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Other sources seem to confirm Dr. Schondelmeyer's analysis. Last month, industry analysts concluded: "it is clear that Part D prices in 2006 will generally be higher than the fully discounted Medicaid price."[9] These analysts estimated that the elimination of the inflation rebate alone could result in a $2 billion windfall for manufacturers in 2006.[10] A Prudential Securities analyst found that manufacturers' increased revenues from just three anti-psychotic drugs - Seroquel, manufactured by AstraZeneca; Lamictal, manufactured by GlaxoSmithKline; and Zyprexa, manufactured by Eli Lilly - would exceed $1 billion.[11] In fact, this analyst concluded that the price increase for just Zyprexa would increase Eli Lilly's earnings per share by 5%.[12]
A report I released in November showed that prices for brand-name drugs under the new Medicare drug benefit are 84% higher than the prices that the Department of Veterans Affairs negotiates for the federal government.[13] An analysis that GAO did for me in October 2000 showed that on average, Medicaid's prices for brand-name drugs were 43% higher than the prices negotiated by the VA.[14] Combining these estimates provides another means to compare the Medicaid and Medicare drug prices.
The result is similar to Dr. Schondelmeyer's: the drug prices under the new Medicare program would appear to be 29% higher than prices under Medicaid.[15]
The net result is a multi-billion dollar windfall for the drug manufacturers. According to the Congressional Budget Office, over the next ten years the federal government share of drug costs for the 6.4 million dual-eligible beneficiaries will be an average of approximately $2,500 per beneficiary per year, which is equivalent to $160 billion over the decade.[16] If Dr. Schondelmeyer's estimates are accurate and these drug prices are 20% to 30% higher than the prices paid under Medicaid, the magnitude of the windfall could reach more than $30 billion over the next ten years.[17]
The Impact on the Taxpayer
Ultimately, it is the federal taxpayer who will pay most of the drug industry windfall. For middle- and upper-income seniors, the costs of the new Medicare drug benefit are shared between the senior and the federal government, with the federal government subsidizing 75% of the costs of the basic Medicare drug plan, and seniors paying the remaining 25%.
For low-income seniors, however, the vast majority of the costs are picked up by the federal government. Under the new Medicare program, dual-eligible beneficiaries are not required to pay any of the plan premiums, and they are subject to only a $1 to $3 copay on covered drugs. The remainder of their drug costs are paid by the federal government in the form of subsidies to the private insurers who cover these beneficiaries. If insurers are paying manufacturers more than the "best price" for the drugs used by these dual eligibles, these additional costs will be directly reflected in increased subsidies paid for by taxpayers.
The end result is that the new Medicare drug benefit will cause a massive transfer of revenues from the taxpayer to the drug industry for no discernable benefit to anyone but the drug companies.
Questions for GAO
I am requesting GAO assistance to help Congress more fully understand the impact of the provisions described by Dr. Schondelmeyer. Specifically, I am requesting that GAO:
(1) Determine if prices paid by private Medicare prescription drug plans for dual-eligible beneficiaries are higher than the "best prices" obtained for the same drugs under the Medicaid system.
(2) Investigate the magnitude of the cost differences for individual drugs; and
Determine the total magnitude of these cost differences for federal taxpayers in 2006 and over the next ten years.
Thank you for your attention to this request. My staff contact on this issue is Brian Cohen, who can be reached at (202) 225-5051.
Sincerely,
Henry A. Waxman
Ranking Minority Member
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