February 3, 2006 in Nation/World

Analysts: Suppliers to get Medicare boost

Tony Pugh Knight Ridder

WASHINGTON – The new Medicare drug benefit will give drug companies up to $2 billion in extra profits this year because they’re no longer required to pay rebates on drugs bought by the government for the elderly poor, according to a study by a U.S. investment firm.

The hefty windfall raises new concerns that the Bush administration won’t fully realize its promises of lower drug prices in the troubled new program.

The boost in profits comes from a shift in the drug coverage of 6.4 million poor and elderly people from Medicaid to the new Medicare drug benefit. Unlike Medicaid, which requires drug companies to charge their lowest or “best price” for medications, the Medicare program relies on competition among private drug plans to keep prices low. By eliminating the need to discount drugs for the government, the industry can now pocket the savings.

A little-known study by the Prudential Equity Group from June 2005 estimated that the makers of three anti-psychotic medications stand to benefit most from the change, taking in roughly $1.1 billion in new profits on products used by the 6.4 million who are Medicare’s most poor and frail patients.

Tony Butler, managing director and pharmaceutical analyst at Lehman Bros., an investment bank in New York, agreed with the report that Medicare would probably have higher drug prices than Medicaid. Butler estimated the sales windfall for drug companies under Medicare to be between $1.8 billion and $2 billion.

Experts say drug prices in the Medicare program will be higher this year than prices under Medicaid because the private Medicare drug plans won’t likely match the price discounts achieved by Medicaid, the joint state and federal health program for the poor.

The new profit estimates and the higher drug price projections have rekindled accusations that the Medicare drug benefit enriches drug companies at the expense of U.S. taxpayers.

Medicare Administrator Mark McClellan questioned Prudential’s findings. In testimony Thursday before the Senate Special Committee on Aging, he said Medicare plans are covering people at a cost average of 15 percent less than expected, which has helped push the average plan premium down to $25 from an original estimate of $37.

As a result, the cost of the drug plan likely will be $30.5 billion in 2006, down from an earlier estimate of $38.1 billion, McClellan testified. And the program’s 10-year cost estimate has likewise dipped from $926 billion to $797 billion.

“The drug plans are negotiating aggressive discounts and rebates that are being passed along to beneficiaries and taxpayers,” McClellan said.

Rep. Henry Waxman, D-Calif., ranking minority member of the House Committee on Government Reform, has asked the Government Accountability Office to investigate the projected profits as a waste of taxpayer money.

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