduce Medicare outlays is to promote generic competition to high-cost biotechnology therapies. CBO
estimates that the federal government could save $9.2 billion over 10 years by establishing an abbreviated pathway for FDA
market approval of follow-on biotechnology therapies (FOBs). For its analysis, CBO assumes a 12-year exclusivity period for
brand-name products and limited requirements for duplicating innovators' clinical trials. The resulting low-priced FOBs would
save Medicare and Medicaid about $8.1 billion during the 2010–2019 period, and other government health programs would have
their costs drop by another $1 billion during that time.
The savings would be even greater—about $12 billion over 10 years—if the government also revised billing codes for biologics
dispensed by physicians in their offices under Medicare Part B. Placing an FOB in the same billing code as a brand-name counterpart
would provide a strong incentive for physicians to prescribe the lower-cost therapy because CMS would reimburse physicians
based on a weighted average of the prices paid to manufacturers for all drugs with the same code. Consequently, a physician
dispensing the less-expensive FOB would be able to retain the difference between product cost and Medicare payment, while
providers who prescribed an expensive brand-name product would face a financial penalty.
Manufacturers object that such incentives promote low-cost biosimilars even if they raise concerns about patient safety and
therapeutic efficacy. CBO acknowledges that authorizing FOBs could cut revenues to biotechnology companies and reduce research
and development of new therapies. But analysts point out that these losses would be offset by larger gains for private health
insurance plans, which would translate into reduced insurance premiums, increased wages, and a parallel boost in federal tax
Even without FOBs, Medicare drug plans are reducing outlays for expensive Part D drugs by establishing formularies with four
or more tiers, including a top tier for specialty drugs that cost more than $600 a month. These expensive medicines now routinely
carry coinsurance rates as high as 33%, compared to a median of 25% three years ago, according to analysis by the Medicare
Payment Advisory Committee (MedPAC) in December. A separate study of oral cancer drugs by the American Cancer Society Cancer
Action Network and Avalere Health found that high coinsurance rates translated into high costs for beneficiaries. For example,
84% of PDP enrollees are in plans that put the leukemia treatment "Gleevec" on tier four or higher, compared to 39% in plans
taking that approach in 2006.