Areas of Limited Competition in Medicare Program

The Henry J. Kaiser Family Foundation has released a Medicare policy report titled Prescription Drug Procurement and the Federal Budget. Prescription drugs are a key area for potentially significant cost savings, but the May 2012 report by Richard G. Frank, PhD, argues that “competition is quite limited” in several keys areas for driving prices down for the federal government. Dr. Frank is the Margaret T. Morris Professor of Health Economics in the Department of Health Care Policy at Harvard Medical School.

Areas identified include drugs provided in Medicare Part D plans to beneficiaries with low-income subsidies and specialty drugs. Dr. Frank outlined 3 strategies for better managing the market: (1) extending Medicare drug prices to Medicare Part D beneficiaries that receive low-income subsidies; (2) establishing a system of temporary administered prices in market segments where there are unique drugs under both Medicare Part B and Part D; and (3) accelerating competition from generic biologics.

The report highlighted some inefficiencies associated with the cost of drugs for low-income subsidy (LIS) recipients. After implementation of Part D, drug purchasing for dual eligibles was automatically shifted from Medicaid to Medicare prescription drug plans, and the new LIS program was created to provide greater financial assistance with Part D plan premiums and prescription drug sharing to dual eligibles and other Medicare low-income beneficiaries. These low-income Medicare beneficiaries are among the sickest and highest-cost beneficiaries, with disproportionately high drug use and spending.

Also, dual eligibles and LIS recipients are disproportionate users of drugs that come under protected classes within Part D, a designation that limits the capacity of Part D sponsors to negotiate lower prices on these drugs because they are mandated by law to include them on their formularies. The protected classes include anticonvulsants, antidepressants, antineoplastics, antipsychotics, antiretrovials, and immunosuppressants, according to the report.

One solution to address concerns about inefficiencies in Medicare drug spending for dual eligibles and other LIS Part D enrollees would be to allow drugs purchased for this patient population to receive the Medicare rebate instead of the price negotiated by Part D plans. As a result, this strategy would lower the price Medicare pays for drugs used by these enrollees. This would achieve savings in an area where Part D sponsors have limited capacity to drive the market share, Dr. Frank said.

Biologics and other unique drugs have significant cost implications for Medicare Part B and Part D. Part B spending for anticancer monoclonal antibodies was estimated to exceed $2 billion in 2009. Part B spending for sole source cancer-related drugs used directly to treat cancer plus those that address treatment side effects exceeded $3 billion in 2009. Of the $11 billion spent on the top 10 Part B drugs administered by physicians in 2009, 43% were sole source products, many of them biologic agents. Overall for Part D spending in 2007, biologic products accounted for nearly 6% of spending. For Part D cancer-related drug spending on biologics alone in 2009, cost was estimated at about $1 billion.

The report outlines 2 proposals to address the spending levels that come from the excess market power of unique drugs. One is to allow the government to negotiate when drugs are unique and Medicare is the major purchaser. Another approach would be to shorten the exclusivity period for biologics from 12 years to 7 years as a way to accelerate competition from follow-on biologic products into the marketplace. Under both strategies, it is “believed that when there are unique drugs where Medicare purchases a large amount of the product, the proposals would yield budget savings with little or no loss in social efficiency,” Dr. Frank said.

“Together, these ideas offer the potential for well over $100 billion in savings over 10 years and continued growth in savings thereafter, which could be especially welcome in a time of fiscal strain on the Medicare program and the federal budget overall,” Dr. Frank concluded.