U.S. plan to cut its Medicaid prescription costs shifts pain to taxpayers

May 07, 1991|By Knight-Ridder News Service

WASHINGTON -- An ambitious attempt by the federal government to trim its prescription drug costs appears to have backfired and left the average taxpayer stuck with the bill.

Health-care experts say privately that insured patients will face higher hospital bills because of a new law requiring drug companies to pay the government rebates on Medicaid prescriptions.

The reason: The companies have raised their prices to hospitals by up to 20 percent in response to the law.

"Free enterprise is not going to take a hit," said Jim LaFlamme, pharmacy director at Elkhart General Hospital in Elkhart, Ind. "Basically, you pass the cost on to the consumer sooner or later."

Medicaid, the federal-state health program for the poor, paid $3.7 billion for prescriptions last year, making it the largest buyer in the country. The program is estimated to account for 10 percent to 15 percent of the market, and until now it has paid retail prices.

The law, which requires drug companies to give Medicaid rebate based on the "best price" offered to any other customer, has led manufacturers to eliminate deep discounts traditionally given to hospitals, nursing homes and health maintenance organizations, as well as other government programs.

As a result, the American Society of Hospital Pharmacists reports that the average hospital is facing an abrupt 14 percent to 20 percent increase in its drug costs.

No jump in drugstore prices is expected, because pharmaceutical companies do not offer similar discounts in the retail market.

"Hospitals don't have a lot of money sitting around to pay for drugs without raising prices," said Stephen Schondelmeyer, a pharmaceutical economist at Purdue University in West Lafayette, Ind. "It has to be a pass-through cost."

Mr. Schondelmeyer says added drug costs will increase hospital patients' bills by 3.5 percent to 4 percent, on top of inflation.

Because Medicare and Medicaid pay hospitals a fixed amount for a given procedure, the bulk of the higher drug costs will be passed on to the 44 percent of patients who are privately insured. That will raise co-payments and will lead to increased insurance premiums, Mr. Schondelmeyer said.

The new law was sponsored by Sen. David Pryor, D-Ark., and Representative Ron Wyden, D-Ore. When it was passed as part

of last year's budget compromise, their bill was hailed as having the potential to save federal and state governments $3.5 billion over five years. But, at least in the short run, the opposite seems to be happening.

The law requires drug companies to pay rebates to Medicaid based on their best price to any other customer. It provides for a minimum 12.5 percent rebate on brand-name products this year, rising to 15 percent in 1993. Rebates for generic drugs are slightly lower.

Mr. Schondelmeyer said hospital drug costs may rise 10 percent more before the market stabilizes.

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