Politics or Poppycock A Look From the Left At Politics, Politicians, Policies and Issues of National Concern

June 25, 2009 • Volume 9, Issue 25

PhRMA, the brand-name drug manufacturers’ lobby, promised this week that drug companies would provide a 50 percent discount on brand-name drugs in the doughnut hole, the coverage gap built into the Part D drug benefit. The discounts would be available starting July 1, 2010, to Part D enrollees who have incomes and assets that are too high to qualify for the Extra Help program, which provides coverage through the doughnut hole, but below about $85,000 for an individual ($170,000 for a couple).

People with Medicare who have hit the doughnut hole must pay the full price of their medicines. Because of the high cost of drugs, many are forced to pick which drugs they can afford to buy, even if forgoing a medicine puts their health at risk. So it is tempting for consumer advocates to provide unquestioning support for PhRMA’s plan.

But we do have questions.

According to PhRMA’s announcement, the discounts for brand-name drugs would count toward the out-of-pocket limit ($4350 this year). That means the full price of the drug—both what the consumer pays and the discount—are added together and when the limit is reached, consumers would enter catastrophic coverage and pay no more than 5 percent of the cost of their medicine.

Currently, Medicare does not allow discounts or giveaways provided by drug manufacturers to count toward the out-of-pocket limit. The reason is that such manufacturer assistance programs can entice consumers to use higher cost drugs, when a cheaper medicine, such as a generic, is equally effective. Encouraging people to use higher cost drugs can raise the costs of the Part D program, which are paid by taxpayers and people with Medicare (through the premiums they pay).

However, Medicare has said that help from bona fide charities paying for drugs in the doughnut hole does count towards the out-of-pocket limit, and drug companies are free to contribute toward those charities, as long as they do not tie those contributions to help paying for their own products. For the most part, drug companies have not exercised this option, and charities have not had enough money to help people through the doughnut hole.

The discount program would be a federal program run by a contractor, so it seems that individual companies would not be able to steer discounts to their products. Generics, however, would not qualify for discounts. Although most (but not all) generics are much cheaper than brand-name alternatives, even at half price, it makes little sense for a government-run program to exclude cost-effective medicines from discounts.

There is also the larger concern that the discount program will increase the cost of Part D coverage. Senate Finance Committee chairman Max Baucus, Democrat of Montana, who helped broker the agreement with PhRMA, said in an announcement that the discount program “would dramatically increase government savings.” How that will happen remains a mystery. What is clear is that savings for Medicare must be part of PhRMA’s promise.

We won’t know how this discount program works until we see it written into health reform legislation. (And it won’t happen at all if that legislation does not become law—PhRMA has been clear about that.)

For drug companies, it appears this discount program is a way to fulfill their promise to President Obama to contribute financially towards health reform and use at least part of that contribution to make it easier for people with Medicare to afford the overpriced medicines they produce.

We can stomach that deal, but not if it means the Obama administration and the Congress agree to let drug manufacturers off the hook for paying to provide coverage, not just discounts, through the doughnut hole. Health reform should include a plan to phase out the doughnut hole, using mandatory price concessions from drug manufacturers to pay for it. That is part of the health reform bill drafted by House Democrats. It should be part of the health reform bill that passes this fall.

Medical Record

Of the $80 billion, we estimate that $30 billion could be used for the doughnut hole and passed on to seniors. The other $50 billion could go to health care reform, but these savings have not been identified at the moment.” (Federal Savings of Lowering Drug Prices Is Unclear, New York Times, June 2009)

“The entire negotiated price of the Part D-covered medicine purchased in the coverage gap would count toward the beneficiary’s out-of-pocket costs, thus lowering their total out-of-pocket spending. Importantly, the proposal would not require any additional paperwork on the part of the beneficiary nor would an asset test be used for eligibility.” (PhRMA Statement on Medicare Part D Coverage Gap, June 2009)

“The agreement would give the Secretary of Health and Human Services the authority to create the new Medicare Prescription Drug Discount Program on July 1, 2010 and the program would be administered by an independent third party. . . . It also establishes audits of drug company manufacturers to ensure the discounted prices are appropriately set.” (Baucus, Pharmaceutical Companies Announce Deal to Reduce Prescription Drug Costs for Seniors, June 2009)