Plan to save on Medicare drug costs would hurt seniors — and Maryland's economy

Making prescription drug program like Medicaid would reduce incentives to research drugs that could help older Americans

July 25, 2011|By Renée Winsky

In the scramble to cut the nation's debt burden, President Obama, congressional Democrats and even some Republicans have proposed squeezing money out of Medicare by changing the way it pays forprescription drugs.

They claim this would save $112 billion over 10 years. But if passed it would be a disaster, costing hundreds of thousands of jobs in the biopharmaceutical industry — an important contributor to the Maryland economy — driving up drug prices and discouraging drug innovation.

Basically, these politicians want Medicare to work more like Medicaid. Today, the two programs have radically different procedures for buying prescription drugs.

Medicare's "Part D" drug benefit, which began in 2006, lets seniors choose between a myriad of drug benefit plans offered by private insurers, with Medicare subsidizing the premiums. To keep premium costs low and attract more seniors, these private plans negotiate their own discount and incentive deals with drug companies.

Part D has been a smashing success. Premiums charged to seniors are well below initial forecasts, and the program costs taxpayers 46 percent less than anticipated. More than 80 percent of enrollees say they are satisfied with their plans. Part D has also increased prescription drug coverage among seniors by 12 percentage points.

Medicaid, by contrast, is a centrally planned program that imposes strict price controls, rather than letting private companies negotiate with drug companies. By law, for a drug to be covered by Medicaid, the manufacturer must give state governments a rebate of 23.1 percent off the wholesale price for brand name drugs (13 percent for generics).

This is a bigger discount than private plans usually negotiate. But if a drug maker gives a bigger rebate to even one other customer, it must match the discount for all of Medicaid. The only way to avoid this one-size-fits-all treatment is for a company to quit Medicaid entirely. That is a huge market loss.

The current proposals would force a similar system on Part D for the drugs that Medicare's 10 million low-income patients use to save the program money.

The hidden cost of obtaining those savings would be substantial.

Drug companies would not be able to simply write off the $112 billion in rebate costs.

One thing the biopharmaceutical industry would do is employ fewer people. Nationwide, the biopharmaceutical sector employs 674,000 workers directly and supports 1.4 million more jobs indirectly. According to a new study from Battelle Memorial Institute, the rebate scheme could cost the nation 260,000 jobs — this would be a strong blow even in better economic times.

Maryland would be especially hard hit. Nearly 90,000 jobs here rely directly or indirectly on the biopharmaceutical industry. Biopharmaceuticals support more than $14 billion in economic output in Maryland every year, and the industry's employees pay more than twice as much in state and federal taxes as the average worker. These are jobs and dollars we cannot afford to lose.

Drug prices would also increase. This would not affect low-income Medicare recipients, as they typically do not pay premiums. But drugs would cost more for everyone else, and as a result, people on private plans, as well as Part D participants who are not low-income, would pay higher premiums and co-pays.

Drug companies would be less inclined to give big discounts to private plans because if they gave a discount bigger than Medicaid's minimum, they would have to match it for 10 million Part D enrollees. They would also likely introduce new drugs at higher prices.

Most frightening of all, the rebate program would discourage research and development into drugs that specifically benefit the elderly — such as treatments for Alzheimer's, osteoporosis and arthritis — since these drugs would become less profitable.

There is no question that to solve the budget crisis we will need to reform entitlements. But what sense does it make to take the nation's best-functioning entitlement program and ruin it with price controls? If enacted, the proposal would mar everything it touches: the economy, American workers, Medicare beneficiaries, patients on private plans and drug companies. This is not the way to go.

Renée Winsky is the chief executive officer of the Tech Council of Maryland. Her email is

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