Medicare Drug Benefit Boosts Pharmaceutical Use

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Pharmaceutical Technology, Pharmaceutical Technology-10-02-2007, Volume 31, Issue 10

Expanded access to drugs for seniors has increased demand and focused attention on costs.

As the Medicare prescription drug benefit heads into its third year, analysts are applauding the program's success in providing pharmaceutical coverage for millions of elderly patients. Surveys show a substantial expansion of benefits, particularly for low-income seniors. Despite initial predictions that the Medicare Part D program would fail, there are multiple signs of success: major insurers are sticking with the program, costs are holding steady, employers are continuing to provide retiree benefits, and drug coverage remains fairly broad. Beneficiaries appear generally satisfied with their plans and express increased comfort in navigating the complex system. Even the much-feared "donut hole," a gap between Part D basic benefits and catastrophic coverage, has created fairly limited problems.

Jill Wechsler

At the same time, many seniors have failed to sign up for drug benefits, either because they still don't know about the program or they use few medicines and don't consider coverage necessary. Many Part D enrollees still have high out-of-pocket drug expenses, especially those who don't qualify for low-income subsidies. And critics of the program claim that Part D plans pay too much for drugs and that the government should negotiate lower prices with manufacturers.

Broad coverage

The good news from the Centers for Medicare and Medicaid Services (CMS) this year is that most Medicare beneficiaries now have prescription drug coverage through a Part D prescription-drug plan (PDP) or other program. By the beginning of 2007, CMS reported that almost 40 million seniors had drug benefits, a substantial increase from the 27 million of the previous year. More than half (24 million) are enrolled in Part D, including nine million seniors eligible for low-income subsidies assigned to PDPs and eight million who obtain coverage through Medicare Advantage (MA) plans. Another seven million retirees receive drug benefits from employers, and five million federal government and military retirees have coverage through government health programs.

Similarly, a national survey of 16,000 seniors reports that 90% of seniors had some kind of prescription-drug coverage in 2006, up from less than 50% in 2005. The breakdown for sources of coverage fits the CMS numbers: half are in Part D plans, one-third obtain coverage from employers, and about 10% have benefits from the Veterans Administration (VA) or military, according to this analysis by the Kaiser Family Foundation, the Commonwealth Fund, and Tufts-New England Medical Center (published online by Health Affairs, Aug. 21, 2007). The survey found that Part D plans had higher proportions of low-income members that were automatically enrolled by CMS, and that seniors with chronic health conditions and high drug use were more likely to obtain coverage than those with low drug use.

In addition to expanding coverage, CMS and the plans themselves are making it easier for seniors to select appropriate programs. Another survey of more than 10,000 seniors, conducted by University of Michigan economists, reports that Part D enrollees feel more confident and less confused about the drug-benefit program.

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Increased use

The big jump in prescription-drug coverage is boosting drug use for an important patient cohort, thus affecting pharmaceutical manufacturers. The 24 million seniors enrolled in Part D plans filled approximately 486 million prescriptions in 2006—almost 15% of the total retail prescription-drug market, according to IMS Health (Norwalk, CT); the Part D share stabilized at 17% of US retail by the end of 2006.


The Medicare program stimulated the use of most chronic therapeutic classes of drugs, particularly those for asymptomatic conditions such as hypertension and high cholesterol. Hypertension drugs got the biggest chunk of the pie, accounting for 122 million prescriptions, or one-fourth of all the drugs provided under the program. Lipid regulators came in second with 7.4% (36 million scripts), and antidepressants accounted for 25 million prescriptions, a 5.1% share.

Other leading therapy classes with more than 20 million prescriptions filled include treatments for diabetes, pain, and ulcers. Rounding out the top 10 were anti-infectives, thyroid hormones, antithrombotics, and seizure treatments.

Providing drug benefits to some 3.4 million seniors who previously lacked coverage has had a noticeable effect on use patterns and compliance. For example, IMS notes that patient use of proton-pump inhibitors (PPIs) increased by 2.7% because of new prescriptions, many written for patients with new coverage who switched from over-the-counter drugs to prescription products. Similarly, prescriptions for angiotensin II antagonists increased by 1.5% as a result of new therapy starts, and by another 2.4% because of improved compliance. About 37 million prescriptions filled under Part D were written for individuals who would have had to pay for the drug out-of-pocket in 2005. The formerly uninsured paid 60% less per prescription on average, while seniors with previous third-party coverage saved 17% per prescription.

Narrow gap

Another factor spurring Medicare drug use is that the much-feared donut hole appears to have affected relatively few Medicare patients. Only 6% of beneficiaries fell into the coverage gap in 2006, and most of those did not reach the hole until late in the year, thus reducing the period of time when they had to pay the full cost for medicines. The numbers are fairly low because low-income beneficiaries are protected from the gap, and many seniors did not spend more than the $2250 basic coverage limit. Moreover, some Part D and MA plans offered gap coverage in the program's first year.

However, of those 3 million seniors who did fall into the donut hole, nearly 25% dropped medicines for chronic conditions during the time they lost coverage. In coming years, the donut hole may be a bigger problem for beneficiaries because PDPs have dropped brand-name drug coverage within the gap. A few insurers such as Humana (Louisville, KY) offered similar plans in 2006, but these plans attracted heavy drug users, and use far exceeded initial projections. Most insurers dropped premium donut-hole coverage for 2007. The one insurer that continued to offer the coverage, Sierra Health Services (Las Vegas, NV), suffered a huge loss and was bought by UnitedHealth (Minneapolis, MN), which is not expected to maintain the program. In its March 2007 call letter to plans outlining Part D requirements for 2008, CMS said that sponsors may offer more than two PDPs if the additional plan covers at least some brands in the donut hole as part of "limited" gap coverage. But most plans are limiting gap coverage to generics, leaving seniors largely on their own to pay for brands.

Pricing pressures

The prospect that beneficiaries who hit the gap will face hefty drug expenditures puts more pressure on plans and policymakers to curb drug prices for all Part D enrollees. Earlier this year, Congress debated legislation to eliminate the noninterference clause in the Medicare program, which prevents the federal government from negotiating prices for all Part D plans. The bill failed, largely because the Congressional Budget Office (CBO) and other analysts predicted that public disclosure of drug prices and rebates would save little money without also establishing a national formulary—and might actually discourage big discounts from manufacturers.

Even without legislation that makes drug pricing more transparent, Rep. Henry Waxman (D-CA) and other program critics are keeping a close watch on Medicare drug costs and formularies. They claim that Part D plans pay more for many drugs than do other government programs such as Medicaid and the VA. Waxman's House Oversight and Government Reform Committee unveiled a study in May 2007 indicating that PDP prices for the most-prescribed brand-name medicines had jumped almost 7% from 2006 to 2007, much more than inflation. Waxman's investigators are looking for more evidence of Medicare overpayments for drugs in reams of Part D rebate data demanded from the top 12 plan sponsors. The VA and other public health programs are concerned that policy changes might undermine their price advantages, just as manufacturers and PDP sponsors fear that public disclosure of specific prices will compromise formulary negotiations.

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.

Revised formularies

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.

Boosting generics

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 is available.

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.

Challenges ahead

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.

These stable premiums reflect lower-than-expected plan expenditures, which also have altered 10-year cost estimates for the program. Earlier this year, CBO predicted that outlays for the Medicare drug benefit would be $675 billion from 2007 to 2016, which is $265 billion less than earlier estimates because of plans' lower costs and enrollment.

Still, some seniors in Part D plans do incur high out-of-pocket costs compared with other retiree benefits. More than one-fourth of all seniors report spending at least $100 a month on medications, and 8% dole out $300 or more, according to the Kaiser survey. Individuals facing such costs are more likely to ignore or drop a prescription, especially for chronic conditions.

As Part D participation rises, program spending is sure to accelerate. Greater spending will inspire more aggressive utilization management and cost sharing by Part D plans and increased demand for cost-effectiveness information from manufacturers. The coming years promise rising premiums and cost sharing for beneficiaries, increased Congressional scrutiny of plan benefits and costs, sharper focus on drug prices in shaping formulary listings, and more competition from generics in important therapeutic categories. Even without federal price controls or a national formulary, Medicare Part D will set the tone for coverage and payment decisions throughout the US market, which in turn will shape pharmaceutical research and development and manufacturing strategies.

Jill Wechsler is Pharmaceutical Technology's Washington editor, 7715 Rocton Ave., Chevy Chase, MD 20815, tel. 301.656.4634,