The impact of Part D on manufacturers

January 8, 2007

It is probably safe to say that pharmaceutical manufacturers as a group approached the implementation of Medicare Part D with mixed feelings. Although the benefit is seen as likely to increase access to medication among those eligible, large government programs run the risk of concentrating purchasing power, thereby lowering prices and decreasing profits over time. Early indicators remain mixed.

Medicare beneficiaries currently receive more than three million prescriptions every day. Part D will shift spending from Medicaid and the private sector to make Medicare the largest prescription drug purchaser in the country. Medicare spending will grow from 2% of prescription drug expenditures in 2005 to 27% of the total for 2006, and is projected to rise to 37% by 2010.

Reducing the out-of-pocket cost of drugs will encourage higher consumption. A study released by PhRMA in October 2006 tracked a group of people who made cash payments for prescriptions in 2005 and transitioned to Part D in 2006. The average number of prescriptions per month increased from 2.5 to four when Part D coverage was instituted, while the average out-of-pocket expense decreased from $59 to $29 per person. The number of distinct drugs used over a three-month period increased from 2.8 to 4.1 in parallel with the increase in the number of prescriptions.

At the same time, the extent of generic drug use has surprised Medicare administrators. Data from the first two quarters of 2006 showed generic usage among all types of Part D plans at 60.1% compared with 51.9% among payers nationally. Part D plans increased the growth rate of generic utilization up to three times faster than the overall market. Medicare Advantage plans that include drug coverage displayed the highest generic utilization rates, likely due to their previous experience with Medicare enrollees and coordination of their benefits.

Drug prices are being closely monitored by stakeholder groups. AARP's quarterly wholesale price report for the first quarter of 2006 found an average 3.9% increase in the cost of 193 Rx drugs commonly used by seniors. Of these, the prices of 63 drugs on the list increased by more than 5%. Families USA reported that the median price for the top 20 drugs rose by 3.7%. Virtually all of the Medicare Part D plans are increasing their premiums for 2007, which critics fear is the result of plans passing on price increases without pressuring for moderation.

While the reported drug price increases are higher than the general rate of inflation, they are within the rate of inflation for healthcare costs. The wholesale price for drugs to manage chronic conditions, for example, increased by 4.1% during the first half of 2006. While prices of prescription drugs increased in 2006, the prices of generic drugs remained flat.

Democrats assumed a majority in both the House and Senate amidst promises to curb drug prices. One strategy they propose to drive lower prices would be to give Medicare the ability to negotiate directly with drug manufacturers. Another would be to permit importation from Canada and other countries. But it is argued that neither alternative is likely to result in drug prices lower than those achieved in a competitive market. Prices negotiated for the Department of Veterans Affairs are considerably lower, but that result comes with fewer therapeutic choices in its national drug formulary.

Stock prices of pharmaceutical manufacturers dropped in the wake of the election, some by as much as 5%. It is likely that the industry will suffer only rhetoric from Congress, but it is apt to see dampened stock prices continue. While there is hostility toward perceived gains to PhRMA from Part D, many patients seem to be satisfied with the program. Republicans will oppose changes to this landmark legislation. Any change that threatens to reduce therapeutic options would not have widespread support from the American public.

THE AUTHOR is associate professor, Department of Pharmacy Health Care Administration, University of Florida College of Pharmacy.