From
New York Times
The pharmaceutical industry is beginning to reap a windfall
from a surprisingly lucrative niche market: drugs for poor people.
And
analysts expect the benefits to show up in many of the quarterly financial
results that drug makers will begin posting this week.
The windfall,
which by some estimates could be $2 billion or more this year, is a result of
the transfer of millions of low-income people into the new Medicare Part D drug
program that went into effect in January. Under that program, as it turns out,
the prices paid by insurers, and eventually the taxpayer, for the medications
given to those transferred are likely to be higher than what was paid under the
federal-state Medicaid programs for the poor.
About 6.5 million
low-income elderly people or younger disabled poor people were automatically
transferred into the Part D program for drug coverage. Because their other
health needs are still covered by Medicaid, they are called dual
eligibles.
The advent of Part D has not affected the drug coverage for
the 45 million other low-income people whose drugs are still paid for under
state Medicaid programs. Those programs closely monitor drug prices, and drug
makers often typically end up paying rebates to the states.
It is too
early to calculate the full effect of the shift of the former Medicaid patients
now covered by Part D. But analysts expect it to generate hundreds of millions
of additional dollars this year for the drug companies, which have long chafed
under the pricing restraints of the state programs.
Drugs tend to be
cheaper under the Medicaid programs because the states are the buyers and by law
they receive the lowest available prices for drugs.
But in creating the
federal Part D program, Congress — in what critics saw as a sop to the drug
industry — barred the government from having a negotiating role. Instead, prices
are worked out between drug makers and the dozens of large and small Part D drug
plans run by commercial insurers.
Since Part D went into effect, the
pharmaceutical industry has raised the wholesale prices of its brand-name drugs
an average of 3.6 percent. Although the actual amount spent depends on what each
insurer negotiates, in many cases the drugs for those 6.5 million people who
used to receive their medicines through Medicaid will cost more now.
Initially, the added costs will be paid by the insurers administering
the new Medicare drug program. But when it comes time for the insurers to settle
accounts with the government, the costs of the 6.5 million drugs for the
transferees will end up being passed along to federal taxpayers, according to
analysts and health care economists.
The windfall for the drug makers
was made possible by a provision of the 2003 Medicare law that exempts Part D
drugs from “best price” rebates that the drug makers have been required to give
to the state Medicaid programs since 1991. Those rebates are meant to make sure
that state Medicaid agencies pay no more than the best prices drug companies
offer to any big commercial insurer.
Under Medicaid, the federal
government and state agencies paid more than $14 billion annually for the drugs
of the 6.5 million transferees. Without the best-price rebates, the cost would
have been 25 percent higher, or about $17.5 billion, said Stephen W.
Schondelmeyer, a professor of pharmaceutical economics at the University
of Minnesota.
Nobody yet knows what the total drug bill will be for
these people under Part D, beyond the assumption by many experts that it will be
higher. Medicare will not have solid numbers until it can analyze the hundreds
of monthly reports that the plans in the Part D system are required to
file.
Yet, one indicator of the higher revenue from dual-eligibles has
already been seen in reports by drug companies this year showing double-digit
United States sales increases of certain drugs that are heavily used by Medicaid
patients. For example, sales of Lamictal, an antipsychosis drug from GlaxoSmithKline,
were up 33 percent, to $305 million in the first quarter; sales of Seroquel, an
antipsychotic from AstraZeneca,
were up 29 percent, to $590 million; and sales of Plavix, a blood thinner from
Bristol-Myers
Squibb, were up 26 percent, to $850 million.
Timothy Anderson, a
pharmaceutical analyst with the Prudential Equity Group, estimates that if Part
D were not in place the rebates for the makers for all of 2006 would have been
more than $2 billion for 13 drugs widely used by the people transferred from
Medicaid to Part D.
Dr. Anderson estimates that because the companies
will not have to pay those rebates under Part D, revenue to Glaxo from Lamictal
will increase by $298 million this year, AstraZeneca’s Seroquel sales will rise
by $521 million, and Plavix revenue will increase $169 million. Estimates on the
rebate increases because of Part D are few, but all are in general agreement on
the size of the rebate to drug makers.
Medicaid programs have been
especially important for drugs like Seroquel and Lamictal, which are prescribed
for bipolar
disorder and other mental
health problems
About two million of the people transferred to Part
D are disabled and younger than 65, and “more than half of them have mental
health problems,” said Jim Verdier, a senior fellow at Mathematica Policy
Research in Washington and a former Medicaid director in Indiana. “In the past,
Medicaid was 80 to 90 percent of the total market for some high-end
antipsychotic drugs,” Mr. Verdier said.
Over all, the Medicaid
best-price rebates have averaged about 15 percent of the list prices of the
manufacturers, but some states, including California, New York and Maine have
obtained even larger rebates, Professor Schondelmeyer said.
Now, under
Part D, all sorts of price deals will be negotiated by dozens of Medicare drug
plans, large and small. The prices will be reported to Medicare, but under a
provision of the law pushed by industry lobbyists, they will otherwise be kept
secret.
Mark
B. McClellan, administrator of the federal agency that oversees Medicare and
Medicaid, said that the lowest-cost plans among the Part D offerings by
commercial insurers were now getting “significantly better prices than
Medicaid.” But he did not provide specifics.
Dr. McClellan also noted
that his agency was requiring the states to return a combined total of $5.8
billion to Washington from federal funds dispensed to the Medicaid program. That
money is based on a federal estimate of the amount states will be saving by no
longer having to provide drugs to the dual-eligibles.
But the states,
disparaging those refunds as “clawbacks,’’ have disputed the federal formula
that was the basis for the repayments. Last month, the Supreme Court declined to
hear a case filed by the attorneys general of Texas and four other states
seeking to quash the repayment formula as unconstitutional.
Now the
plaintiffs, which also include Kentucky, Maine, Missouri, and New Jersey, are
expected to take the fight to lower courts. Ten other states have supported the
plaintiffs.
The states say the federal formula assumes higher drug costs
than many Medicaid programs have been spending.
“We get 32 percent back
in drug rebates,” said Jude E. Walsh, a special assistant to Governor John
Baldacci of Maine. She said Maine’s Medicaid drug costs were rising only 2
percent to 3 percent a year, compared with national trends that are three to
four times that.
The drug companies, for their part, have played down
the size of the expected windfall from Medicaid transferees. And Bush
administration officials say they do not know how much they will end up spending
on those people. “No one is willing to quantify it,” said Dr. Anderson, the
Prudential analyst.
In one of the few public comments by a drug company
official, Derica W. Rice, chief financial officer of Eli
Lilly, told analysts on a conference call in April that Lilly expected
“modest price benefits due to lower rebates as patients move from Medicaid to
Plan D.”
Zyprexa, a Lilly drug for schizophrenia,
is another medication widely prescribed for Medicaid patients.
The drug
makers do have reason to worry about long-run prospects under the vast new
Medicare Part D program. There are currently 81 Part D drug plan sponsors, large
and small, with varying degrees of negotiating power. But the plans are expected
eventually to merge into a handful of large survivors, each of them presumably
having more bargaining power with drug companies.
A further concern is
that as the true costs of Part D become known, Congress may eventually impose
spending ceilings.
For now though, as the drug industry begins to report
its quarterly profits, the market for those 6.5 million poor people is likely to
look rather lucrative.