Joe Baker: Rep. Waxman wants probe of Medicare

U.S. Rep. Henry Waxman, D-Calif., has asked the Government Accounting Office (GAO) to look into a provision of the new Medicare Part D prescription drug program that he says may hand drug companies a multi-billion dollar windfall.

What Waxman and others are concerned about is the transfer of drug coverage for certain senior citizens from Medicaid to Medicare that was mandated by the Republican Congress.

In his letter to the GAO, Waxman said: “The drug company windfall involves the 6.4 million seniors and people with disabilities who were switched automatically from the Medicaid drug benefit to the new Medicare drug benefit on Jan. 1. This transfer is enriching the pharmaceutical industry because drug prices under the new Medicare drug benefit appear to be significantly higher than the prices previously paid by Medicaid. The policy change is likely to provide tens of billions of dollars in new profits for the drug companies.”

Waxman said nearly all of that money will come from U.S. taxpayers. Further, he said there seems to be no justification for this gigantic hidden subsidy of the drug industry. “It appears,” said Waxman, “that the only party benefiting in this arrangement are the drug companies that give millions to the Republican leaders who drafted the legislation.”

Until Jan. 1, the 6.4 million seniors who held both Medicare and Medicaid eligibility got their drugs paid for under the Medicare program through the federal and state governments. Pharmaceutical companies participating in the Medicaid program must, through a rebate system, guarantee Medicaid the best possible deal on drug prices. The rebate plan requires the drug-makers to charge the government no more than the lowest negotiated price offered other private insurers. Drug-makers also are required to furnish rebates to make sure prices paid by Medicaid do not rise at a rate higher than the rate of inflation.

Waxman observed: “The federal government indirectly pays for the drugs used by these beneficiaries by subsidizing the private plans. This switch has resulted in massive disruption, with millions of beneficiaries unable to obtain the medicines they need, and it also appears to have resulted in a large increase in the prices paid for the drugs.”

Under Part D, these dual-eligible seniors must join a private plan to get the drug benefit. The drug-makers, however, are then not obligated to provide the “best price,” and they no longer have to make sure price increases don’t top the inflation rate. The end result is that many, if not most, of these private plans cannot get the price breaks the federal and state governments obtain under the Medicaid plan.

Waxman said Dr. Stephen Schondelmeyer, professor of pharmaceutical management and economics at the University of Minnesota’s School of Pharmacy, estimated the drug prices negotiated by the private companies are “20 to 30 percent above the Medicaid prices.”

Last month, industry analysts said, “It is clear that Part D prices in 2006 will generally be higher than the fully discounted Medicaid price.” They estimated that elimination of the inflation rebate alone could put an extra $2 billion in drug-makers’ pockets this year.

Waxman issued a report last November that showed prices on the 10 most prescribed brand-name drugs, under the new benefit, are 84 percent higher than the prices negotiated by the Department of Veterans’ Affairs.

The Congressional Budget Office estimates that over the next 10 years, the federal government’s share of drug costs for the 6.4 million seniors with dual eligibility will run an average of $2,500 per beneficiary per year. That’s equal to $160 billion over the decade. Waxman said if Dr. Schondelmeyer’s estimates are correct, then the size of the windfall could hit more than $30 billion over the next 10 years.

“Ultimately,” said Waxman, “it is the federal taxpayer who will pay most of the drug industry windfall. For middle-and-upper-income seniors, the costs of the new Medicare drug benefit are shared between the senior and the federal government, with the federal government subsidizing 75 percent of the costs of the basic Medicare drug plan, and seniors paying the remaining 25 percent.”

In the case of low-income seniors, most of the cost is picked up by the federal government. Dual-eligibility seniors don’t have to pay plan premiums and are subject to a co-pay on covered drugs of from $1 to $3. Uncle Sam picks up the rest in the form of subsidies to private insurers.

Waxman said: “The end result is that the new Medicare drug benefit will cause a massive transfer of revenues from the taxpayer to the drug industry for no discernible benefit to anyone but the drug companies.”

From the Feb. 8-14, 2006, issue

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