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WASHINGTON - January 27 - Today Rep. Henry A. Waxman wrote to GAO regarding concerns that the transfer of drug coverage for dual-eligible beneficiaries from Medicaid to Medicare, mandated by the Republican Congress, which will likely result in a multi-billion dollar windfall for drug manufacturers. The text of the letter follows:
January 27, 2006
The Honorable David M. Walker
Comptroller General
U.S. Government Accountability Office
441 G Street NW
Washington, DC 20548
Dear Mr. Walker:
On January 20, 2006, I held a briefing on the new Medicare drug benefit.[1] At this briefing, the members heard testimony from an expert on drug pricing who revealed that the January 1 transfer of drug coverage for dual-eligible beneficiaries from Medicaid to Medicare, which the Republican Congress mandated, will likely result in a multi-billion dollar windfall for drug manufacturers. I am requesting that GAO investigate this issue.
The drug company windfall involves the 6.4 million seniors and people with disabilities who were switched automatically from the Medicaid drug benefit to the new Medicare drug benefit on January 1. This transfer is enriching the pharmaceutical industry because drug prices under the new Medicare drug benefit appear to be significantly higher than the prices previously paid by Medicaid. The policy change is likely to provide tens of billions of dollars in new profits for the drug companies, virtually all of which will come out of the pockets of U.S. taxpayers.
There appears to be no rational policy justification for providing this immense hidden subsidy to the drug industry. As we learned at the briefing, the transfer to Medicare Part D has caused enormous disruptions for seniors, causing many to be unable to get drugs that they were previously receiving through Medicaid. It appears that the only party benefiting in this arrangement are the drug companies that give millions to the Republican leaders who drafted the legislation.
The Pharmaceutical Industry Windfall
Until January 1, 2006, 6.4 million dual-eligible Medicare beneficiaries had their prescription drugs paid for by the federal government and state governments under the Medicaid program. Manufacturers that take part in the Medicaid program are required, via a rebate system, to guarantee that Medicaid receives the best deal possible on drug prices.[2] The rebate program requires that manufacturers charge the government no more than the lowest negotiated price they offer to other private insurers.[3] Manufacturers are also required to provide rebates to ensure that the drug prices paid by the Medicaid program do not increase at a rate that that exceeds the inflation rate.[4]
After January 1, 2006, the drug benefits of all 6.4 million of these dual-eligible beneficiaries were switched from the Medicaid program to dozens of different Medicare-approved private prescription drug plans. The federal government indirectly pays for the drugs used by these beneficiaries by subsidizing the private plans. This switch has resulted in massive disruption, with millions of beneficiaries unable to obtain the medicines they need.[5] And it also appears to have resulted in a large increase in the prices paid for the drugs.
When dual-eligible beneficiaries enter private plans, the drug manufacturers who sell to these plans are no longer bound by the Medicaid "best price" provisions. They are also no longer bound by the requirements that price increases not exceed the inflation rate. The result is that the dozens of private drug plans are unable to obtain prices that are as low as the prices paid by the federal and state governments under the Medicaid plan.
This hidden drug industry windfall was described by Dr. Stephen Schondelmeyer, a Professor of Pharmaceutical Management and Economics and the Director of the PRIME Institute at the University of Minnesota's School of Pharmacy, at the January 20 briefing.[6]
Dr. Schondelmeyer compared published prices for the Medicare drug plans (available on Medicare.gov) to estimates of the prices paid by the federal and state governments under the Medicaid program.[7] He concluded that the Medicare prices negotiated by the private plans are "20 to 30 percent above the Medicaid prices."[8]
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