Healthy Skepticism Library item: 7242

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Publication type: news

Berenson A.
Medicare windfall lifts drug companies
The New York Times 2006 Nov 6
http://www.iht.com/articles/2006/11/06/yourmoney/medicare.php

Abstract:

For big drug companies, the new Medicare prescription benefit is proving to be a financial windfall larger than had been predicted by even the most optimistic Wall Street analysts.

But those gains may come back to haunt drug makers like Eli Lilly and Pfizer if Democrats take control of Congress.

Democrats, who have long charged that the drug industry is profiteering at the expense of taxpayers, say they want legislation to revoke the law that bars Medicare from negotiating prices directly with drug makers like Pfizer for the medicines it buys.

Medicare now pays for drugs indirectly, through the private insurers that administer the prescription program, and those insurers typically pay higher prices than government agencies.

The government is expected to spend at least $31 billion this year on the drug benefit, which provides partial drug coverage for people over age 65. Next year, the program is expected to cost almost $50 billion.

Republicans, and the pharmaceutical industry, say that the benefit program is working and has cost less than initially projected.

More than 38 million Medicare beneficiaries are enrolled in the program, and most say that they are satisfied with their coverage, said Michael Leavitt, the secretary of health and human services.

Wall Street analysts say they have little doubt that the benefit program, called Part D, has helped several big drug makers report record profits and exceed earnings forecasts this year.

Companies have raised prices on many top-selling medicines by 6 percent or more this year, double the overall inflation rate. In some cases, drug makers have received price increases of as much as 20 percent for medicines that the government was already buying for people covered under the Medicaid program for the indigent. Medicare also pays more than the Veterans Administration, which runs its own benefit program.

“Part D was a good thing for almost everybody,” said Les Funtleyder, an industry analyst at Miller Tabak, a research firm in New York.

Drug makers have tried to play down their gains from the program because they do not want to be seen as profiteering in an election year, Funtleyder said.

Democrats say the government could save as much as $190 billion over the next 10 years if it negotiated directly, which would allow beneficiaries to cut their out-of-pocket expenses. Republicans say the savings estimates offered by the Democrats are inflated. They note that Medicare has already cut its 10-year projection of the program’s cost by $117 billion.

Ken Johnson, senior vice president at Pharmaceutical Research and Manufacturers of America, the main lobbying group for drug makers, said that allowing Medicare to negotiate directly would be unfair because the government has too much market power.

“The government doesn’t negotiate prices – it dictates prices,” Johnson said.

Also, the Veterans Administration and Medicare plans are not directly comparable, because the average Medicare drug plan covers 4,300 medicines, while the veterans plan covers only 1,300, he said.

The structure of Part D is complex. Medicare does not directly provide coverage. Instead it subsidizes plans offered by private insurers. Insurers negotiate prices with drug makers and create menus of different plans, some with high premiums and broad drug coverage and others that offer basic coverage at low premiums. All plans have to follow certain basic rules, like offering at least two medicines in every drug category.

Medicare then calculates the cost of the average plan and pays every insurer a subsidy of about 75 percent of that cost. Beneficiaries cover the rest, with the amount they pay depending on what plan they choose.

Part D has raised profits for drug makers by increasing the prices they receive and by encouraging beneficiaries to fill prescriptions they might otherwise have been unable to afford, analysts say. The biggest gains have gone to companies that make drugs widely used by the Medicaid program, which covers the indigent.

Drug makers were legally required to give Medicaid a discount of at least 15 percent, and sometimes significantly more, from their list prices. Now Medicaid recipients over age 65 are covered through the Part D program, which does not require the same discounts. As a result, drug makers are being paid as much as 20 percent more for the same drugs that they had already been providing to recipients under the Medicaid program.

The biggest gainer, analysts say, is Eli Lilly, which makes Zyprexa. Zyprexa, used to treat schizophrenia and other severe mental illnesses, is widely prescribed to Medicaid patients.

Lilly reported two weeks ago that its third-quarter sales had risen 7 percent to $3.9 billion, and its profits were up 10 percent to $874 million compared with 2005. The sales gains resulted almost entirely from Lilly’s prices rising 11 percent in the United States, while actually falling in Europe and Japan.

“We are experiencing a one-time sales benefit resulting from a shift of certain low-income patients from Medicaid to Medicare,” a company spokeswoman, Terra Fox, wrote in an e- mail response to questions about Part D. Fox declined to quantify how much Lilly had gained from the shift.

Lilly is not alone in benefiting. Pfizer, the largest drug maker in the world, said that its sales rose 14 percent in the United States in the third quarter, while increasing only 3 percent internationally. Over all, Pfizer said that its profits more than doubled, to $3.4 billion from $1.6 billion, though part of the difference came from high one-time charges last year.