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State of the Union: Obama's Words on Prescription Drug Subsidies

Posted on Feb 18, 2013 by Sergio Ulloa ()

In the United States, there are two main insurance programs administered by the federal government - Medicaid and Medicare. People on Medicaid are normally low income adults, and the program will also enroll children, pregnant women and other people deemed low-asset. Medicare, on the other hand, applies to people 65 years and older, as well as younger people with certain disabilities.

Of course, some people are eligible for both Medicaid and Medicare. A 55-year-old with a serious kidney condition can receive insurance through Medicare, and if he is low-income he will qualify for Medicaid as well. Similarly, a senior citizen over 65 will naturally qualify for Medicare, and if her income is below the national poverty level she is probably accessing Medicaid services, too. These people are known as dual eligibles. A dual eligible may rely on Medicare for general visits to a physician and prescription drugs, then turn to Medicaid for dental coverage and long term care such as placement in a skilled nursing facility. Why should we care about dual eligibles? We should care because the financial and health care needs of these people using both Medicaid and Medicare is currently influencing public policy in a big way. In his State of the Union address at the beginning of the month, President Obama said, "Already, the Affordable Care Act is helping to slow the growth of health care costs. The reforms I'm proposing go even further. We'll reduce taxpayer subsidies to prescription drug companies and ask more from the wealthiest seniors." Those subsidies to drug companies that Obama mentions, subsidies that are costing taxpayers billions of dollars, were born from a 2003 law that changed the rules on insurance for dual eligibles. In 2003, then president George W. Bush passed the Medicare Prescription Drug Improvement and Modernization Act. This act created Medicare Part D, also known as the part of Medicare that provides coverage for prescription drugs. Medicare Part D was created to address prescription drug affordability for seniors, however Part D also had an important effect on dual eligibles - President Bush's legislation stipulated that anyone qualifying for both Medicaid and Medicare coverage would now have all of their prescription drugs covered by Medicare Part D. Here's the problem - Medicare Part D costs more money. Firstly, Medicare Part D was created to be administered through private rather than governmental insurance avenues, therefore administrative practices take up a good portion of the budget. Most importantly, whereas Medicaid has regulations to slow price increases, Medicare has no such rules, and so drug manufacturers are able to charge Medicare more money for the same products. Analysts have found that drugs purchased through Medicare cost an average 30 percent more than drugs purchased through Medicaid; keep in mind that this cost is shouldered by federal taxpayers. When President Bush moved around 9 million dual eligible people from Medicaid to Medicare Part D, drug manufacturers made a lot of money. According to a 2008 report by the U.S. House of Representatives, switching dual eligibles from Medicaid to Medicare Part D resulted in financial windfalls for drug companies totaling $3.7 billion dollars in the first two years alone. Medicaid drugs are cheaper because of rules built into the founding statute that prohibit drug companies from increasing their prices faster than inflation. Medicare has no such rules. A 1990 Medicaid drug rebate law also states that manufacturers must provide certain discounts in order to participate in the program. With Medicaid, brand name drugs must be sold at their lowest prices, or 15 percent below the average manufacturer price, and companies must provide a discount of around 11 percent on generic drugs. These regulations do not apply to Medicare. Drug companies have therefore been able to raise Medicare pricing with little regulation - in just the first year of Medicare Part D, drug costs increased by 6.6 percent. So, let's get back to the White House, 2013. The Presidential Administration has confirmed that Obama's State of the Union comment about "reducing taxpayer subsidies to drug companies" meant asking manufacturers to fix the costly disparity between Medicaid and Medicare Part D drugs and offer rebates for dual eligible people. After all, if these people are also technically eligible for the cheaper drugs covered by Medicaid, why should they be forced into the more expensive Medicare Part D system? President Obama's words did not sit well with pharmaceutical manufacturers. The Chief Executive of drug company Eli Lily and Company has already commented that implementing rebates for dual eligibles would cost the industry $112 billion over the next decade, while discouraging manufacturers from developing new drugs. The lobbying group Pharmaceutical Research and Manufacturers of America has been likewise critical of what it calls a "radical proposal" to amend the Medicare Part D drug pricing system. Still, plenty of people agree that manufacturers rather than taxpayers should cover more drug costs. In 2011, Senator John Rockefeller introduced a bill to "require drug manufacturers to provide drug rebates for drugs dispensed to low-income individuals under the Medicare prescription drug benefit program." In other words, President Obama's exact State of the Union proposal - manufacturers should better cover the drug costs of dual eligibles. The non-partisan Congressional Budget Office estimated that Rockefeller's plan would save the government at least $112 billion over the next ten years. Rockefeller's bill did not pass, but it received much support from other members of congress as well as its 13 co-sponsors. It's funny how just a few words in a State of the Union address can have so much meaning. President Obama's statement about reducing taxpayer subsidies for drug companies is about so many things - it's about a 2003 law to create Medicare Part D, it's about nearly 10 million dual eligible people legislated into taking the more expensive option, and it's about the financial responsibility of private enterprise versus public taxpayers. Who should cover the cost of dual eligibles' prescription drugs? Until Obama's words become pen and paper legislation, we shall have to wait and see.
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